China’s external lending increased massively over the last two decades

Over 25% of the world’s bilateral external debt was owed to China by the end of 2023, making the country the leading debt collector. Two decades ago, the country rarely lent money; Japan lent the highest amount, followed by Germany, France, the United States and the United Kingdom.

Further, over the last two decades, when China’s external lending increased massively, the amount of bilateral external debt owed by countries surged exponentially too. In other words, China is majorly responsible for the rapid rise in external debt in many countries in the last 20 years.

Bilateral external debt is a country’s debt to foreign governments. In this analysis, only bilateral debt is considered and not debt owed to agencies such as the International Monetary Fund and bondholders.

Chart 1 shows the bilateral external debt stocks owed to all countries and to China specifically over time. It also shows (in %) China’s share in the total bilateral external debt stock owed. External debt stock is the debt owed by a country to non-residents repayable in currency, goods, or services. It is the sum of all public, publicly guaranteed, and private non-guaranteed long-term debt and short-term debt.

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The external debt stock owed to all countries increased from $49.5 billion to $741.4 billion between 1973 and 2023. The external debt stock owed to China increased from $1 billion to $193.1 billion in the same period. In percentage terms, the share of debt owed to China remained around the 1% mark until 2003, surged to 16.6% by 2013, and to 26% by 2023.

Chart 2 shows the share of external debt stock owed to top lenders in the 1973 to 2023 period. By the end of 1973 and 1983, the U.S. was the top lender. The U.S. was later surpassed by Japan, which remained the top lender by the end of 1993, 2003, and 2013.

External debt stock owed to the U.S. drastically reduced from 36% in 1973 to just 4% in 2023. Notably, by the end of 2023, the Netherlands was the third biggest lender after China and Japan.

Chart 3 shows the external debt owed by all countries to China in absolute terms and percentage terms. For instance, Pakistan owed $22 billion to China by the end of 2023, which is close to 60% of all the bilateral debt owed by the country. The farther a nation is to the right, the higher the share of its bilateral debt owed to China by 2023. The bigger the size of the bubble, the higher the debt owed to China in absolute terms.

Notably, many countries to which China loaned money were either in a financial crisis which then worsened or later descended into a financial crisis. For instance, Laos, one of the poorest nations in Asia, owed $6 billion to China in 2023, which was over 75% of its bilateral external debt.

The nation’s economic situation turned difficult with persistent high inflation, currency depreciation, and slow growth. In 2021, China opened a high-speed rail line with Laos as a part of its Belt and Road initiative.

Angola, the second largest oil producer in sub-Saharan Africa, owed $17 billion to China, which was about 58% of its external debt. In fact, 16 sub-Saharan nations owe over 50% of their external debt to China.

According to the New York Times, 15 of the 19 cobalt-producing mines in the Democratic Republic of Congo were owned or financed by Chinese firms. The nation owes 88% of its bilateral debt to China.

Sri Lanka, which owes $8 billion to China, about 50% of its bilateral debt, was struggling to repay its debt and handed over the major port of Hambantota to China in 2017.

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Beijing:

Chinese President Xi Jinping today pledged to step up China’s support across the debt-distressed African continent with funding of nearly $51 billion, backing for more infrastructure initiatives and a promise to create at least 1 million jobs.

The commitments were made at the Forum on China-Africa Cooperation Summit in Beijing.

Beijing, the world’s biggest two-way lender, also promised to carry out three times as many infrastructure projects across resource-rich Africa, despite Xi’s new preference for “small and beautiful” schemes based around selling advanced and green technologies in which Chinese firms have invested heavily.

“China is ready to deepen cooperation with Africa in industry, agriculture, infrastructure, trade and investment,” Xi told delegates from more than 50 African nations gathered in Beijing for the ninth meeting of the three yearly forum.

After the opening ceremony, delegates adopted the Beijing Declaration to build an “all-weather China-Africa community with a shared future in the new era,” as well as the Beijing Action Plan for 2025-2027, China’s state media said.

Xi also called for “a China-Africa network featuring land-sea links and co-ordinated development,” as he told Chinese contractors to return to the one-billion-strong continent, after the lifting of COVID-19 curbs that disrupted its projects.

“China and Africa account for one-third of the world population. Without our modernisation, there will be no global modernisation,” Xi told the summit.

The Chinese leader committed 360 billion yuan ($50.70 billion) in financial assistance, but specified that 210 billion would be disbursed through credit lines and at least 70 billion in fresh investment by Chinese companies, with smaller amounts provided through military aid and other projects.

At the 2021 China-Africa summit in Dakar, China promised at least $10 billion in investment and the same again in credit lines. This time, the financial assistance would be in yuan, in an apparent push to further internationalise the Chinese yuan.

Xi did not mention debt in his speech, despite Beijing being many African states’ biggest bilateral lender, but the Action Plan for 2024-2027 included terms for repayment postponements and called for the establishment of an African rating agency to bring about “a new rating culture”.

United Nations Secretary General Antonio Guterres told the summit African countries’ inadequate access to debt relief and scarce resources was a recipe for social unrest, while proposing fresh reforms to the international financial architecture.

SHARED FUTURE OR DEBT DIPLOMACY?

The Forum on China-Africa Cooperation Summit chalks out a three-year programme for China and every African state bar Eswatini, which retains ties to Taiwan.

In addition to 30 infrastructure connectivity projects, Xi said, “China is ready to launch 30 clean energy projects in Africa,” offering to co-operate on nuclear technology and tackle a power deficit that has delayed industrialisation efforts.

But the Chinese leader did not reiterate his pledge at the 2021 forum in Dakar for the Asian giant to buy $300 billion worth of African goods, pledging only to unilaterally expand market access.

Analysts say Beijing’s phytosanitary rules for market access are too strict, making China unable to meet that promise.

But Africa continues to receive more Chinese financing instead. Last year, China approved loans worth $4.61 billion to Africa, in the first annual increase since 2016.

“I’m here to see how best we can foster our relationship with China,” Princess Dugba, Sierra Leone’s fisheries and marine resources minister, said to the summit’s sidelines.

“China is getting us a fish harbour, which is one of the first of its kind,” she added.

Xi Jinping also said China was “ready to assist in the development of the African Continental Free Trade Area, and deepen logistics and financial co-operation for the benefit of trans-regional development in Africa.”

China has been accused of having “hidden agendas” in its “debt diplomacy”. Nations dealing with China have often faced the dangers of unaffordable debt via unsustainable financing, which, as highlighted by India at the United Nations, leads to a “vicious cycle of debt traps”.

($1=7.0976 Chinese yuan renminbi)