Chinese SOEs and International Debt Relief

Check out the referenced source here.

About 42 low-income countries primarily located in Africa and Asia are participants in the eight-month debt suspension initiative (DSSI) launched by the G-20 in April to remedy COVID-19-related plunges in commodity prices and capital flow issues.

Last week, G-7 finance ministers released a joint-statement imploring all G-20 member states to comply with DSSI requirements to freeze debt payments to government creditors for the low-income countries participating in the program. China was the focus of those comments due to the country’s tricky state-owned enterprise (SOE) sector.

Traditional standards that enable differentiation between government entities and private firms do not apply to China’s complicated SOE landscape. In China, besides selecting CEOs, directing certain investment practices, and driving some strategic decision making, SOEs are not operated by the government. Meaning, these firms are not government entities in the traditional sense nor do they fit the typical private firm mold. This ambiguity has enabled the Chinese government to evade compliance with DSSI by classifying large state-owned financial institutions as private firms, thereby freeing them of debt freezing responsibility.

This SOE dynamic is consequential for a variety of reasons but I will focus on two. First, Chinese lenders in the state-private firm gray area make up 60% of debt owed by the 42 participating low-income countries. Effectively, successful noncompliance on the part of China will result in this G-20 led debt freezing initiative falling flat. This poses immediate risk for the economic recovery of the developing world. 

Second, the larger issue of blurred divisions between state and privately owned/operated firms in China clearly lacks a regulatory solution from the perspective of international commerce. The G-20’s struggle to secure well-defined and quantified commitments from China to freeze low-income nation debt is of the same kind that fueled the United States’ volatile response to an ascendant TikTok, WeChat, and Huawei. Western nations have yet to develop tools to handle China’s SOEs or even private firms under heavy government influence. 

International adaptation, particularly from the West, is needed in order to maintain productive global business and commerce relations. We’ve witnessed the impact of the Chinese state-private ambiguity on technology and public debt, what sector is next? How will international regulators like the IMF and WTO adapt? That will depend on which Chinese firms seek to enter foreign markets and it will depend on Western leadership.