EM sovereign bonds in focus as China switches from creditor to debt collector

Research published by the Lowy Institute in Australia points to China's shifting role from key creditor to developing markets to becoming a debt collector, and puts a spotlight on emerging market sovereign debt.

According to the reasearch (https://interactives.lowyinstitute.org/features/peak-repayment-china-global-lending/) the debt collection pressure from China comes just as the West is retrenching from its role as a traditional creditor to poorer nations.

Key findings include:

• In 2025, the world’s poorest and most vulnerable countries will make record high debt repayments totalling $22 billion to China. Beijing has transitioned from capital provider to net financial drain on developing country budgets as debt servicing costs on Belt and Road Initiative projects from the 2010s now far outstrip new loan disbursements.
• China continues to finance strategic and resource-critical partners despite a broader collapse in its global lending. The largest recipients of new lending include immediate neighbours, Pakistan, Kazakhstan, and Mongolia, and developing countries that are critical mineral or battery metal exporters, such as Argentina, Brazil, Congo DR, and Indonesia.
• China is grappling with a dilemma of its own making: it faces growing diplomatic pressure to restructure unsustainable debt, and mounting domestic pressure to recover outstanding debts, particularly from its quasi-commercial institutions. But a retrenchment in Western aid and trade is compounding difficulties for developing countries while squandering any geopolitical advantage for the West.

The research adds: "Data reported by debtor governments to the World Bank show that China is the largest source of bilateral debt service for developing countries, accounting for more than 30% of all such payments in 2025. For the poorest and most vulnerable countries, payments to China make up a quarter of all debt service costs, outweighing both multilateral lenders and private creditors. No single bilateral creditor has been responsible for such a large share of developing country debt service in the past 50 years."

"The outsized share of payments to China reflects its unparalleled holding of developing country debt. China is the single largest bilateral creditor in 53 countries and ranks among the top five in three‑quarters of all developing countries. As of 2023, China held 26% of external bilateral debt in developing countries and more than half in the world’s poorest and most vulnerable economies. Given its scale and the importance of bilateral creditors in debt restructurings, China wields outsized influence over the debt sustainability outlook for the world’s poorest and most vulnerable countries."

Three groups of developing countries continue to enjoy access to credit: those with land borders on China itself, those that have switched diplomatic recognition away from Taiwan, and those supplying critical minerals.

Looking ahead, the report concludes: "China’s role as a lender has passed a watershed. The nation that was once the developing world’s largest source of new finance has now wholly transitioned to being the world’s largest single destination for developing country debt service payments. The Belt and Road Initiative hit its peak in the mid-2010s; peak repayment was reached in the mid-2020s. Now, and for the rest of this decade, China will be more debt collector than banker to the developing world."