What is the impact of China's overseas lending to poor countries? | Experts’ Opinions

As the lender of choice for many nations over the past decade, China has lent more than US$500 billion to developing countries, becoming one of the world’s largest creditors. By lending huge amounts to governments across Asia, Africa and Europe, China has grown its global influence mainly through infrastructure megaprojects. Now the country is under growing pressure to take certain decisions that would allow restructuring some of the debts owed by poor countries. Should it agree to this? Check out some opinions below.

DevelopmentAid: What is the impact of China’s overseas lending to poor countries?

“China’s lending to low-income countries in the 2000-2021 period has made it the world’s largest annual creditor, surpassing the World Bank, IMF, and Paris Club combined. But a lot of the Chinese non-concessional program debt goes to countries like Russia, Venezuela, Iraq, North Korea which are not necessarily dollar bilateral exchange markets but rather through export receipts or project revenues, using terms like interest fee loans or even debt forgiveness. (Editor’s note: The countries with the biggest debt to China were Pakistan ($27.4 billion of external debt to China), Angola (22.0 billion), Ethiopia (7.4 billion), Kenya (7.4 billion) and Sri Lanka (7.2 billion) according to Statista.com). Below are some of the direct consequences of this:

• Besides the direct internal sovereignty influence, there is increasing empathy towards authoritarian but helpful regimes, and gratitude incentives to work with China
• Buying votes in international organizations to enforce the China policy. Recognizing Taiwan will result in exclusion from the highly concessional lending program
• A rise in China’s BOP because of their big surplus US$ reserves linked to foreign project countries; additionally, efficient use of domestic industrial overproduction (cement, steel, aluminum, etc.)
• Securing cheap, long-term needed natural resources from borrowers
• Positives include the implementation of infrastructure projects with China in three years as opposed to the OECD’s eight years. Thus, poor countries have faster and easier financial support which has shown a rise in near-term economic growth
• Lastly, a disruptive amount of emergency lending is in RMB, an international policy to overtake the US$ in global markets.”

“China’s overseas lending to poor countries has had both positive and negative impacts. On the positive side, China’s loans have enabled many countries to invest in infrastructure and development projects that they may not have been able to otherwise afford. These projects have contributed to economic growth and development in these countries, as well as improving their social welfare. On the negative side, China’s loans have also left many countries with significant debt burdens that they may struggle to repay, potentially leading to financial instability and dependency on China. Additionally, there are concerns that some of the infrastructure projects funded by China have had negative environmental and social impacts.”

DevelopmentAid: Should China forgive at least some of the debts?

“First, let’s recall the main borrowing structure of China: a group of many private creditors who add together their capital to lend to countries. Therefore, it is not China that has not to forgive the debts but it must convince and organize different policies and preferences among the many creditors to forgive the debts although the Chinese global lending strategies are changing. In 2021, China announced that it would sign up to the common lending framework and engage in sovereign debt restructurings in coordination with international creditors. Thus, the country will continue with the world’s trust through a fair lending program. In total, more than 20 debtor countries have received US$240 billion in Chinese rescue lending since 2000, of which nearly US$185 billion was between 2016–2021. (Horn-Reinhart, 2023). This strategy involves a foreign dependency on China as well as a system of “bailouts” that helps countries to avoid defaults and continue servicing their debts. Chinese state-owned oil companies provided cash advances for commodity imports that are reminiscent of Western “rescue” efforts — US oil prepayments to Mexico during its debt crises of 1982 — therefore China is repeating common and globally accepted international economic schemes. Final answer: it depends. If some of the low-income countries’ debts are really forgiven, it will leave the world better off.”

“Whether or not China should forgive some debts is a complex issue. On the one hand, debt forgiveness could alleviate the financial burden on many poor countries, potentially reducing their risk of default and enabling them to invest in other areas such as healthcare and education. On the other hand, debt forgiveness could set a precedent for other countries to default on their loans, potentially undermining the credibility of the international financial system. Additionally, there are concerns that debt forgiveness could be used as a tool of political influence, potentially enabling China to gain even more power and influence in the countries it has lent to. Ultimately, the decision to forgive debts should be made on a case-by-case basis, taking into account the specific circumstances of each country and the impact that debt forgiveness would have on the broader financial system. Any debt forgiveness should also be accompanied by measures to promote transparency and accountability in lending practices, as well as efforts to address the root causes of indebtedness in poor countries.”

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