China, Debt, Climate and Nature: Opportunities for Financial Stability

As developing countries emerge from the COVID-19 crisis, they will need to pivot rapidly to relaunch their economies. Given the severity of the current economic downturn, the world has an opportunity to pivot to greener and more inclusive forms of economic growth in the next business cycle. Standing in the way is a second crisis: sovereign debt. Governments cannot enact the climate-friendly growth commitments enshrined by their Nationally Determined Contributions, in accordance with the Paris Agreement, nor their commitments to reverse global biodiversity loss by 2030, while simultaneously facing serious debt distress.

China is in a unique position to support countries in addressing both of these crises at once. As the world’s largest bilateral creditor, it can consider a variety of sustainable alternatives for debt relief for the most debt-stressed countries, including debt-for-nature swaps, debt-for-climate swaps, and sustainability-linked bond issuances. Traditional ‘debt-for-nature swaps’ are an incentive-based solution for achieving conservation targets in highly indebted countries, where organizations and/or government creditors negotiate with government debtors to cancel or reduce debts in return for binding commitments to protect threatened species, reduce deforestation, or achieve other environmental goals, often through the creation of protected areas. The design of debt swaps has evolved to increase investments over longer periods of time, include more involvement of a diverse group of stakeholders, and ramp up enforcement. This includes the extension of debt relief incentives to facilitate national climate mitigation and adaptation targets in debtor countries, termed ‘debt-for-climate’ swaps.

Our study, published in Science, discusses opportunities for China to support these efforts in low- and middle-income countries facing high debt exposure from Chinese loans. The results highlight where environmental returns on investment show promise for China to consider in the lead-up to this year’s Convention on Biological Diversity’s Conference of the Parties (CBD COP 15).