Countries defaulting, inflation soaring, people losing jobs and their families facing starvation... Western media have claimed for years that the world's poorest countries are falling into a "debt trap" caused by China and China is the "world's biggest and most unforgiving government lender."

However, recent on-site investigations in several countries presented a contrasting picture, showing the West, not China is the biggest lender to these developing countries and their loan interest rates are actually nearly two times higher than that of China. 

Besides, Chinese investments to these developing countries have helped them build up infrastructure and boosted local economic growth, the investigation found.

The investigations were conducted by Xinhua in countries such as Pakistan, Kenya, Zambia and Sri Lanka.

China is not the biggest lender

According to the National Treasury of Kenya, Kenya's external debt stock stood at $36.66 billion at the end of March 2023. Among the debts, 46.3 percent is owed to multilateral lenders, including the International Monetary Fund (IMF) and the World Bank (WB), and 17.2 percent is owed to China.

Data from the Economic Affairs Division (EAD) of Pakistan showed that as of April 2023, Pakistan's total external debt was $125.702 billion, while the loan from Chinese entities was $20.375 billion, 16.2 percent of its total (without adding the safe deposits which stand at some $4 billion).

Pakistan foreign minister Bilawal Bhutto Zardari told reporters that the accusation that Pakistan is caught in Chinese "debt trap" is "political propaganda" as Pakistan not only accepts loans from China but other countries. He added that most of China's assistance to Pakistan has been in the form of investment or soft loans on favorable terms. 

He stressed that Pakistan's vital infrastructure will not be controlled by other countries due to the debt issue. Bilawal made the remarks while visiting Japan in July.

Meanwhile, in Sri Lanka, official data showed that as of March 2023, Sri Lanka's external public debt is $27.6 billion, with private creditors taking the lion's share at $14.8 billion (53.6 percent), multilateral creditors $5.7 billion (20.6 percent). Chinese entities' share is $3 billion (10.8 percent).

In the case of Zambia, the country's foreign debt stood at $18.6 billion by the end of 2022, according to Chibeza Mfuni, deputy secretary general of the Zambia-China Friendship Association. And around $6 billion of debt is owed to Chinese entities, said Mfuni.

"The Chinese debt is only one-third of what Zambia owes externally. So if we were to worry as a country, we must worry about the two-thirds. This is two-thirds that is not owed to China; it's owed to Western donors, multilateral institutions and bilateral ones," Mfuni said.

Besides, WB statistics show that nearly three-quarters of Africa's total external debt is held by multilateral financial institutions and commercial creditors, making them the largest creditors in Africa, not China.

Who is to blame?

In recent years, various factors such as the U.S. Federal Reserve's interest rate hikes, global commodity price cycles, the economic structures of certain developing nations, the COVID-19 pandemic and the Ukraine crisis have led to a liquidity shortage. This has severely constrained the repayment capacity of some developing countries, leading to sovereign debt crises.

However, a recent AP report depicted China as the reason for many developing countries' debt problems. The AP story said a dozen countries "most indebted to China," including Pakistan, "found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel."

"Pakistan under the burden of Chinese debt is not a true statement," said Shakeel Ahmad Ramay, CEO of the Asian Institute of Eco-civilization Research and Development in Pakistan.

"Our real problem is the foreign debt from the Western financial institutions. Pakistan cannot pay them back because they are high-interest loans," said Ramay. "Pakistan also sold bonds in the Western market at a higher rate. Those all are causing real problems for Pakistan."

Asad Umar, former Pakistan Federal Minister for Planning, Development, Reforms and Special Initiatives in 2021 said that China’s average loan interest rate on energy projects of the China-Pakistan Economic Corridor (CPEC) is lower than that of the WB, the Asian Development Bank and other Western institutions.

For Mfuni, former deputy head of the Zambian mission in Beijing, Chinese debt has the lowest interest rates, lower than Western and multilateral debt, the IMF, the WB and especially private lenders.

"Our biggest problem is not the Chinese debt but the vulture funds. They are not interested in debt forgiveness," said Mfuni. 

According to Lewis Ndichu, a researcher at the Africa Policy Institute in Nairobi, Kenya's debt challenges should not be attributed to China but to the spillover effects of the Ukraine crisis and global economic uncertainties.

"Kenya's debt dilemma is not a Chinese problem," said Ndichu, adding "In Kenya, the last key miles of a railway were never built due to poor planning and a lack of funds." 

"China thought it was important to give African countries time to stabilize because we started paying back debt for the SGR (standard gauge railway) in 2020. The government is now able to reap the impacts of the SGR and is slowly on the right track regarding its debt sustainability for the SGR. When the time comes, especially now we have the new government, we can start on the second leg of the SGR," said Ndichu.

U.S.-lead global financial system the root cause

Economically vulnerable nations often fall victim to debt crises due to financial downturns transmitted by the West. From 2022, the U.S. monetary policy went from extreme looseness to rapid interest rate hikes, which catalyzed the outbreak of debt problems in some poor countries.

With the dollar's dominance, the U.S. implemented rounds of quantitative easing and lowered interest rates to near zero, causing a significant inflow of low-interest dollars into Africa and emerging markets. However, it later increased interest rates aggressively, leading to a stronger dollar and capital outflows. 

Consequently, this resulted in a liquidity shortage, disrupted funding chains, currency depreciation, and a surge in sovereign debt, said Ye Jianru, associate professor at Guangdong University of Foreign Studies. He believes that an unfair global financial system led by the U.S. is the root cause of Africa's debt problem.

The global financial governance system, centered on the U.S. dollar and institutions like the IMF and WB, puts African countries at a disadvantage. Africa has limited representation in the IMF and faces high financing costs due to bias from major rating agencies favoring the U.S. and Western countries.

As a result, African nations experience rapid credit rating downgrades and increased debt servicing expenses during liquidity challenges. Despite being the largest shareholder in the WB and IMF, the U.S. needs to take more action to address Africa's debt issues or offer viable solutions, said Ye.

China fulfilled its role in debt relief

Song Wei, a professor at the School of International Relations and Diplomacy, Beijing Foreign Studies University, said that China does not lend simply for profits, but provides loans to foster progress and cooperation. 

Besides, China fulfilled its role fairly well as a responsible G20 stakeholder in implementing the COVID-19 Debt Service Suspension Initiative (DSSI), Song added. Data shows that in the 46 countries that participated in the DSSI, Chinese creditors accounted for 30 percent of all claims, and contributed 63 percent of debt service suspensions.

Furthermore, data from the WB show that since 2016, China, as a bilateral creditor, has been responsible for roughly 16 percent of global debt relief, surpassing the U.S. and the WB, and that China's debt reduction has already doubled the average reduction scale of the G7 countries.

Ding Yibing, dean of the School of Economics at Jilin University said that though China has provided the largest debt relief overall among G20 countries, the country is not the biggest debt owner of developing countries. 

"Multilateral financial institutions and commercial creditors hold the highest share of debt. Even without China's debt, these countries still face high debt pressure," said Ding.

(With input from Xinhua)