Overview
This year, a record $21.6 billion in debt repayments will flow from developing countries to China, marking a pivotal moment in the evolving global lending landscape. Since the end of the COVID-19 pandemic, China has significantly scaled back its bilateral loan commitments while emerging as the world’s largest official debt collector. This shift coincides with numerous challenges in the global economy, including a sharp decline in traditional sources of global aid. With more than half of the world’s most vulnerable countries now classified by the International Monetary Fund (IMF) as being either at risk of or already experiencing debt distress—coinciding with scheduled repayments to China—how these intersecting pressures unfold will have significant ramifications for global development finance and the international economy writ large.
China’s Role in Foreign Financing
Launched in 2013, China’s Belt and Road Initiative (BRI) is a state-backed investment program aimed primarily at financing traditional infrastructure, such as roads, railways, and ports. In just a decade, China has disbursed over $1 trillion in loans and other funding for development projects across the globe through this initiative. To date, between 146 and 150 countries are estimated to have signed memorandums of understanding with China to participate in the BRI, with three new members joining as recently as 2023.
Even before the BRI was formally announced, China had been actively engaging in foreign investments targeting both developing and more advanced economies. These investments are motivated by varied strategic goals, including access to raw materials, advanced technologies, and export markets. BRI’s creation, however, was largely seen as a response to China's domestic needs, like the need to utilize surplus capital from prior stimulus efforts, address regional economic inequalities between China’s coastal and inland provinces, and offload overcapacity in construction and production materials. Simultaneously, it also sought to enhance China’s global connectivity by improving port access and trade routes, thereby expanding markets for Chinese firms and deepening ties with trading partners.
China has consistently promoted the BRI as a “win-win” opportunity for global development, emphasizing its potential to address the investment and infrastructure financing gaps faced by many developing nations. However, many aspects of the BRI remain opaque, particularly regarding the lack of available data on specific financing figures and investment types. Moreover, critics of BRI accuse Beijing of pursuing “debt-trap diplomacy,” a term coined in 2017 following China’s deal with Sri Lanka to receive a 99-year lease for the Hambantota Port in Sri Lanka after Sri Lanka fell behind in debt payments. Debt-trap diplomacy is understood to be China’s scheme to extend unaffordable loans to low-income countries, compelling them to eventually give up strategic assets to China in a debt-for-equity swap. What is clear is though is that the launch of the BRI brought about an increase in the amount of China’s long-term loan commitments. According to World Bank data, China’s loans to the world’s poorest countries surged between 2012 and 2013, rising from $11.5 billion to $18.3 billion — the largest single-year increase in such commitments. Over the following years, China's lending accelerated, with the country financing numerous “megaprojects” worth more than $500 million each. The primary financiers of these overseas projects have been two Chinese policy banks: the China Eximbank and the China Development Bank.
Starting in 2016, however, China’s overseas lending began to slow due to stricter domestic regulatory controls, a trend further exacerbated by the economic impacts of COVID-19. By 2020, the Chinese government started shifting its focus away from large-scale megaprojects in conflict- and debt-prone regions, instead channeling resources toward more sector-specific initiatives. This slowdown also coincided with earlier BRI loans exiting their grace periods and entering repayment phases. While exact terms vary, China’s loans typically carry interest rates of 4–5%, a four-year grace period, and a 10-year maturity period, though many loans have shorter maturity timelines.
To Delay or Restructure
As the largest bilateral lender to low- and middle-income countries, China must navigate an environment with sovereign borrowers in increased debt distress. UN Trade & Development found that external debt for developing countries had quadrupled in the last two decades, reaching a record $11.4 trillion in 2023, and net interest payments to external creditors increased 26%, amounting to $847 billion. With global debt levels continuing to rise, many indebted nations have called for repayment suspensions and rescheduling agreements. In response, China has offered bailouts to these countries, often in the form of payment suspensions and deferrals. Of note is China’s participation in the Debt Service Suspension Initiative (DSSI), launched by the G20 following the COVID-19 outbreak. The DSSI allowed the poorest countries to suspend their debt service payments for one year, enabling them to focus on pandemic-related challenges. China, however, signaled its frustration with the DSSI as it provided the largest share of debt relief under this initiative, totaling $5.7 billion, which accounted for 55% of the total DSSI relief while only being responsible for 29% of the repayments that were due.
