Friday, 07 Nov, 2025
China has faced criticism for its lending practices to poorer countries, accused of leaving them struggling to repay debts and therefore vulnerable to pressure from Beijing
Sri Lanka is undergoing its worst crisis since its independence. The island-nation's debt-laden economy has "collapsed" and it is unable to import food, medicine, cooking gas, and other fuels. Last week, protesters stormed the residence of President Gotabaya Rajapaksa Colombo forcing him to flee to an unknown location
While many believe domestic factors such as mismanagement and corruption the reason behind the crisis, a large part of blame lies on China's "debt-trap diplomacy". Defaults over China's infrastructure-related loans to Sri Lanka, especially the financing of the Hambantota port, are being cited as factors. In 2020, according to the Central Bank of Sri Lanka, China’s loans to Sri Lanka totaled $4.6 billion.
What is China’s debt diplomacy?
China has faced criticism for its lending practices to poorer countries, accused of leaving them struggling to repay debts and therefore vulnerable to pressure from Beijing. As of 2021, China is one of the world's largest single creditor nations. It has now eclipsed traditional lenders, including the World Bank, the International Monetary Fund and all the creditor nations of the Organization for Economic Cooperation and Development (OECD) put together.
According to a report by World Bank International Debt Statistics, its loans to lower and middle-income countries have tripled over the past decade, reaching $170bn (£125bn) by the end of 2020. In total, the Chinese state and its subsidiaries have lent about $1.5 trillion in direct loans and trade credits to more than 150 countries around the globe.
Unlike other creditors, China tends to lend at higher rates of interest, typically 4 times that of a typical loan from the World Bank or countries such as France or Germany. The required repayment period for a Chinese loan is also generally shorter - less than 10 years. Not only this, Chinese-state-owned lenders arm themselves with considerable leverage by incorporating provisions that go beyond standard international lending contracts. For example, asking the borrowers to maintain a minimum cash balance in an offshore account to which the lender has access or power to scrap loans or even demand full repayment ahead of schedule.
Every contract since 2014 has incorporated a sweeping confidentiality clause that compels the borrowing country to keep confidential its terms or even the loan’s existence. China itself does not publish records of its foreign loans.
Dragon’s debt trap
One hundred and sixty five countries owe a total of US$385 billion in ‘hidden debts’ to China with 42 poorer countries including Laos, Papua New Guinea, the Maldives, Brunei, Cambodia and Myanmar owing debt exceeding 10 per cent of their individual GDP.
Earlier this year, the Center for Global Development found eight more countries at serious risk of not being able to repay their loans. The affected nations – Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan – are among the poorest in their respective regions and will owe more than half of all their foreign debt to China.
Beijing's international economic policy is not simply a pursuit of its geopolitical influence but also, in some tellings, a weapon. It begins as a "saviour" to weaker countries and then gradually enlarges its footprint in that state to become its economic master.
