China is “very” reluctant to offer nominal haircuts for debt-distressed countries such as Zambia and Sri Lanka due to Chinese banking sector reforms in the last three decades and needs higher political intervention to do so, Shang-Jin Wei, former Chief economist at the Asian Development Bank (ADB) said.

In conversation with the China Global South Project podcast, Shang said that one of the idiosyncratic features that are seen on the Chinese side when it comes to debt negotiation is their strong reluctance to take an outright cut in the principal amount while being relatively accessible in extending the loan.

Shang, who is a Professor of Chinese Business and Economy and Professor of Finance and Economics at the Columbia Business School said that part of the Chinese banking sector reforms of the three decades was to impose much harder constraints on bank lenders.

“In the domestic context, the loan officers take on an extraordinary kind of burden in making sure the loans don’t go south, not just banks but individual officers in the bank that approve loans, if the loans go south they have to bear a mark that goes with the loan officer even if they change the employers,” he said.

He noted that the reason for such harder constraints was that in the 1990s there were a lot of bad debts in the banking system and some Chinese banks were near technical default.

So he added that this same feature applies to the Export-Import (EXIM) Bank and China Development Bank, although their loan set-up has different components, a very big chunk of loans are made on the same kind of commercial basis in the minds of the banks and are therefore, subjected to the same kind of disciplines as domestic loans.

“They (banks) have relative flexibility in extending the loans,” he said adding that it's not that China has never cancelled debt to other countries but this particular decision has to be made at a much higher political level.

China EXIM Bank offered a two-year debt moratorium for Sri Lanka for 2022 and 2023 years in January, which was not sufficient financial assurance for the International Monetary Fund (IMF) to unlock the Extended Fund Facility (EFF) to Sri Lanka.

However, the EFF was unlocked in March after a letter by the EXIM Bank which offered the same two-year moratorium with a target of finalising debt-treatment specifics in the coming months, according to Reuters.

Sri Lanka is looking for a $ 17 billion debt reduction between 2022-2027 to close the external financing gap.