How Is China’s Overseas Lending Changing in a Post-Default Era?
Chinese overseas lending is currently undergoing a transition. During the decade from 2010 to 2020, Chinese policy banks – particularly the Export-Import Bank of China (Exim Bank) and the China Development Bank (CDB) – provided extensive loans to many countries across the Global South, and became the largest bilateral creditor to many such nations. Data from Global Development Policy Center shows that Chinese policy banks lent approximately $500 billion during 2008-2021, which amounted to 83 percent of the total lending by the World Bank. The primary focus of these loans was infrastructure development, and Chinese loans proved to be a useful political and economic tool for many countries that had infrastructure financing gaps.
Over time, Chinese lending extended beyond infrastructure projects to support balance of payments needs. This was done through syndicated loans or currency swaps. Such financial assistance became an important feature of China’s engagement with the Global South, shaping its economic relations across multiple continents.
Defaults and Debt Crises After 2020
This trend, however, started to change after 2018, and witnessed a reversal after 2020, particularly in the post-COVID era. Economic contractions and a reduction in export revenue of many Global South countries triggered severe sovereign debt crises. Several countries, including Sri Lanka, Zambia, Ghana, Suriname, and Ecuador declared sovereign defaults and more than 50 countries are estimated to be in severe debt distress.
This wave of defaults and near-default situations directly affected China’s two main policy banks, China Exim Bank and the CDB, which held large loan portfolios in developing countries going through debt distress and default. All the countries in default initiated debt restructuring processes, compelling Chinese policy banks to take part in sovereign debt restructuring and provide debt relief.
Chinese policy banks initially resisted participating in the restructuring process along the parameters set out by the International Monetary Fund (IMF) and strongly protested against the norm of excluding multilateral institutions such as the World Bank and IMF from debt restructuring. However, after much contention, Chinese policy banks agreed to provide debt relief in line with IMF parameters and Paris Club norms, even though China is not a Paris Club member.
It is important to note that once Chinese officials realized that their resistance to global debt restructuring practices was not beneficial, they finalized debt restructuring deals quickly. For example, in Sri Lanka, China was the first bilateral creditor to finalize debt restructuring, even though Chinese banks significantly delayed their initial assurance in taking part in debt restructuring (often referred to as financing assurances).
While both China Exim Bank and the CDB avoided taking outright haircuts, they were compelled to restructure debt largely through maturity extensions and interest rate reductions, in line with IMF debt sustainability analysis targets.
Risk and Institutional Incentives
For most Chinese overseas lending, Chinese policy banks were not the only Chinese actors involved. Many of these loans were tied to a project – often an infrastructure project such as a road, a port, or a power plant – that is contracted to a Chinese state-owned enterprise (SOE). Under this model, Chinese policy banks provide loans to the recipient government, and the recipient government awards the project contract to a Chinese SOE. In other words, the loan money is utilized to pay the Chinese SOE for carrying out the project. Often, projects are completed within five years; thus Chinese SOE gets paid within that period for the project contract.
For the SOEs, this arrangement was fairly low risk and profitable. Once projects were completed within five years, or a little bit more, the SOEs were paid. But for policy banks such as China Exim Bank and the CDB, the repayment schedules extended over 15 to 30 years. This created a mismatch of incentives: SOEs profited in the short term, while policy banks bore the long-term risks.
Some loans, particularly concessional ones, were facilitated by China’s Ministry of Commerce. In these cases, the ministry compensated China Exim Bank for concessional interest rates by providing subsidies. This model worked well for both SOEs and policy banks because it served their respective institutional interests. Both policy banks and SOEs worked together because it served their financial interests.
Scholars such as Shahar Hameiri and Lee Jones have argued that Chinese overseas financing reflects a “fractured” institutional structure, where entities act on their own profit motives rather than a single unified national strategy. Research from Muyang Chen shows that the CDB, although a state bank, is self financed, while since 2006, China Exim began to undertake what it called “self-run” business, under which interest rates were determined by the market instead of being subsidized by government revenue. Thus, these institutions were very much commercial actors.
In this system, SOEs benefited immediately with rapid rise in revenues and profiles, while policy banks accepted long-term risk, but diversified their lending exposure outside China with attractive interest income (usually in U.S. dollars). The arrangement between Chinese policy banks, Chinese SOEs and foreign public sector borrowers worked well until emerging market debt crises severely exposed the strategy’s weaknesses.
