China, once a major lender for the world’s poorest nations, is now emerging as the largest debt collector, a shift that poses serious risks to global poverty reduction efforts and stability, according to a new report by Australia’s Lowy Institute. After years of aggressive lending through its Belt and Road Initiative, China’s lending to developing countries has slowed, leaving many nations struggling to repay their debts, fueling economic instability and social unrest.
Declining Lending and Increased Debt Collection
The report, titled “Peak Repayment: China’s Global Lending,” reveals that China began curtailing its lending even before the COVID-19 pandemic. This decline in new loans comes as China faces growing diplomatic pressure to restructure unsustainable debt and recover outstanding payments from borrowing nations. With over a quarter of external debt in developing countries now owed to China, these nations are expected to repay at least $35 billion to Beijing this year, exacerbating the financial strain in regions already battling economic instability.
China’s Learning Curve in Debt Restructuring
Critics have long accused China of creating a “debt trap” through its aggressive lending practices. However, Deborah Brautigam, director of the China-Africa Research Initiative, suggests that China’s lending practices are more driven by commercial logic than overt political leverage. According to Brautigam, Chinese lenders are learning from past mistakes and are transitioning to more sustainable lending practices. As the state-owned China Export-Import Bank’s influence wanes, commercial banks are stepping in to fill the gap, albeit cautiously given the global financial uncertainty.
Debt Burden on Developing Nations
The impact of Chinese debt is particularly severe for countries that borrowed heavily in the 2010s. Nations like Kenya, Zambia, Pakistan, and Mongolia are now facing mounting debt servicing costs that are diverting funds from essential public services like education, healthcare, and infrastructure. According to the report, debt payments are “crowding out” development spending, deepening the economic setbacks in these regions. The burden of repaying Chinese loans is compounded by global economic challenges, including the impact of U.S. tariffs and reduced foreign aid from Western nations.
Impact on Domestic Politics and Stability
In some countries, China’s role as the largest lender has even affected domestic politics. In Kenya, for instance, the Chinese-funded Nairobi-Mombasa rail line became a point of contention, with some viewing it as a symbol of corruption and poor investment. The issue of foreign debt played a significant role in the presidential election, where populist candidate William Ruto capitalized on anti-China sentiment. Such political fallout highlights how foreign debt can influence public opinion, domestic politics, and international relations.
The Sri Lanka Crisis and Broader Implications
The economic fallout from Chinese debt was dramatically illustrated by Sri Lanka’s 2022 financial collapse. Facing a massive debt burden, Sri Lanka defaulted on its $4.2 billion debt to China and was forced to restructure its obligations. This default not only worsened the country’s economic crisis but also undermined confidence in its currency and future borrowing prospects. This example underscores the broader risks that Chinese lending poses to global financial stability, particularly in low-income countries vulnerable to external shocks.
Future Outlook: A Tightening Financial Squeeze
As more loans come due, the financial squeeze on developing nations is likely to intensify. Without new concessional financing or coordinated debt relief, these countries face the prospect of deeper development setbacks and heightened instability. While some nations, especially those rich in vital resources like lithium and nickel, continue to receive favorable treatment from China, the broader trend of rising debt service costs threatens to derail progress in poverty alleviation and sustainable development.
