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As Coronavirus Raises Debt Sustainability Concerns, New Report Shines a Light on China's Lending to Developing Countries

April 2, 2020

China's loans aren't debt traps, researchers say, but interest rates are consistently higher than World Bank

Contact:
Jeremy Gaines
Center for Global Development
jgaines@cgdev.org
+1-202-416-4058

WASHINGTON – As the COVID-19 economic crisis brings about rising concerns over debt sustainability in developing countries, a new report from the Center for Global Development (CGD) finds that China's loans tend to have shorter grace periods and maturities and higher interest rates than loans from the World Bank.

“With developing countries taking an economic hit from the COVID-19 pandemic, there’s a real concern about debt risks in developing countries—many of which were already at risk of debt distress. China is now the largest bilateral lender in the world, so decisions made in Beijing have a huge impact on the economies of developing countries,” said Scott Morris, a senior fellow at CGD and an author of the report.

“We found that China's loans have consistently contained harder terms than the World Bank, particularly for the poorest countries. Most of the discussions of debt vulnerability in developing countries have focused on the overall amount of borrowing, but the shift in loan terms matters a lot too,” said Brad Parks, the executive director of AidData and an author of the report. “That said, while we have concerns, we don’t find evidence for the ‘debt trap’ narrative. A few percentage points more in interest compared to the World Bank hardly seems usurious.”

With a lack of official Chinese government data on its lending programs, the researchers created a database of 2,453 loans from China and 4,859 loans from the World Bank for comparison, spanning 157 countries and 15 years. Data includes loan-by-loan information on interest rates, maturities, and grace periods, including for projects that fall under the Belt and Road Initiative.

  China World Bank
Total Financing (USD) $333 billion $624 billion
Average Loan Size (USD) $307 million $148 million
Average Grant Size (USD) $9 million $44 million
Total Number of Projects 2,453 4,859
Volume of Grants (% total financing) 3.77% 6.42%
Volume of Loans 96.23% 93.58%
Weighted Mean Interest Rate 4.14% 2.10%
Weighted Mean Maturity (years) 16.6 17.9
Weighted Mean Grace Period (years) 4.8 7.7

“It's clear that developing country governments find value in China’s lending, compared to what they can get on the markets. But it's incredibly important that the Chinese government, which has a stated commitment to debt sustainability, carry out its lending program in a way that doesn’t heighten debt risks in its partners,” Morris said.

“The IMF and the World Bank are calling for lenders to step up and help developing countries with their debt obligations during the crisis. As one of the world’s leading creditors, this is a good opportunity for Beijing to show that it’s sensitive to debt risks.”

The full report and dataset are available at https://www.cgdev.org/publication/chinese-and-world-bank-lending-terms-systematic-comparison

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Photo of Bradley Parks
Non-Resident Fellow
Photo of Scott Morris
Director of the US Development Policy Initiative, Co-Director of Sustainable Development Finance, and Senior Fellow