The Chinese overseas lending model pre debt crisis: the relationship between Chinese SOEs and Chinese policy banks.
When Defaults Hit: Winners and Losers
In post-COVID era, many emerging market countries are facing severe debt distress, with some declaring sovereign default. During 2020-2023, 10 countries declared defaults – some countries multiple times. In most of these countries, China was the largest bilateral lender. This was the case for Zambia, Sri Lanka, Ghana, and Suriname, all of which defaulted between 2021-2023.
In these countries, public debt had become unsustainable, leading to debt restructuring. Chinese policy banks were compelled to provide debt relief, extend maturities, and absorb losses. Conversely, SOEs had already gotten paid for most of the projects by debtor countries. Some SOEs faced issues such as payment delays and halting construction of ongoing projects. But SOEs didn’t have to absorb losses in the way policy banks did.
This uneven outcome has made Chinese policy banks far more cautious. Their financial performances are adversely affected by losses due to providing debt relief. Countries in default are now clearly risky borrowers. Thus, as institutions that are largely driven by their commercial and financial interests, Chinese policy banks are now reluctant to continue aggressive lending, given the long-term exposure they already have from previous lending.
Conversely, SOEs didn’t have to absorb such losses as they usually get paid for the work’s current state of progress. Even in the case of incomplete projects they had the option to halt work when the debtor countries became unable to pay. Therefore, the existing overseas project loan model disproportionately exposed Chinese policy banks to long-term risks while SOEs captured short-term benefits, with substantially lower risks compared to banks.
The Chinese SOE and policy bank relationship after defaults.
Shifts in Lending Practices: Sri Lanka and Kenya
The change in Chinese policy banks’ approach is very visible in Sri Lanka after its debt restructuring concluded in 2024. Soon after concluding debt restructuring, China Exim Bank significantly cut down the committed loan amount of the largest loan they provided to Sri Lanka for the Central Expressway project.
Phase 1 of the Central Expressway project was initially backed by a $989 million loan from China Exim Bank signed in 2019. This amounted to 85 percent of the total cost of the project, which was contracted to Metallurgical Corporation of China Ltd. (MCC). By 2024, when Sri Lanka concluded debt restructuring with China EXIM Bank, only about $50 million of this loan was disbursed. This loan amount was restructured alongside other Chinese loans.
There was approximately $939 million left to be disbursed for this loan. However, after restructuring, China Exim Bank agreed to disburse only $500 million, merely around half of the original commitment. The loan currency was changed to Chinese renminbi instead of U.S. dollars, which was in the original agreement. Furthermore, the initially agreed interest rate was also revised from a 2.5 percent fixed rate to a variable rate with a floor of 2.5 percent to 3.5 percent. In other words, China Exim Bank has requested a variable rate that is in line with China’s Prime Lending Rate (PLR).
This implies that China Exim Bank treated the undisbursed balance for the loan already agreed to for Phase 1 of the Central Expressway project almost as a new loan. This could be due to the major delays of the project due to sovereign default and economic crisis. As per the original agreement, the loan disbursements were to be completed before 2024 (within five years of signing the loan agreement). Shifting from a fixed rate to flexible rate that is in line with China’s PLR indicates that China Exim Bank is being more cautious and risk averse than they were in pre debt crisis era. It also points to the fact China Exim Bank is driven largely by commercial interests, as opposed to geopolitical interests.
On the other hand, Metallurgical Corporation of China Ltd. (MCC)., the SOE contracted for the project, did not suffer losses similar to China Exim Bank. Parliament committee discussions and news reports indicate that the Sri Lankan government will make penalty payments to MCC to compensate for payment delays for the project. Although China Exim Bank cut back the loan finance for the project, the remaining financing gap (around 50 percent of the project cost) will be covered by the Sri Lankan government, ensuring the SOE retains its contract.
Post-default lending and risk-assessment by China’s policy banks.
The Central Expressway Project isn’t the only example. China Exim Bank has not continued with financing the loan provided for a water supply project in Sei Lanka’s Central Province. The Kandy North Pathadumbara Integrated Water Supply Project was initiated in 2017 and the contract was awarded to Sinohydro, a Chinese SOE that had carried out many projects in Sri Lanka. In 2017, the loan agreement was signed with China Exim Bank to obtain a loan of 1,636 million RMB (equivalent to $250 million) to finance the project. By 2024, only 775 million RMB (Less than 50 percent of the total project cost) had been disbursed for the project.
