China has cast itself in concrete as the world’s largest creditor to developing nations. This year, it’s responsible for outstanding debts, amounting to at least $54 billion. This expanding role of ENGOs points to a significant change that has taken place over the last 10 years. Initially, China did this by becoming the largest global investor in infrastructure projects with its Belt and Road Initiative. Recent trends point to a calculated retrenchment in lending, sparking fears of a coming debt crisis among developing countries.
In the last decade, China aggressively expanded its lending portfolio, funding essential infrastructure like railways, ports, and roads across various developing regions. Lending has plummeted over the last five to ten years. The consequences of this cut are now playing out as nations face growing repayment burdens.
Impacts of COVID-19 on Debt Repayments
In 2020, when COVID-19 exploded all over the world, China made a big move by agreeing to defer repayments on existing debt for many developing countries. This decision was intended to relieve short-term financial burdens. As the pandemic is starting to recede, countries are currently facing a tsunami of repayment calls that threaten to upend their economies.
“Now, and for the rest of this decade, China will be more debt collector than banker to the developing world,” – Mr. Duke
The Lowy Institute’s analysis of World Bank data highlights that some of the world’s poorest countries are facing unprecedented debt servicing costs to China. These increasing fiscal challenges risk reversing the gains made in reducing poverty and slowing overall development progress.
“The high debt burden facing developing countries will hamper poverty reduction and slow development progress while stoking economic and political instability risks,” – Mr. Duke
For debts incurred during China’s lending boom, grace periods are beginning to expire. Nations are now under increasing scrutiny to deliver on their promises.
The Case of Pacific Island Nations
Countries such as Tonga, Samoa, and Vanuatu are emblematic of the challenges faced by developing nations in repaying Chinese loans. Take Tonga, for instance, which has borrowed $121 million from China to rebuild from the fruitful rioting that destroyed much of Nuku’alofa in 2006. Currently, Tonga is in the process of repaying $190 million worth of loans to China. This enormous amount is equal to about a fourth of the nation’s GDP.
These nations of the Pacific are pursuing loan extensions with gusto. Even today, they are still figuring their way through the challenges of deep talents. The diplomatic balancing act for China becomes increasingly difficult as it weighs its need to recover debts against the potential consequences for bilateral relations.
“Beijing faces a dilemma: pushing too hard for repayment could damage bilateral ties and undermine its diplomatic goals,” – Mr. Duke
China’s quasi-commercial lending arms are feeling the squeeze to collect on debts, intensifying the ruckus.
Future Financial Dynamics
China, for its part, is aggressively playing the long game. Its policy on debt collection will have a huge impact on the economic future of these developing nations. On the repayment side, recent trends indicate that Beijing’s preferred approach is to defer repayment problems, rather than extract aggressively pursue collections. While this approach offers short-term relief, it risks creating a long-term fiscal crisis for many of these countries.
“China’s earlier lending boom, combined with the structure of its loans, made a surge in debt servicing costs inevitable,” – Mr. Duke
Each of these developments could have a major influence on the future of international relations. They might pose risks to economic stability in countries that are overly reliant on Chinese financing.
