Pressure relief valve

China and the US should work together to promote a coordinated system for international development assistance

The issue of sovereign debt governance, especially for lower-income countries, was included in the G20 agenda well before the outbreak of the novel coronavirus. But the G20's collective efforts to assist the developing world tackle the pandemic have brought this issue to the fore, as the economies of developing countries have suffered heavy losses, resulting in dwindling government revenues and acute growth challenges. Due to the uncertainties surrounding economic recovery and the financing environment, global debt vulnerabilities have increased significantly.

The United States and China, one as the dominant financial power and the other as the largest official bilateral creditor, share common interests and responsibilities in enhancing sovereign debt governance and fostering global sustainable development.

The two countries played constructive roles in the launch of the G20's Debt Service Suspension Initiative, which grants temporary debt service suspension to participating countries facing major revenue shortfalls, and the Common Framework for Debt Treatments beyond the DSSI, which facilitates coordination and cooperation on debt treatments for up to 73 low-income countries that are eligible for the initiative, as in urging the financial institutions to mobilize emergency resources for indebted countries.

However, this assistance is still far from enough. Sovereign debt vulnerabilities are expected to rise due to inflationary pressures in the next several years.

China and the US should cooperate more on this issue to help countries in need.

First and foremost, the US should stop scapegoating China for the sovereign debt of developing countries by hyping the theory it engages in "debt trap diplomacy".Removing this political obstacle is an important prerequisite for greater pragmatic cooperation between China and the US. China, on the other hand, should address the concerns of the US, such as the issue of debt transparency. Indeed, the two countries should tackle the issue of transparency of development finance as a whole.

Second, the two countries should lead in coordinating macroeconomic policies, controlling global debt risks and mobilizing new resources for the alleviation of the debt burdens of debtor countries. Stable and sustainable capital inflows in the international capital market are important concerns of developing countries. Both parties should encourage the G20 members to coordinate their macroeconomic policies taking into account the perspective of developing countries, and actively promote the use of existing tools to fully release the potential, including the redistribution of the newly issued International Monetary Fund Special Drawing Rights and the financing support of multilateral development banks. They should also seek to maximize the resources of the private sector to provide financing for developing countries.

Third, under the framework of true multilateralism, each side should actively explore its own comparative advantages and leverage international resources to help indebted countries during their current difficulties.

China and the US should work together to explore truly multilateral and public-private partnership approaches to deal with the unsustainable debts on a case-by-case basis, ensuring equitable and fair burden-sharing among all categories of creditors.

The US, as the "master valve" and "signal light" in the global debt chain, should actively and responsibly encourage the private sector to play its part. On its part, China, as the largest bilateral official creditor, should also actively support developing countries to deal with their debt and development challenges.

Fourth, China and the US should be far-sighted and strengthen their communication and coordination on restructuring the concepts, rules and mechanisms of international financing and debt governance from the perspectives of the United Nations 2030 Agenda for Sustainable Development and maximizing development financing.

International development financing is undergoing structural changes. Official financing, both multilateral and bilateral, is still the main source of international financing for low-income countries, with the Paris Club countries as the most important sources. But financing from private institutions is growing rapidly. Giving the market full play will enable the private sector to play an increasingly important role in filling the medium and long-term infrastructure financing gap.

China and the US should respect the market-oriented trend above, strengthen communication and coordination on international development principles, norms and standards, such as financing transparency, and jointly promote the construction of a more effective international debt governance system.

They should also deepen trilateral development cooperation in the developing world through broader policy dialogue in the future. The two countries should also take the opportunity of debt treatments to foster the green and sustainable development of debtor countries, while respecting their ownership and development level.

It remains a lasting challenge to strike a balance between debt relief and long-term development, so as to get the debtor countries on track to green and sustainable growth. This requires enhanced collaboration between China and the US, together with other countries concerned, to tackle the problems from the development needs of the debtor nations.

With the debt problem ultimately being an issue of development, the solutions to it should focus on not only debt relief, but also the capacity-building of the developing countries in economic recovery and sustainable development. To this end, China and the US need to work together on a comprehensive, complementary and coordinated system for international development, covering trade, investment, aid and financing, so as to provide larger market access for developing nations.

Ye Yu is an associate research fellow and assistant director at the Institute for World Economy Studies at the Shanghai Institutes for International Studies. Zhou Yuyuan is a senior research fellow at the Center for West Asian and African Studies at the Shanghai Institutes for International Studies. The authors contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn