Private lenders, not China, are driving the emerging market debt crisis, new report shows - Trade Treasury Payments

For more than a decade, the global narrative surrounding sovereign debt in developing countries has largely pointed a finger at China. 

The image is familiar: far‑flung infrastructure projects funded by Beijing that eventually leave poor nations ensnared in what’s commonly referred to as “debt‑trap diplomacy”. This framing has coloured political speeches, media coverage, and even parliamentary submissions, yet a strikingly different story emerges from a new study by Debt Justice UK. 

That study suggests that lower‑income countries actually direct nearly three times as much repayment to private lenders as they do to Beijing. 

Revealing the data: Who is being paid and how much

Debt Justice UK’s analysis draws on World Bank statistics covering 88 lower‑income countries between 2020 and 2025. In that period, 39 per cent of external debt repayments went to private lenders (i.e., bondholders, international banks, commodity traders, etc.) while just 13 per cent were paid to Chinese public or private lenders. Multilateral institutions claimed 34 per cent, and other governments around 14 per cent. 

In sheer financial terms, private creditors now absorb significantly more of these countries’ scarce revenues than any other category. According to an UNCTAD report, a total of 3.3 billion people live in countries that now spend more on interest payments than on either education or health.

The data are not confined to isolated regions. Other analyses illustrate how the story holds across Africa. One Debt Justice campaign briefing notes that African governments owe three times as much to Western private creditors as they do to China, and pay nearly double the interest. 

These figures overturn the prevailing lens through which so much of the debt crisis has been viewed.

Why the China-centric narrative took root

Yet why does the Chinese creditor dominate public consciousness so completely? The answer lies in a combination of symbolism, convenience and selective observation. 

Sri Lanka’s Hambantota Port, a financially underwhelming infrastructure project that ultimately ended up managed by a Chinese company, is still the most resonant example, appearing to confirm worst-case suspicions. 

Meanwhile, the rapid roll‑out of the Belt and Road Initiative (China’s famed infrastructure development project that stretches across continents and has cost billions of dollars in investment) offered ripe imagery for media, think tanks and foreign ministries eager to illustrate China’s rising global footprint. 

With this picturesque villain as a comparison, it is little wonder that private bond financings (which are opaque, largely anonymous, and frankly a little dull) have not been given the same attention in the media, even where their impact is more pronounced.

Debt-trap diplomacy: A closer look at the evidence

The notion of “debt‑trap diplomacy” originated in 2017, when Indian strategist Brahma Chellaney characterised China’s infrastructure lending as a geopolitical lever used to claim strategic assets when debtors could no longer pay. 

That view gained traction, echoed in official communiques and op‑eds worldwide. However, a growing body of scholarly work refutes the narrative as oversimplified at best and misleading at worst. 

Chatham House’s thorough study concluded that Belt and Road loans are largely recipient-driven, economically motivated, and lack evidence of deliberate asset seizure schemes. Accordingly, the Hambantota Port originated as a Sri Lankan initiative, not a Chinese handover. Malaysia provides another example of a recipient agency, with domestic leaders using the BRI framework to advance their policy priorities, not as victims of Beijing’s coercion.

Nevertheless, scholars acknowledge that there can be political leverage embedded within Chinese contracts. Defensive clauses such as those circumventing the Paris Club and sovereign immunity waivers are common, though not unique to China, and could tilt outcomes in a creditor’s favour. 

Crucially, however, these remain the exception rather than the rule, and far from the script of strategic predation implied by the debt‑trap narrative.

The mechanics and impact of private debt

Understanding the role of private creditors requires a look at how their loans and bonds differ from other forms of sovereign borrowing. Unlike official bilateral loans, which are often concessional and can be renegotiated through political channels, private debt is governed almost entirely by contract law, most often under the jurisdiction of New York or London courts. This means that terms are typically fixed, the interest rates higher, and the repayment schedules less flexible. 

In practical terms, this means that when a country falls into distress and wants to restructure its loan, it must convince a disparate group of bondholders (which sometimes number in the hundreds) to agree to changes. The consequences are visible in recent debt crises, like the one in Zambia.

Zambia’s drawn-out negotiations are a reminder that in the realm of private debt, speed is rarely part of the design. 

The opacity of private debt compounds the problem. While loans from multilateral institutions or state lenders are generally disclosed, the full terms of bond agreements are rarely public. This makes it difficult for citizens, analysts, or even policymakers to grasp the true scale of the obligations, let alone to plan credible paths out of crisis. 

Rethinking the debt conversation

The Debt Justice UK study refocuses attention onto the more hidden but financially dominant actors (i.e., private lenders) who now shape the burden of external debt far more than the headline‑grabbing loans attributed to China. 

The traditional narrative was much simpler and made use of widely accepted tropes: East versus West, developing nations ensnared, China as puppet‑master. But the truth is rarely so simple. 

Reform must tackle the bond markets, the city‑based banks, and the financial instruments that move through London and New York courts. Official lenders, multilateral institutions and private creditors alike must be held to account, not just in rhetoric, but in restructuring frameworks and legal reforms.

Proposals already appear, such as the UK private member’s bill that would pause creditor legal actions during debt talks and impose good‑faith requirements on private lenders. If judging by the data, this trend should be furthered through coordinated reform. 

In the end, the Debt Justice UK report compels a more mature, comprehensive dialogue about what debt reform truly requires.