China has taken on a new role that has far-reaching implications for the world. The rising economic giant has emerged as the world’s largest debt collector, owed a staggering amount ranging from $1.1 trillion to $1.5 trillion by developing countries, according to a recent report. This development has shifted China’s role from merely being a major bilateral lender to becoming an international debt collector.
Belt and Road Initiative’s Influence
Since 2017, China has held the title of the world’s biggest bilateral lender, with its development banks disbursing nearly $500 billion between 2008 and 2021. While some of this lending predates the Belt and Road Initiative (BRI), China’s flagship program has played a significant role in mobilizing investment in developing countries. The BRI, a massive infrastructure development initiative, has been instrumental in financing projects worldwide, from railways in Kenya to power plants in Cambodia.
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Growing Debt Challenge
The AidData research lab at William & Mary University conducted a comprehensive analysis of 20,985 projects in 165 low- and middle-income countries that received grants and loans totaling $1.34 trillion between 2000 and 2021. Their findings revealed that, as the debts to Chinese lenders increased, so did the number of suspended or canceled projects. With a substantial portion of lending directed toward countries facing financial distress or at risk of it, Beijing is becoming increasingly concerned about the rising risk of defaults.
Dealing with Defaults
China is now taking on the role of an international crisis manager, creating a safety net for countries in financial turmoil and, by extension, their heavily exposed Chinese creditors. Zambia’s historic debt restructuring deal in June, involving a substantial portion owed to the Export-Import Bank of China, exemplifies China’s efforts to mitigate the risk of future defaults. To address these concerns, Chinese policymakers have introduced measures like reducing loans for infrastructure projects and increasing emergency lending. In 2015, more than 60% of China’s loan portfolio was dedicated to infrastructure project lending, but by 2021, that share had dropped to just over 30%, with emergency lending taking up nearly 60%.
Changing Loan Terms
To further lower their exposure to risk, Chinese lenders have started increasing penalties for late repayments, a move that might strain their relationships with borrowing countries. According to the AidData report, public approval ratings for China in low- and middle-income countries fell from 56% in 2019 to 40% in 2021. While the specific terms and conditions of Chinese loans are often opaque, economists estimate that Chinese government loans to low-income countries typically have a 2% interest rate, compared to the World Bank’s 1.54% for concessional loans. However, during the early years of the BRI (2014-2017) to the latter period (2018-2021), Chinese lenders increased the maximum penalty interest rate for late repayments from 3% to 8.7%.
China’s Strategy and the Long Game
Bradley Parks, one of the report’s authors and the executive director of AidData, highlighted China’s evolving role, noting that it is navigating as the world’s largest official debt collector at a time when many of its major borrowers are financially strained. Debt collection, as he puts it, doesn’t win a lot of popularity contests. However, China is not content to let its flagship global infrastructure initiative crumble. Beijing is on a rescue mission to minimize debt distress, while also playing the long game, putting in place safeguards and strategies to future-proof the Belt and Road Initiative.
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China’s transformation into the world’s largest debt collector signifies a significant shift in its global economic role. As the international community grapples with the implications of this change, it’s clear that China is determined to protect its investments and ensure the sustainability of the Belt and Road Initiative. The evolving dynamics between China and its borrower nations will continue to shape the global financial landscape in the years to come.