OBOR scheme turns PRC into world’s largest debt collector

FORUM Staff

The People’s Republic of China (PRC) — the world’s second-largest economy — is now the world’s single-largest source of international debt, according to a new report from AidData, a United States-based research lab.

AidData calculated that more than half of the loans Beijing has made as part of its One Belt, One Road (OBOR) infrastructure scheme have entered their principal repayment period at a time when global interest rates have risen sharply, adding to the overall debt burden incurred by already cash-strapped countries with adjustable rate loans. In addition, about 75% of the PRC’s loans in the developing world are to countries in financial distress, according to the report.

Chinese Communist Party General Secretary Xi Jinping launched OBOR in 2013 purportedly to build a “broad community of shared interests” throughout the Indo-Pacific, Africa, Latin America and Europe, via projects including ports, roads, power plants and other infrastructure. Beijing has since provided $1.34 trillion in loans and grants for nearly 21,000 projects in 165 low- and middle-income countries, most of them under OBOR.

Many countries are struggling to pay their debts, with Beijing doling out billions in bailout loans. The PRC “is increasingly behaving like an international crisis manager,” and has effectively created a safety net for financially distressed countries that have taken on OBOR projects, AidData reported.

Beijing is scrambling to reduce its risk exposure. Chinese lenders have reduced loans for infrastructure projects from 60% of their portfolio in 2015 to about 30% in 2021, with emergency lending now accounting for nearly 60%. Lenders have also imposed stronger penalties for late payments, more than doubling the maximum penalty interest rate from 3% to 8.7%, according to AidData, which is based at William & Mary University in Virginia. Xi has tried to rebrand OBOR as support for the scheme has waned, pushing for “smaller, greener” projects including digital finance and e-commerce platforms.

“Beijing is trying to find its footing as the world’s largest official debt collector at a time when many of its biggest borrowers are illiquid or insolvent,” Bradley Parks, executive director of AidData, told The Guardian newspaper. “And debt collectors don’t win a lot of popularity contests.”

In addition to unmanageable debt incurred by nations on the receiving end of OBOR projects, observers have pointed to the PRC’s strategy of offering no-bid contracts with its state-run companies while exposing recipients to financial and environmental risks, and inflated costs. In 2017, Sri Lanka turned over the Hambantota port, on the country’s southern coast, to the PRC under a 99-year lease. That deal erased about $1 billion of Sri Lanka’s debt but raised concerns that the move could lead to a Chinese military base on the island.

AidData cited declining Gallup World Poll approval ratings for the PRC among low- and middle-income countries, down from 56% in 2019 to 40% in 2021. Some countries have canceled OBOR projects. In October 2023, the Philippines dropped plans to build three rail lines with financing from the PRC, looking instead to India and Japan for funding. In mid-2023, Italy announced it would abandon OBOR.

Meanwhile, the U.S. International Development Finance Corp. and international partners have provided $41 billion in financing globally since the agency’s founding in 2018, including a recent $500 million commitment to support development of a deep-water shipping container terminal in the Port of Colombo, Sri Lanka.