High Interest Rate Sends China’s Debt Diplomacy in Disarray

China was the lender of choice for many nations over the past decade, doling out funds for governments to build bullet trains, hydroelectric dams, airports and superhighways. Now, as the global economy slows, China has the power to cut those nations off, lend them more money or forgive small portions of their debts.

The economic distress in poor countries is palpable, given the lingering effects of the Covid-19 pandemic, coupled with high food and energy prices after Russia’s invasion of Ukraine. The nature of China’s loans is compounding the challenges.

China issues a far greater number of loans to poor countries at adjustable interest rates than Western governments or multilateral institutions do. With global interest rates rising swiftly, debt payments are soaring when these nations can least afford to pay. And their weak currencies make it even more costly for many of them to repay China’s loans, almost all of which must be paid off in dollars.