Shortly afterward, China joined the G20 in creating a new mechanism called the Common Framework, designed to address deeper debt sustainability issues for the world’s poorest countries. This framework provides options for debt rescheduling, relief, and, in rare cases, reductions or cancellations. However, China’s participation in the Common Framework has faced criticism, being described as either sluggish or intentionally obstructive. While Chinese officials have expressed their willingness to engage on international debt relief, they have emphasized that China should not bear the burden alone. Furthermore, as Beijing increasingly shifts its focus toward addressing domestic economic challenges, it is likely that debt relief efforts is receiving less attention, contributing to delays in addressing Common Framework-related demands. China has also strongly resisted calls for more substantial forms of debt restructuring, such as outright debt forgiveness or reductions.
To date, the Common Framework has been employed to restructure the sovereign debts of Ghana and Zambia, which sought adjustments of $13 billion and $3 billion, respectively. Nonetheless, indebted countries have expressed widespread dissatisfaction with the framework, criticizing it as overly narrow in scope and impact, excessively slow in implementation, and unnecessarily complex. A growing chorus of voices—from country leaders to regional bodies—has demanded urgent reforms. At the African Union conference earlier this month in Togo, representatives issued a statement calling for significant improvements to the Common Framework. They emphasized the need for greater inclusivity, transparency, and efficiency in global debt management and financial reforms.
Intersecting Pressures
The global debt crisis is unfolding against the backdrop of intersecting pressures that threaten the economic stability of developing nations. Rising sovereign debt, compounded by declining foreign aid and volatile global markets, is reshaping the development finance landscape. China’s role as the largest bilateral lender and its growing influence in debt restructuring negotiations position it as a key player in determining how these challenges will be addressed.
However, China’s concern with economic problems at home will constrain its capability to shape reform of the Common Framework. It seeks to collect its credit now, meaning it will likely not be an ally for the Global South in efforts to restructure outstanding debt obligations. Without the political will to lead in debt restructuring, debtor countries may face a tight fiscal environment over the horizon.
Pressure on developing countries stands to increase with a reduction of global aid, most significantly with the US’ dismantling of USAID and a planned 83% reduction in its global programs. Many countries already stretched by the dual demands of external debt servicing and internal crises now face an increasingly difficult financial predicament to fill in development gaps, especially for public services like health infrastructure. While there has been speculation that China will now expand its focus beyond infrastructure lending to address these humanitarian and development challenges, China has shown limited intention to fill the void left by reduced US aid. Moreover, the scale of China’s foreign assistance remains relatively modest compared to US disbursement before its withdrawal from many global initiatives.
For debtor countries, the convergence of rising external debt obligations and shrinking fiscal space is creating a precarious environment. Governments pushed to prioritize debt payments will continue to struggle in addressing critical development issues which require extensive and sustained investment. The slow pace and complexity of existing mechanisms like the Common Framework continue to raise concerns about whether current methods are adequate to alleviate mounting debt burdens, with increasing calls for reforms from debtor countries. Debt burdens may force unpopular fiscal reforms upon Global South countries, creating short-term downside risks in popular frustration, such as in the case of Kenya’s 2024 protests, in addition to short-term financial instability.
While China has scaled back in major new infrastructure and development loan disbursements, it remains highly exposed to the debt of developing countries through its continued engagement in existing infrastructure projects and as a major lender. These dramatic shifts in the global development finance landscape may underpin calls to change the bilateral and multilateral debt management systems, as both lenders and debtors alike face the challenge of protecting financial investments without debt burdens becoming untenable. If China issues strict demands for repayment, it risks conjuring distrust in its loan programs, potentially undermining its ambitions with the BRI and creating an opening for alternative lenders to fill the gap. With mounting debt servicing costs, debt-distressed countries are at risk of increased poverty and political fragility, reducing their capacity to tackle domestic challenges and opening the doors to civil unrest and conflict. High debt service costs would also render many of these countries less capable of handling climate-related issues which could lead to increased irregular migrations. These challenges hold significant risks for spillover into other countries, alongside greater market instability and disruptions to global supply chains.
