Chinese Lending and Sovereign Debt Distress in Developing Countries

Abstract

China has emerged as the world's largest bilateral creditor to developing countries, yet its effects on sovereign debt outcomes remain contested. Competing theoretical perspectives predict opposing effects: Chinese lending may increase debt vulnerability through opacity, moral hazard, and unsustainable obligations, or reduce it by providing critical financing to countries excluded from traditional capital markets. This study assesses the relationship between Chinese lending and sovereign debt distress using panel data on 152 developing countries from 2000 to 2022. Employing a within‐between Mundlak decomposition and an instrumental variable strategy, we find little evidence that Chinese lending increases debt distress within countries over time. China's loans may actually decrease the risk of debt crises. We find no consistent evidence that Chinese lending increases debt restructuring or IMF funds access. We also find no evidence that Chinese loans increase overall debt burdens, affect countries' ability to service obligations, or lead to riskier fiscal behavior. Our findings suggest that rather than focusing on blame attribution, research should prioritize developing institutional mechanisms to coordinate creditors in managing debt distress in an increasingly fragmented global financial landscape.