China has become the world’s biggest debt collector, as the money it is owed from developing countries has surged to between $1.1tn (£889bn) and $1.5tn, according to a new report. An estimated 80% of China’s overseas lending portfolio in the global south is now supporting countries in financial distress.
Since 2017, China has been the world’s biggest bilateral lender; its main development banks issued nearly $500bn between 2008 and 2021. While some of this predates the belt and road initiative (BRI), Beijing’s flagship development programme has mobilised much of the investment in developing countries.
But a new report by researchers at the AidData research lab at William & Mary, a public university in Virginia, found that China, the world’s second largest economy, is now navigating the role of international debt collector as well as being a bilateral funder of major infrastructure projects.
Lending from Chinese state-backed banks has helped to build railways in Kenya and power plants in Cambodia, along with thousands of other projects. The AidData researchers analysed 20,985 projects in 165 low- and middle-income countries, which were financed with grants and loans worth $1.34tn between 2000 and 2021.
The researchers found that as the debts to Chinese lenders have mounted, the number of suspended or cancelled projects has also increased. With a high share of lending directed towards countries in, or at risk of, financial distress, Beijing is now increasingly worried about the risk of defaults.
In June, Zambia reached a historic deal to restructure $6.3bn of debt, two-thirds of which is owed to the Export-Import Bank of China, one of the country’s two main policy banks.
To mitigate the risk of future defaults, Chinese policymakers have introduced a number of measures, including reducing loans for infrastructure projects while ramping up emergency lending. In 2015, infrastructure project lending accounted for more than 60% of China’s loan portfolio. By 2021, the share was just over 30%, with emergency lending accounting for nearly 60%.
“China is increasingly behaving like an international crisis manager,” the researchers concluded. China has created “a safety net” for countries in financial distress – “and, by extension, their highly exposed Chinese creditors”.
Another way in which Chinese lenders have been trying to lower their exposure to risk is by increasing the penalties for late repayments, a move that may alienate borrowers. The AidData report cites figures from the Gallup World Poll which shows that public approval ratings for China in low- and middle-income countries fell from 56% in 2019 to 40% in 2021.
The terms and conditions of specific Chinese loans are often not transparent, but economists estimate that Chinese government loans to low-income countries typically have a 2% interest rate compared with the 1.54% norm for the World Bank’s concessional loans. But the AidData researchers found that between the early years of the BRI (2014-2017) and the latter period (2018-2021), Chinese lenders increased the maximum penalty interest rate for late repayments from 3% to 8.7%.
Bradley Parks, one of the report’s authors and the executive director of AidData, said: “Beijing is trying to find its footing as the world’s largest official debt collector at a time when many of its biggest borrowers are illiquid or insolvent. And debt collectors don’t win a lot of popularity contests.”
Still, Parks noted, “China is not going to stand by and watch its flagship global infrastructure initiative crash and burn.” Beijing is currently on a “rescue mission” to minimise debt distress, but the government is also “playing the long game”, Parks said. “It is putting in place a set of loan repayment safeguards … that are designed to futureproof the belt and road initiative.”
