China Extends $1.1 Trillion in Debt to Developing Countries to Address Crisis and Build Railways

Over the past two decades, China has poured debt into developing countries, amounting to $1.1 trillion.

This debt has been used to finance the construction of roads, airports, railways, and power plants in developing countries across Latin America to Southeast Asia. The influx of debt has positioned China as the world’s largest lender.

Last Monday (6/11), AidData reported that 165 developing countries have received loans from China, with 55% of these debts set to mature amid global economic challenges such as high interest rates, weakening local currencies, and slowing global growth.

For years, China has provided loans to fund infrastructure projects in poor countries, often known as the Belt and Road Initiative.

“Over the past 10 years, China has been the world’s largest creditor. And now we are at a turning point where China is truly becoming the world’s largest official debt collector,” said Brad Parks, executive director of AidData and author of the report, to CNN Business on Friday (10/11).

Initially aimed at funding infrastructure projects, these debts have now shifted to become rescue loans as some countries face financial crises. AidData reported that around 57 indebted countries are currently experiencing financial difficulties.

China’s debt for infrastructure projects in developing countries has steadily decreased from 65% in 2014 to 50% in 2017, further dropping to 49% in 2018, and then significantly down to 31% in 2021.

The report stated that 58% of the debt is emergency rescue loans, helping countries under pressure to sustain their foreign exchange reserves and credit ratings or assisting them in repaying debts to other international lenders.

AidData describes China as an “international crisis manager,” as countries in crisis heavily rely on Chinese banking.

The impact of problematic loans on China’s banking sector, burdened by increasing debt issues, is still unclear. However, China is currently in negotiations with troubled borrowers such as Zambia and Ghana.

AidData mentioned that China is also demanding troubled borrowers to provide larger funds, using cash guarantees not possessed by other countries.

“They (China) have also imposed heavier penalties for payment delays,” the report stated.