• In 2019 China became a net recipient of financial flows from developing economies.

• Emerging states are now repaying more money to China than they receive in new disbursements for Chinese debt and equity investments.

• This situation reflects China’s increasing focus on getting repayments for its investments, amid concerns about previously poor lending decisions.

• It is not clear whether this trend will persist after the pandemic; Chinese financial outflows may recover in 2022 as global economic prospects brighten.

• Financial repayments to China will become an increasingly important issue for emerging countries in the coming years, fuelling mutual interdependence.

New data published by the World Bank show that China’s net financial flows (debt and equity investments) turned negative in 2019, at -US$1bn, compared with a peak of U$16bn in 2016. Developing countries are now repaying more money to China than they receive in new disbursements.

China remains the biggest lender to emerging economies, but the country only accounted for 39% of financial flows to low- and middle-income states in 2019 (from almost half in 2018). This situation reflected a 29% reduction in net Chinese equity investments and a 48% drop in debt outflows from China to emerging countries in that year.

From new kid on the block to concerned creditor

The data highlight China’s shift away from its position as a generous lender to the emerging world towards a situation where it is now increasingly focusing on receiving repayments. Reimbursements from Angola, Samoa, Tajikistan, Dominica, Tonga, Ghana, Brazil and Jamaica proved especially large (as a share of their GDP) in 2019.

There are China-specific limitations to the data, however. It is unclear whether World Bank figures capture all financial flows to and from China; the data do not include debt disbursements and equity investments from Chinese private entities, even though some of them may have ties to the government. In addition, Chinese financial flows are often channelled through special-purpose vehicles, which are not accounted for in World Bank figures. As a result, the apparent drop in Chinese outflows from China may be misleading.

Temporary blip or new trend?

The data predate the Covid-19 pandemic, and it is hard to make accurate projections of how Chinese financial flows have evolved in 2020 and so far this year. However, the figures make it clear that China was already concerned about potential repayment issues before the pandemic hit emerging economies hard and constrained their capacity to meet their financial obligations.

Looking ahead, the drop in net Chinese outflows might well be a temporary pause rather than a policy shift (although the Chinese government is rethinking its Belt and Road Initiative strategy, which may involve a tightening of previously lax lending conditions). The trend might well reverse in 2022, once the global economy has recovered from the coronavirus pandemic and growth prospects brighten in developing countries.

Interdependence goes both ways

In the coming years financial repayments to China will become an increasingly important issue for many emerging countries. Debt owed to China is not treated as “sovereign debt” as part of the Paris Club, mainly owing to China’s use of parastatal entities to channel financial outflows. This means that those emerging countries that are struggling to repay their financial commitments may need to negotiate arrangements on a bilateral basis with China—a situation that will give China more leverage to advance its economic and political interests.

However, the interdependence goes both ways; in such cases, China’s options are limited. In many instances, China will probably agree to restructurings in an attempt to recoup some of its investments. Cancelling interest payments or agreeing to restructurings in exchange for shares in state assets (as has happened in Laos) are options. From a geopolitical perspective, all of these strategies will increase the interdependence between China and emerging countries for even longer periods. Coupled with vaccine diplomacy, this points to increased Chinese influence in developing countries in the coming years, unless resentment against China’s lending practices opens a window of opportunity for Western countries to step in with new deals of their own.

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