More Problems More Money? Does China Lend More to African Countries with Higher Credit Risk Levels?

Abstract

China has provided hundreds of billions of dollars in loans to developing countries. Researchers and pundits have focused on China’s motivations for allocating development finance, particularly in Africa, due to debt sustainability concerns. This paper aims to contribute to the understanding of the ways in which creditworthiness impacts the Chinese government’s development finance allocation decisions. In doing so, it examines the impact of African countries’ creditworthiness levels on Chinese development finance commitments. It also explores the impact of African country creditworthiness on Chinese loan cancellations and forgiveness. This paper finds that a disproportionate share of Chinese government loan commitments to African countries are made to governments with high credit risk levels. It also finds that, as African countries’ creditworthiness decreases, their likelihood of having Chinese loan commitments canceled increases. This underscores the importance of greater transparency from—and coordination with—China in its approach to debt sustainability and its attitude toward risk on the African continent, as well as the importance of building African debt management and capacity to ensure responsible borrowing. Finally, the paper finds negative, though weak, relationship between creditworthiness and Chinese loan forgiveness. In other words, as opposed to what the debt trap diplomacy hypothesis would suggest, Chinese loans to risky countries are more likely to be forgiven.