After debt restructuring, China Exim Bank has not been responsive to Sri Lanka’s request to provide the remaining undisbursed amount of the loan. Therefore, in early September 2025, the Sri Lankan government decided to move ahead with the project using domestic funding and make payments to Sinohydro without waiting for China Exim Bank to provide remaining loan financing. Sri Lanka also used domestic funds to pay penalty payments to Sinohydro.
This too indicates that SOEs continue to receive payments and are in a more advantageous position than policy banks. As evidence from Sri Lanka suggests, SOEs often get paid even though there will be delays. This indicates that SOEs bear much lower risk than China’s policy banks.
This wasn’t the case only in Sri Lanka. China Exim Bank and the CDB had to provide debt relief in multiple countries, including Zambia, Ghana, Suriname, and Ecuador, absorbing losses each time. Thus, being commercial entities that had absorbed substantial losses, both China Exim Bank and the CDB had to adopt risk averse strategies.
The recent proposal to convert Kenya’s Standard Gauge Railway loan from USD-denominated to RMB-denominated implies China Exim Bank’s attempt to reduce the lending cost, and reduce the interest cost for the borrower. Commentary by Chatham House pointed out that converting the loan to renminbi will reduce the interest rate for the loan, thereby reducing Kenya’s debt service to China substantially. This shift also reduces financing costs for Exim Bank, especially at a time when U.S. interest rates are high.
Yufan Huang, a fellow with the China-Africa Research Initiative at Johns Hopkins University has noted that the proposed currency change of Kenya’s SGR loan implies that both China Exim Bank and Chinese export-credit agency Sinosure recognize Kenya’s debt repayment risks.
The currency conversion of both Sri Lanka and Kenya loans issued by China Exim Bank isn’t merely about advancing China’s push to internationalize the renminbi. It is also about reducing financing cost and curtailing the risk for China Exim Bank, and Sinosure, which has commercial purposes to curb the risk.
What Does This Mean?
Independently functioning Chinese policy banks are running into problems after incurring losses due to a series of sovereign defaults and debt distress episodes in the post-COVID era. The policy banks officials have lost face within the Chinese bureaucracy and political system. In short, China EXIM Bank and CDB officials are now perceived as poor financial managers by their superiors.
In that context, it is very rational for them to be very cautious and risk averse, as reflected by their behavior in Sri Lanka after the default. For them, restarting disbursements on previously committed loans would be equivalent to providing a new loan; they need to be extra cautious in lending to a country whose credit profile has completely shifted. Chinese SOEs, on the other hand, were fully paid for most project work before the default episodes. For the projects that were disrupted due to default, SOEs continue to get paid (although with some delays). Sri Lanka’s experience with the Central Expressway Project shows that MCC, the Chinese SOE contractor, even successfully claimed penalties for the delays occurred due to default.
In light of the reluctance of Chinese policy banks to lend to Sri Lanka after default, Chinese SOEs are moving into equity-based projects in Sri Lanka and competing to get contracts from multilateral funded projects. For example, Sinopec secured a contract to construct and operate an oil refinery in Hambantota in 2023 through competitive bidding through investment. This project, which is estimated to cost $3.7 billion, is considered the largest Foreign Direct Investment (FDI) for Sri Lanka.
It is likely that Chinese SOEs had come to the realization that the old model of relying on policy bank lending to overseas governments is difficult to materialize in the current context, particularly in countries that have gone through sovereign default and debt distress. This is because SOEs’ financial interests and Chinese policy banks’ financial interests are no longer aligned.
The End of the Old Model?
Going forward, we are unlikely to see Chinese project finance return to the scale of the 2010s, at least in this decade. There are two main reasons for this. First, Chinese policy banks are now adopting a low-risk approach, carefully evaluating projects before committing funds.
Second, many Global South countries are already debt-ridden and constrained by IMF programs. Under austerity and fiscal tightening, they lack the freedom to take on new large-scale infrastructure debt. In addition, there is public resistance amid ongoing austerity measures to finance large scale infrastructure projects with more debt.
The fractured alignment between SOEs and policy banks that once underpinned China’s overseas lending model is now breaking down. While SOEs may still secure contracts, the old system of large-scale export credit finance no longer seems a preferred, viable, or sustainable path for financing projects in emerging markets. As a result, Chinese overseas lending has entered a new era: one marked by caution, risk reduction, and far more limited exposure to sovereign borrowers.
