New research shows that China has emerged as the world’s largest debtor for developing nations, which are due to pay back at least $54 billion to Beijing this year.

Australian foreign policy think tank the lowy Institute has crunched data from the World Bank and found some of the world’s poorest countries are now facing “record high debt payments” to China.

Belt and road Initiative

China rapidly boosted investments in infrastructure last decade, funding railways, ports and roads across the developing world under its sprawling Belt and Road Initiative – projects which have often been welcomed by governments across latin America, Africa, Central Asia and South-East Asia.

But the lending has also placed pressure on government balance sheets around the world.

Beijing has sharply pulled back lending in the last five to 10 years, but the Lowy Institute‘s Riley Duke says bills from earlier loans are now starting to land.

“China’s earlier lending boom, combined with the structure of its loans, made a surge in debt servicing costs certain,”

“Because China’s Belt and Road lending spree peaked in the mid-2010s, those grace periods began expiring in the early 2020s.”

Debt Repayments

“It was always likely to be a crunch period for developing country repayments to China.”

The problem has been exacerbated by China’s move to defer debt repayments during the COVID-19 pandemic, a move which was “helpful at the time” but is now “heightening … the current repayment spike”.

The picture painted by the report is incomplete, as China typically does not provide data for its loans, and details isn’t available for many developed nations.

But Mr Duke said it was obvious that developing countries – including in the Pacific – were now “grappling with a tidal wave of debt repayments and interest costs.”

“Now,and for the rest of this decade,China will be more debt collector than banker to the developing world,”

“The high debt burden facing developing countries will hamper poverty reduction and slow development progress while stoking economic and political instability risks.”

Pacific nations like Tonga, Samoa and Vanuatu are already grappling with high levels of Chinese debt, and have been pushing Beijing for extensions on their loans.

For example, Tonga borrowed heavily from China to rebuild in the wake of the devastating 2006 riots in Nuku’alofa. it has now started gradually repaying loans worth around $190 million – a sum which Lowy says is roughly equivalent to a quarter of its GDP.

But those repayments – along with recent natural disasters – have placed significant strain on Tonga’s budget, as well as stoking political controversy in the Pacific Island nation.

Australia has stepped in with significant financial support to help Tonga balance its books, including an $85 million budget support package unveiled earlier this year.

The report says that while Chinese institutions are at times willing to push back repayment demands, they’ve typically been unwilling to forgive debts – which means Beijing often faces a challenging diplomatic balancing act.

“Beijing faces a dilemma: pushing too hard for repayment could damage bilateral ties and undermine its diplomatic goals,”

“Simultaneously occurring, China’s lending arms, especially its quasi-commercial institutions, face mounting pressure to recover outstanding debts.”

The report says Beijing’s preference to kick the can down the road could create new financial dynamics in a host of developing countries.

“As a result, China’s approach to debt distress increasingly echoes the ‘extend and pretend’ practices of Western lenders during the 1980s Lost Decade – a period that left many low-income countries deeply indebted and ultimately required sweeping restructurings and write-downs in the 1990s.”