China's trillion-dollar lending boom to the developing world has followed the same boom-bust pattern as past sovereign debt cycles, leaving many low-income countries trapped in a silent debt crisis with little prospect of coordinated relief.
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China has become the largest bilateral creditor to the developing world, yet until recently the full scale of its overseas lending remained hidden from view. In this episode of VoxDevTalks, Sebastian Horn discusses the arc of China's sovereign lending – from its extraordinary rise to its abrupt reversal – and what this cycle means for indebted countries today.
How large is China's overseas lending portfolio?
Quantifying China's overseas lending has proven remarkably difficult. The Chinese government treats its overseas lending activities as a state secret, making even basic estimates the subject of active scholarly debate. Drawing on painstaking detective work across embassy statements, bank annual reports, parliamentary gazettes, and news articles, researchers have assembled increasingly comprehensive datasets.
"We're talking about roughly one trillion US dollar in lending by Chinese state-owned banks to developing and emerging market countries over the past 20 years. So yeah, a massive amount."
The lending has been channelled primarily through two state-owned policy banks, and directed towards large-scale infrastructure: roads, railways, and ports across the developing world.
What drove the boom in Chinese development lending?
The surge in lending was the product of a powerful alignment of global push and pull factors. China was running persistent current account surpluses throughout the 2000s and early 2010s, accumulating vast foreign exchange reserves that had been parked in low-yielding US Treasuries. With global interest rates depressed after the 2008 financial crisis, redirecting capital towards higher-return lending in emerging markets became an attractive proposition. At the same time, developing countries – flush from debt relief, rising commodity prices, and strong growth – were eager borrowers with significant infrastructure needs.
"On the recipient end in developing countries, this financing was welcomed with open arms. I mean, these are capital scarce economies. They have massive demand for infrastructure projects, or they were very keen on taking up Chinese loans, in particular, because at the time they had comparatively little debt."
How Chinese loan contracts were structured
A notable feature of China's lending model is that, despite being state directed, the financial terms were far from concessional. Interest rates were close to market levels, maturities comparatively short, and the contracts notably creditor friendly. Most striking is the widespread use of commodity-backed collateral.
"Around 50% of the loans are collateralised against the revenues of commodity exports."
Under these arrangements, a borrowing country would simultaneously enter a commodity delivery contract – oil revenues, for example, would flow into a third-party account controlled by a Chinese bank, giving creditors a powerful safeguard against default even in some of the world's most volatile economies. Horn describes China as, in effect, "an international subprime creditor", lending at scale to countries – including Venezuela, Angola, and Russia – where few other creditors were willing to go.
The bust: How and why the lending cycle reversed
From around 2015, a succession of global shocks – falling commodity prices, the COVID-19 pandemic, rising US interest rates, dollar appreciation, and the war in Ukraine – eroded the conditions that had made the boom possible. Many developing country sovereigns, which had also borrowed heavily from private international and domestic markets during the same period, found themselves in acute debt distress. China's response was to curtail new lending sharply from around 2019.
"New long commitments dropped very sharply in around 2019 and now the net flows between Chinese banks and developing countries have actually reverted so they are negative, meaning that developing countries repay more to Chinese banks in principal and interest than they receive in new lending."
When distress hit, Chinese banks initially responded much as Western creditors had done in past crises: serial, light-touch restructurings that extended maturities by a year or two without resolving underlying solvency problems – a strategy Horn characterises as "kick[ing] the can down the road".
A silent crisis in the developing world
Despite the scale of the distress, the episode has attracted surprisingly little international attention. Rating agencies do not track defaults on Chinese or other official creditors' loans, and many affected countries are too small to generate systemic financial contagion.
"Many of the developing countries are simply too small, from a financial perspective, to send shivers through the global financial system. There has been very little contagion, which is, of course, good, but it also implies that there has been very little urgency to sort out the problems."
Countries have often managed to avoid outright default only by cutting investment in health and education – a silent toll that rarely registers in financial headlines.
How this boom-and-bust compares to historical lending cycles
Horn argues that the most striking feature of the Chinese lending episode is how closely it mirrors earlier boom-bust cycles – the 1920s sovereign lending wave that collapsed in the 1930s defaults, and the 1970s syndicated lending boom that preceded the 1980s debt crisis. Each followed the same pattern: benign global conditions, over-optimism, inadequate scrutiny of risk, then a reversal of global factors triggering sudden stops and a prolonged struggle to resolve debt overhangs.
"This recent lending boom looks very similar to the boom-bust patterns that we have seen in the past… Although you can find many features of Chinese lending that are distinct, the outcome has been very, very similar to what we have seen in the past."
Lessons for policymakers
For finance ministries in affected countries, Horn's advice is pointed: the time for caution is during the boom, not after it. When growth is strong and capital is freely available, that is precisely when scrutiny of debt levels matters most. For countries already in distress, the priority is coordinating Western private creditors and Chinese state creditors around meaningful debt write-offs that genuinely resolve solvency – not just liquidity – problems. Historical precedent suggests China is unlikely to resume large-scale sovereign infrastructure lending for some decades; the more immediate task is managing the legacy of the cycle that has already run its course.
Reference
Horn, S, C M Reinhart, and C Trebesch (2025). "China’s lending to developing countries: From boom to bust," Journal of Economic Perspectives, 39(4): 75-100.