The party is over for the Chinese economy and poor countries are feeling…

Written by Michael Beckley

In the early 2000s, former Venezuelan President Hugo Chavez bet his country’s economic future on a rising China, securing tens of billions of dollars in investment deals and loans in exchange for the country’s oil. At first, it worked. China greedily consumed Venezuelan oil while also funding a slew of projects, from high-speed rail to power plants.

But the 2000s brought the bill. Oil prices fell and China’s oil demand growth slowed as its economy slowed. Venezuela’s oil export revenues fell from more than $73 billion in 2011 to $22 billion in 2016. Mismanagement by Chavez and his designated successor, Nicolás Maduro, and other internal problems had already pushed Venezuela to the brink. A gamble with China helped push it over the edge. In 2014, Venezuela’s economy collapsed. People were scavenging for food in dumpsters, hospitals ran out of medicine, and crime rates soared. Since then, nearly eight million people have fled the country. China has largely cut off Venezuela from new credit and loans, leaving a trail of unfinished projects.

Venezuela’s overreliance on China was a warning that the world ignored. Dozens of other countries that have relied on China’s rise are now at risk of financial distress and bankruptcy as the Chinese economy stagnates. But China refuses to provide meaningful external debt relief while doubling down on protectionism at home when it should be launching reforms to liberalize and reboot its economy, the world’s second-largest and a critical driver of global development.

This is the flip side of the China “miracle.” After the 2008 global financial crisis, the world needed a financial savior, and China stepped in. Starting in 2008, it transferred $29 trillion into its economy in nine years—about a third of global GDP. The positive impact was felt worldwide: From 2008 to 2021, China accounted for more than 40% of global growth. Developing countries eagerly clung to what seemed an unstoppable economic rock, and China became the leading trading partner for much of the world. Many, like Venezuela, discovered that China’s booming economy was a lucrative new market for their exports and relied heavily on it, leaving other parts of their economies to struggle.

China has also lent more than $1 trillion abroad, mainly for infrastructure projects to be undertaken by Chinese companies under the One Belt, One Road initiative. Over the past two decades, one in three infrastructure projects in Africa have been built by Chinese entities. The long-term risks of debt in fragile developing economies have often been overlooked.

China’s boom, as we now know, was unsustainable. It was fueled largely by years of ineffective domestic stimulus spending, which ultimately left China saddled with massive debt. President Xi Jinping stifled entrepreneurship, resisted reform, and provoked a protectionist backlash from the United States. Since Xi took office a decade ago, Chinese growth has slowed dramatically. Some experts believe it is barely growing.

This directly affects countries that have tied their economic fate to China. Studies show that every 1% decline in China’s GDP can slow the economies of its trading partners by almost the same amount. Some countries have already seen their exports to China decline. On the other hand, China is dealing with its own economic slowdown by providing massive loans and subsidies to Chinese manufacturers, which floods global markets with cheap products, drives down global commodity prices, and creates unfair competition for manufacturers in other countries.

Of course, China is not solely responsible for the weakness of the global economy, which has been battered by the pandemic, wars and trade tensions. But it is making matters worse at a critical moment. It has drastically reduced foreign borrowing and pressured developing countries to repay their loans. Rather than offering real debt relief, China has routinely extended short-term credit default swaps and loan swaps.

Zambia and Sri Lanka defaulted on billions of dollars in debt to foreign creditors in 2020 and 2022, respectively. In both cases, an explosion of Chinese loans and credit was a major factor in pushing these countries into deep financial trouble. This led to difficult and lengthy debt restructuring negotiations, partly due to the opaque nature of Chinese lending practices, which exacerbated the crises in both countries. Zambia and Sri Lanka ultimately had to extend their repayment terms, meaning that resources that could have been spent on their economic recovery ended up being diverted toward servicing their debt obligations. The widespread uncertainty made it difficult for these countries to access new financing.

The International Monetary Fund and the World Bank have warned that dozens of countries across the developing world—many of which have close trade ties to China—are now facing debt problems. Pakistan has sunk into a deep economic crisis from which it cannot escape, in part because it needs to repay billions of dollars in loans to China to finance infrastructure and other projects. Some factories in the country are idling because they have been unable to buy the necessary materials and because the government cannot afford to maintain a stable power supply.

In Laos, about half of its external debt goes to China, which has provided billions of dollars in loans for projects including the China-Laos high-speed railway, widely described as a white elephant. The heavy debt has hurt the country’s currency, made it harder to service the debt and forced it to surrender some of its economic sovereignty in repayment, allowing China to take a stake in its power grid, among other things.

Even some rich countries, such as Germany, Europe’s economic powerhouse, face significant challenges because of their over-reliance on trade with China. German exports to China fell 9% last year—the biggest drop since China joined the World Trade Organization in 2001—and the German economy shrank that year. Major commodity exporters, such as Australia, Brazil and Saudi Arabia, are at risk, as exports of energy, metals or agricultural products to China make up a large part of their economies.

The United States is less directly at risk. Manufacturing exports to China account for less than 1% of U.S. GDP. However, the glut of Chinese products like electric cars and solar panels poses a threat to domestic manufacturers, while some of America’s largest companies, including Apple, General Motors, Nike, Starbucks, and Tesla, are losing sales revenue in China due to falling demand, supply chain disruptions, or increased competition from subsidized Chinese companies.

There are disturbing parallels between today’s situation and the debt crisis that swept developing countries in the 1980s. Many countries, especially in Latin America and Africa, were saddled with huge debts that they had to repay primarily to Western banks and international institutions such as the International Monetary Fund and the World Bank. Faced with rising interest rates and falling commodity prices, countries such as Mexico, Brazil, and Argentina ended up in bankruptcy. Some of these countries subsequently had to endure years of low economic growth, severe austerity measures, declining living standards, and political turmoil.

China, the world’s largest creditor today, has played a leading role in loading many countries with new levels of debt, often through opaque arrangements, as in the 1980s. Now the situation is dangerous. In the past decade, during which China has issued more debt than the Paris Club—a group of the world’s largest creditor nations—the total value of interest payments by the world’s 75 poorest countries has quadrupled, and will exceed their combined annual spending on health, education, and infrastructure, according to the World Bank. An estimated 3.3 billion people live in countries where interest payments outstrip investment, whether in education or health, according to the United Nations.

The example of Venezuela, still mired in economic crisis, has shown where these conditions can lead: economic collapse, repression, and humanitarian disasters.

In a world already shaken by war, the risks posed by sovereign defaults, political instability, and the resulting mass migration are acute. In recent months, people in France, Poland, Kenya, Bolivia, Sri Lanka, and many other countries around the world have staged protests against worsening economic conditions. At the same time, there are growing calls for rich economies and creditor countries to work together to provide debt relief, market access, and other ways to help the most vulnerable economies.

Such measures will have only limited impact unless China is able to confront its responsibility for exacerbating these problems and failing to address them. Finding the collective international resolve needed to persuade China to change its self-interested ways will be extremely difficult. The crucial first step is to acknowledge the scale of the problem.

*Michael Beckley is a political scientist at Tufts University, a senior fellow at the American Enterprise Institute, and director of the Asia Program at the Foreign Policy Research Institute.

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