China raises hope for emerging market debt


China’s commitment to restructure the $6 billion it is owed by Zambia is a good sign for Sri Lanka and others that have borrowed heavily from Beijing. In April, the People’s Republic joined the African country’s creditor committee. That group it co-chairs with France has yet to detail how large any haircuts will be, but the initial agreement is an important step forward in setting a new model for emerging-market debt relief. Unlike Zambia, Sri Lanka was not poor enough earlier to be covered by a G20 initiative that suspended $13 billion in debt service payments for some 50 countries through the pandemic. That framework was the basis for China’s change of tack on Zambia prompting it to effectively join the Paris Club in all but name.

Yet China will struggle to draw such arbitrary boundaries around its lending losses: Sri Lanka’s $14 billion of foreign bonds trade for as little as 28 cents, half the level of Zambia’s $3 billion of paper. Both are in default. Both need urgent relief. Zambia’s fix will lead the way for a new band of emerging market creditors including India and Saudi Arabia who have grown significantly in the last decade.