"Demystifying Chinese Overseas Lending and Development Finance: Why China Became the World’s Largest Official Bilateral Lender" 20 April 2023

What are the drivers and determinants of China’s overseas lending and development finance (OLDF)? Does China’s OLDF boost or hamper economic growth in recipient countries? And is there any credibility to claims of debt trap diplomacy?

A new policy brief by Oyintarelado (Tarela) Moses, Cecilia Springer and Kevin P. Gallagher demystifies the drivers of China’s OLDF, providing insights into the determinants and impacts of Chinese OLDF, discussing what led to the increase of Chinese loans, how this finance has impacted recipient countries and debunking the debt trap diplomacy narrative.

Main findings:

• A series of interconnected supply “push” and demand “pull” factors within recipient countries and specific sectors has enabled a tremendous amount of development finance from China. [...]
• Debt trap diplomacy is not a driver of Chinese OLDF. The authors analyzed eight examples of supposed debt trap diplomacy cases and found no empirical evidence that China lends with the end goal of seizing a strategic public asset or gaining strategic leverage in the event of non-repayment.
• The authors also identify several problems with the China debt trap diplomacy narrative [...]
• There are also several conceptual issues with the debt trap diplomacy narrative that undermine the dynamics at play between the push and pull factors discussed [...]
• Empirical evidence shows that China’s OLDF is associated with economic growth that benefits host countries.
  • It is important to note that Chinese finance can pose social, environmental and debt sustainability risks to recipient countries and as such, China should promote low-carbon, resilient and socially inclusive growth abroad, as well as participate in debt relief and emergency financing efforts. [...]