By Rebecca Ray
In the last few years, China’s net debt transfers (new disbursements minus repayments) to low-income countries have turned negative. This trend means that poor countries are now repaying China more each year for past years’ lending than they are receiving in new loans. As Figure 1 shows, Chinese creditors are collecting on old debts to a greater extent than they are extending new loans. The figure shows net disbursements to low-income countries—defined here as countries eligible for concessional borrowing through the International Development Association (IDA)—both overall and by creditor category across the 21st century.
The reason for this reversal is simple: China’s outbound finance disbursements peaked in 2018 and have dramatically declined since then (as documented in the China’s Overseas Development Finance database managed by the Boston University Global Development Policy Center). Figure 2 shows more detail of these trends over time. However, an intrinsic fact of lending is that repayments extend for a longer period of time than disbursements. Thus, inevitably, as China’s lending has declined, its borrowers have shifted into a period when their repayments on existing loans outweigh new disbursements.
It is important to note that these trends are not unprecedented or even particularly unusual. For example, when Paris Club creditors were experiencing financial volatility associated with the real estate bubble of the mid-2000s, their net transfers to IDA countries similarly reversed. As Figure 3 shows, Paris Club net transfers hit a trough of -$9.4 billion in 2005, a shockwave that swamped the value of China’s net transfers of -$5.9 billion in 2024.
Furthermore, the impact of China’s negative net transfers is concentrated among a few countries. To explore this distribution in more detail, Figure 4 shows each IDA country’s net debt transfers from each category of creditors, as well as their total net debt transfers overall, as a share of their government expenditure in 2024. For the 19 countries shown at the top of Figure 3, the most negative net transfer came from China. However, most of those 19 countries recorded positive net transfers overall, meaning they offset negative net transfers from China with positive net transfers from other lenders.
The remaining six countries had negative net transfers from China and negative net transfers overall, meaning that the negative net transfers from China served to compound an already dire situation. These six countries are concentrated in Asia and the Pacific (Myanmar, Samoa, Tonga and Tajikistan) and Africa (Djibouti and Mozambique).
Nonetheless, despite the fact that China’s negative net transfers are not unprecedented and have a significant impact on a relatively small number of countries, these flows still create a difficulty for these countries and for China’s management of its development finance in general. Thus, now is an important time for China and its IDA-eligible financing partners to explore constructive approaches for sustainable long-term finance and investment. Five avenues in particular offer promising approaches for this moment:
- Refinance existing loans in countries facing debt distress. China’s benchmark interest rate is well below the US interest rate currently, which means that now is an excellent opportunity to take advantage of this disparity to refinance loans that were originally denominated in U.S. dollars at lower interest rates in Chinese RMB.
- Exchange loans that are at risk of default for longer-term, RMB-denominated bonds. Bonds can be traded, allowing banks to offload them from their balance sheets. Exchanging them for RMB-denominated bonds would allow for easier repayment terms, making them more sustainable for borrowers as well. Akin to the Latin American experience in the 1990s, this approach can bring stability and breathing room for lender and borrower alike.
- Provide new long-term lending for green growth in RMB. For IDA-eligible countries that are not at or near debt distress, China’s current low interest rates create a favorable context for new long-term lending in the sectors where China has global advantages and where low-income countries face bottlenecks to growth, such as renewable energy development. This lending should be project-based rather than for general support, to prevent it from simply being used in debt repayments to other creditors such as bondholders. China’s recent issuance of long-term RMB-denominated green bonds signals an intent to expand the RMB sovereign bond market, which could be an important tool in this regard.
- Engage in cooperative foreign direct investment (FDI) in countries with manufacturing capabilities. For countries with domestic manufacturing sectors, incorporating Chinese FDI can relieve the danger of debt pressures and ensure that the relationship brings continued growth and economic development. China has already brought hundreds of billions of dollars in green manufacturing investment to developing countries in general; building on this trend can bring economic sustainability as well as growth for both partners.
- Expand RMB-based trade with IDA-eligible countries. If lending relies more heavily on RMB-denominated credit, trade should follow suit to avoid shortages in the currency needed for debt repayments. China’s recent elimination of tariffs for the lowest income countries is an important step in this direction.
Pursuing these five options can help China maintain its relevance in sovereign finance and reinforce existing trade and investment relationships. Just as importantly, they can help the lowest-income countries continue to progress toward their goals of stable, inclusive and sustainable economic development in the future.
Rebecca Ray is a Senior Academic Researcher at the Boston University Global Development Policy Center (GDP Center). Follow her on X: @BUBeckyRay
