Debt Crisis Related to China's Belt and Road Initiative

Title: Debt Situation of Developing Countries in 2025
- By Alex Kozul-Wright, 28 May 2025
- Report by the Lowy Institute

Many of the world’s poorest nations are facing record debt repayments to China in 2025.
These debts stem from loans extended during the peak of China’s Belt and Road Initiative (BRI) approximately ten years ago.
The BRI is a state-backed infrastructure investment program initiated by China in 2013, aimed at enhancing connectivity between Asia, Africa, and the Americas through construction of ports, highways, and railroads.

In 2025, total debt repayments owed to China by developing countries will total approximately $35 ext{ billion}$ .
Out of this total, $22 ext{ billion}$ will specifically be paid by 75 of the world’s poorest countries.
The report raises concerns that this debt burden could jeopardize spending on essential services like health and education.

Quote from Riley Duke (report author):
- "For the rest of this decade, China will be more debt collector than banker to the developing world."
There is an ongoing “tidal wave” of debt repayments for developing countries, which poses significant challenges for their economies.
High Debt Servicing Costs:
- High costs associated with servicing debt can hinder investments in public services, including education and healthcare.
- Developing economies also face limitations in their capacity to respond to economic and climate-related crises.
Comparison of Debt Servicing:
- The 46 least developed countries (LDCs) allocated around 20% of their tax revenues toward servicing external public debt in 2023.
- For context, Germany utilized only 8.4% of its budget for debt repayment in the same year.

The Lowy Institute report highlights possible geopolitical motivations behind China's lending practices in the Global South, raising the question of whether these debts provide China with leverage over recipient nations, particularly in contrast to reduced foreign aid from Western nations, exacerbated during Donald Trump's presidency.
The decline of Western aid may heighten the dependency of developing nations on Chinese financial support.

While Chinese lending appears to be slowing, specific countries are observing increases in loan agreements:
- Countries like Honduras, Burkina Faso, and the Solomon Islands have recently secured significant loans from China after changing diplomatic recognition from Taiwan to China.
- Indonesia and Brazil are notable for signing new deals focused on securing critical minerals essential for electric batteries as part of global energy transitions.

China’s Foreign Affairs Ministry responded to the report, suggesting that the allegations of creating debt dependency are unfounded.
Mao Ning, a spokesperson, noted that some countries aim to blame China and insisted that Beijing’s investments align with international practices.
Criticism of the BRI is not new; the Hambantota Port in Sri Lanka is often used as a prominent example of so-called debt traps, where the inability to repay a loan led to a long-term lease to a Chinese firm.
Despite these narratives, it's important to recognize that some recipient countries consider China a more reliable partner compared to Western lenders who withdraw support during critical periods.

The Lowy Institute acknowledges challenges in accurately quantifying China’s total lending, noting that data from Beijing is often scarce or limited.

According to AidData, in 2021, China was associated with an estimated hidden debt of around $385 ext{ billion}$ across various developing nations.

The Rhodium Group’s study examined 38 Chinese debt renegotiations and found that Beijing’s leverage is frequently limited.
Prior to the 2019 report, developing nations restructured roughly $50 ext{ billion}$ of Chinese loans, often resulting in favorable outcomes for the borrower such as loan extensions and forgiveness.
A separate analysis from Johns Hopkins University indicated that between 2000 and 2019, China canceled around $3.4 ext{ billion}$ of debt in Africa and refinanced an additional $15 ext{ billion}$ , with no assets being seized in these cases.

In contrast to obligations owed to China, debt repayments to private financial institutions and multilateral development banks (MDBs) are significantly higher.
As of 2022, the Debt Justice Group reported that African governments owed three times more to private lenders than they do to China, at interest rates approximately double that of Chinese loans.
Kevin Gallagher from the Boston University Global Development Policy Center stresses that focusing solely on Chinese debt overlooks the broader context, asserting that many developing countries would still be in a debt crisis even without China's involvement.

Following the COVID-19 pandemic and Russia's invasion of Ukraine, inflation prompted the US Federal Reserve and other central banks to raise interest rates.
This led to capital flight from developing economies towards US financial assets, complicating their debt repayment levels by increasing costs and depreciating local currencies.
Although global interest rates have seen a slight decrease, developing nations still confront borrowing costs averaging two to four times higher than those in the United States, and six to twelve times higher than in Germany.
Gallagher emphasizes that Chinese loans are often long-term and growth-oriented, focusing particularly on enhancing infrastructure, unlike Western lenders who may implement shorter-term, more expensive loans.