China "world’s biggest debt collector" as poorer nations struggle with its loans

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, The Guardian reports.

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”.

A construction vehicle prepares ground in Hungary before the installation of the Budapest-Belgrade railway line
China spent $240bn on belt and road bailouts from 2008 to 2021, study finds

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.”