China is now the world’s largest creditor to developing countries. These countries need to repay at least $54 billion to Beijing this year alone. Many developing countries are currently stuck living with the consequences of irresponsible past infrastructure investments associated with China’s Belt and Road Initiative (BRI). In the last ten years this program has quickly appropriated billions for new and upgraded railways, ports and roads. With China suddenly—almost overnight—halting the annual increase in its lending, the aftereffects of all that past debt buildup are coming sharply into focus.
The Lowy Institute warns that the bills from these previous loans are just beginning to come due. This transition has happened to line up with an unprecedented drop in Chinese lending over the past five to ten years. China’s decision to suspend debt repayments at the start of COVID-19 has exacerbated this repayment spike currently being experienced. This change in responsibility has made the burden much heavier for developing nations.
Rising Debt Burden in the Pacific
Pacific Island countries, like Tonga, Samoa, and Vanuatu are facing record-high debt levels. They are on the hook for almost all of this debt to China. Tonga, for example, took out lots of loans from Chinese government banks to reconstruct infrastructure damages from riots in 2006. At present, Tonga is in the midst of repaying loans totaling approximately $190 million. That figure is approximately one-fourth of the nation’s GDP.
As Tonga deals with these economic pressures, Australia has intervened with a strong financial support. In April of this year, Australia announced a new AU$85 million (US$63 million) budget support package to assist Tonga in meeting its budgetary commitments. This support highlights the precarious position developing countries are in, as they juggle their debt obligations and pursue pathways for sustainable economic recovery.
“The high debt burden facing developing countries will hamper poverty reduction and slow development progress while stoking economic and political instability risks.” – Mr Duke
This increasing cost of servicing debt has worried experts at the ongoing effects this could have on these countries’ economies for years to come. These figures from the Lowy Institute’s recent analysis illustrate how a number of the world’s poorest nations are now experiencing historic debt payments to China. This is an ominous sign for their prospects to continue producing robust economic growth.
China’s Lending Practices Under Scrutiny
China has not yet deployed this tactic but it has brought to mind the worst practices used by Western lenders during the 1980s. Many experts have noted that China’s lending practices are more and more starting to look like the extend and pretend approach. These tactics have left many low-income countries drowning in debt today.
“China’s earlier lending boom, combined with the structure of its loans, made a surge in debt servicing costs inevitable.” – Mr Duke
Specialists forecast that poorer countries can have a good worsened fiscal squeeze this decade. The grace periods on all those other loans are beginning to run out, increasing the urgency. The impacts of these debts go beyond the fiscal bottom line; they threaten to destabilize whole regions and hinder community growth.
Beijing is in an extremely precarious position as it implements these repayment calls. This puts Chinese lending arms under extreme political pressure to recover outstanding debts. Renewing demands for full repayment too quickly would threaten critical diplomatic and other relations with those countries.
“Beijing faces a dilemma: pushing too hard for repayment could damage bilateral ties and undermine its diplomatic goals.” – Mr Duke
Future Implications for Developing Economies
This imbalanced financial dynamic between China and developing countries is changing quickly. These challenges are building into an enormous crisis for nations across Asia and the Pacific. They are facing down an oncoming tsunami of debt maturities and soaring interest expenses. This reality begs some important questions regarding the future of Chinese influence in these areas.
Experts like Mr Duke emphasize that “now, and for the rest of this decade, China will be more debt collector than banker to the developing world.” The economic stakes of this transition are enormous—potentially larger than the tech industry today. It will hit efforts to end poverty and advance sustainable development projects hard.
“Because China’s Belt and Road lending spree peaked in the mid-2010s, those grace periods began expiring in the early 2020s.” – Mr Duke
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