Developing nations have outstanding debts of at least $11 trillion to China, and repayment is imminent

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A recent data analysis reveals that developing nations owe at least $1.1 trillion to Chinese lenders. The study further shows that over the past two decades, more than half of the numerous loans provided by China are becoming increasingly difficult for borrowers to repay.

According to AidData, a research lab at William & Mary in Virginia, loan repayments to Chinese lenders are significantly increasing, with nearly 80% of China's lending portfolio in developing nations currently assisting countries experiencing financial difficulties. Beijing has long allocated its financial resources towards financing infrastructure projects in poorer countries, including under the "Belt and Road Initiative" launched by Chinese leader Xi Jinping a decade ago this fall.

Funds were generously allocated to infrastructure projects such as roads, airports, railways, and power plants in various regions from Latin America to Southeast Asia, contributing to the economic growth of the borrowing countries. As a result, China emerged as the world's largest creditor, forging closer relationships with the governments involved. However, this influx of funding also raised concerns regarding irresponsible lending. AidData's analysis of over 20 years of China's overseas funding in 165 countries reveals that currently, 55% of China's official sector loans to developing countries have reached their repayment periods.

Many of these debts are now becoming due in a challenging economic climate characterized by high interest rates, weakening local currencies, and a global slowdown in growth. According to Brad Parks, the executive director of AidData and author of the report, a significant number of these loans were granted during the Belt and Road initiative that began in 2013. These loans typically included grace periods ranging from five to seven years. In addition, the international debt suspension measures implemented during the pandemic added two years of grace period, during which borrowers were not required to make repayments.

The story is undergoing a transformation. Over the past decade, China has held the title of the world's largest official creditor. However, we are now at a crucial juncture where China is primarily seen as the world's largest official debt collector," he stated.

AidData's findings stem from their database, which monitors a total of $1.34 trillion in loan and grant commitments from China's government and state-owned creditors to both public and private sector borrowers in low- and middle-income countries from 2000 to 2021.

The dataset, created by gathering official and public information on individual loans and grants, offers valuable insights into the typically obscure Chinese funding activities. Additionally, the researchers referred to data disclosed by lenders to the Bank of International Settlements based in Switzerland, revealing that developing nations owe Chinese lenders a minimum of $1.1 trillion and possibly up to $1.5 trillion by 2021.

The China-backed Karuma dam at the Karuma Hydropower Plant in Kiryandongo, Uganda.

Hajarah Nalwadda/Xinhua/Getty Images

International crisis manager

China's lending approach seems to have evolved due to a significant increase in financially-distressed countries with unpaid debts. According to AidData, until 2008, Beijing had never encountered more than 10 such nations. However, their data reveals that by 2021, at least 57 countries were facing financial distress and owed outstanding debts to Chinese state-owned creditors. This phenomenon appears to have influenced China's lending behavior.

According to AidData, Beijing's funding for major infrastructure projects, which had previously gained it positive reception in the developing world, is declining significantly. However, China is now offering a significant number of emergency rescue loans. The researchers also confirm that Chinese lending is not reaching a minimum point. China is still the largest official provider of development finance worldwide and surpasses any single developed economy in the Group of Seven (G7), as well as multilateral lenders.

Thats even as the United States and its G7 partners have ramped up their rival efforts. Together, they outspent China by some $84 billion in 2021.

Zimbabwe's Hwange Thermal Power Station expanded electricity generation capacity with a Chinese-funded expansion.

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China's investment in Africa's infrastructure has been substantial, but there are signs that it may be scaling back. According to AidData, funding commitments from China to the developing world decreased at the beginning of the pandemic. In 2016, funding reached a peak of nearly $150 billion but in 2020, it dropped below $100 billion, marking the first time since 2014.

Financing commitments for 2021, including grants and loans, amounted to $79 billion according to the latest data from AidData. This represents an increase of $5 billion from the previous year. In comparison, financing commitments from the World Bank in 2021 were around $53 million.

Chinese lending for infrastructure projects to low- and middle-income countries as a proportion of total commitments decreased from 65% in 2014 to 50% in 2017 and further declined from 49% in 2018 to 31% in 2021. In that particular year, 58% of the lending consisted of emergency rescue loans, which provided assistance to financially struggling nations by bolstering their foreign reserves and credit ratings, as well as aiding them in repaying debts to other global lenders.

China is playing an expanding role as an "international crisis manager," as highlighted by AidData. The allocation of emergency rescue loans from China is dependent on the level of risk posed to the Chinese banking sector by the borrower. Parks emphasized that it is significant to note that China primarily extends these loans to the largest Belt and Road borrowers who have the highest extent of exposure in Chinese banks.

Muscling in

The potential effect of these problematic loans on China's banking sector remains uncertain given the existing strain on domestic debt. Although China has participated in collective discussions for debt relief with countries like Zambia and Ghana, AidData researchers believe that China may have hindered coordinated relief efforts by prioritizing repayment through the requirement for borrowers to provide cash collateral that other lenders do not possess.

They also stated that stronger penalties for late repayments have been implemented.

China has steadfastly upheld its track record in debt relief, emphasizing its "positive" and "constructive" contributions to multilateral initiatives. It highlighted last month that the Belt and Road program has witnessed continuous improvement in debt sustainability.

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According to AidData findings, China has also shifted towards syndicated loan arrangements, collaborating with Western commercial banks and multilateral institutions to assess projects and mitigate future risks. The report states that half of China's non-emergency lending portfolio to developing countries now consists of syndicated loan arrangements, with over 80% of these partnerships involving Western or multilateral partners.

China has taken steps in recent years to improve the Belt and Road Initiative, aiming to enhance supervision and minimize risks due to growing concerns about environmental, social, and labor issues associated with the projects. Chinese officials have vigorously defended the impact of these initiatives. During a recent forum held in Beijing, they celebrated a new phase of the project that prioritizes "high-quality" development.

Countries in debt and looking to refinance with Beijing's emergency rescue loans should be cautious about exchanging cheaper debt for costlier debt, cautioned AidData researchers.