Productive Finance for the Belt and Road Initiative: Reexamining China’s Debt Sustainability Framework

Abstract China has committed over $1 trillion in financing across the world, investment in public assets that have been very productive, closed infrastructure gaps, triggered economic growth, and beyond. Nevertheless, numerous external shocks—that have little to do with China’s finance– have left many countries struggling to pay external debts or borrow more at costly terms. Chinese authorities have thus importantly begun to put a framework in place to assess the debt sustainability of its investment partners across the world. This paper analyzes China’s debt sustainability assessment framework and identifies three areas that China’s framework falls short. Because the framework is largely based on the one derived by the International Monetary Fund and World Bank, the Chinese framework does not account for the accumulation of public assets but rather only analyzes liabilities, it does not account for the productive nature nor the multiplier effects of external finance, and it does not differentiate between local and foreign currency forms of debt. After analyzing these flaws in the framework, new indicators are suggested that can remedy these flaws. JEL Codes: F34; H63; O10