China’s Lending to Developing Countries: From Boom to Bust

In the last two decades, China has become the world’s largest state creditor and a key player in the international financial system. China’s lending footprint in the developing world currently rivals that of the World Bank. As part of this transformation, the Chinese government and its state-owned banks provided more than $800 billion in loans, mostly denominated in US dollars, to developing countries to finance infrastructure and energy projects (Dreher et al. 2022). China’s lending to developing countries has been spearheaded by a small number of state-owned banks, and this bank-based approach departed from the trend among emerging markets towards bond financing since the 1990s. However, circa 2014–2015, many of the countries that had borrowed from China were faced with mounting debt-servicing difficulties from a decline in commodity prices, which a few years later was followed by the COVID-19 pandemic and then the Russia-Ukraine war. Lending from China went into reverse. As shown in Figure 1, net transfers from China to governments in emerging market and developing economies have been negative since 2019.