Over the past two decades, China’s rise as the world’s largest bilateral creditor has profoundly altered the global development finance landscape.

Yet international scholarship on Chinese sovereign lending — especially to Africa — remains trapped in a binary: Western-centric “debt-trap diplomacy” narratives versus Beijing’s “South-South cooperative altruism” rhetoric.

Understanding this requires moving beyond these ideological framings to analyze the macroeconomic externalities of China’s internal economic architecture — specifically, a “dual system” China has employed in its overseas financing over the past 30 years: internal Keynesianism paired with external neoliberalism.

In other words, China’s overseas sovereign credit acts internally as a macroeconomic vent for domestic state-Keynesian industrial overcapacity, while its external execution relies on pragmatic, depoliticized and commercialized market mechanisms that mirror neoliberal risk-mitigation frameworks.

1. Internal Keynesianism’s external mirror

To understand Chinese infrastructure financing overseas, one must look beyond conventional geopolitical accounts and focus on the deep structural mechanisms of China’s domestic macroeconomic engine.

Within this state-directed loop, central and subnational governments act as the ultimate planners, resource allocators and systemic risk guarantors. By channeling massive liquidity through state-owned policy banks and large state-owned commercial banks, Beijing engineered an unprecedented domestic credit expansion.

While this model sustained high GDP growth rates for decades, a state-Keynesian regime dependent on continuous capital-intensive injections inevitably runs into diminishing marginal returns. By the mid-2010s, this had produced severe structural overcapacity across a number of sectors, along with a buildup of subnational balance-sheet distress.

When domestic fixed-asset absorption reached its peak, the Chinese state faced an urgent structural mandate: find an external vent for its surplus industrial capacity and its large accumulation of U.S. dollar foreign exchange reserves. This process mirrors what geographer David Harvey calls the “spatial fix” — the displacement of overaccumulated domestic capital into long-term overseas infrastructure projects.

Thus, the Belt and Road Initiative (BRI) emerged as the logical international extension of this internal Keynesian model. The micro-financial loop of this externalization was designed with considerable institutional precision:

First, a Chinese policy bank extends a dollar-denominated sovereign loan or export buyer’s credit to an African state government. Second, the loan agreement embeds strict procurement and exclusivity clauses, stipulating that the financed infrastructure asset must be built by designated Chinese state-owned enterprises acting as engineering, procurement and construction contractors.

Finally, and critically, while the sovereign debt is legally registered to the borrowing African government, the capital itself rarely leaves the Chinese banking system: In the clearing process, the dollar funds are transferred directly from the bank’s headquarters in Beijing to the corporate accounts of the Chinese state-owned enterprises executing the project.

Through this arrangement, Beijing converted low-yielding dollar reserves into overseas commercial orders for its domestic industrial base, effectively exporting its overcapacity to economies abroad.

2. External neoliberalism in practice

While the macro-level motivation for China’s overseas credit expansion remains rooted in state-backed Keynesianism, the micro-level behavior of Chinese capital changes once it enters the international market.

On foreign soil, Chinese banks operate with a pragmatic, highly commercial focus on capital preservation, risk insulation and asset securitization that mirrors neoliberal financial logic.

Traditional Western multilateral institutions — the Bretton Woods system led by the World Bank and the International Monetary Fund (IMF) — embed explicit political and economic conditions within their credit facilities.

Guided by the “Washington Consensus,” these institutions require borrowing states to implement sweeping structural adjustment programs, which often mandate fiscal austerity, state-enterprise privatization, transparency reforms and, occasionally, specific judicial or electoral changes.

China, by contrast, operates under a diplomatic doctrine of “non-interference” and “no political strings attached.” International observers, however, often misinterpret this lack of political conditionality as an absence of commercial or legal conditions as well.

In contract design, commercial enforcement and financial risk mitigation, Chinese banks often behave like highly rational market actors. Rather than attempting to reshape the governance structures of recipient states, Chinese capital insulates itself from host-country governance risks through strict commercial and legal mechanisms.

The clearest institutional example of this external neoliberal risk insulation is the “Angola Mode,” a structure often categorized as “commodity-backed infrastructure lending.”

When extending credit to sovereign states with low credit ratings, high institutional fragility and restricted access to international capital markets, Chinese financial institutions have designed a tightly closed-loop system for protecting their exposure:

• The offshore escrow mechanism: The credit arrangement bypasses the domestic central bank and fiscal systems of the borrowing state. Instead, a binding contract mandates the creation of an offshore escrow account, typically maintained in an international financial hub or directly with the lending bank in Beijing.
• The revenue interceptor: The borrowing state mandates that revenues from its strategic commodity exports be paid directly into this offshore escrow account by the buyer. The creditor bank holds a senior security interest over the account, automatically deducting principal and interest payments before any residual capital is remitted to the borrowing nation’s domestic treasury.

Through these offshore structures, the lending and repayment of capital are detached from the fragile and often corrupt central banks and currency systems of the borrowing countries.

In other words, as long as Angolan oil continues to be extracted and shipped to China, the repayment cash flow is intercepted directly by Chinese financial institutions in escrow accounts established overseas.

This approach — securing capital without altering the borrowing country’s institutions, relying solely on sophisticated financial contracts and resource-monetization flows — takes the underlying neoliberal logic of “property rights, contracts, free flow of capital and risk-bearing” to its extreme.

3. When Keynesian credit meets market anarchy

This dual-track credit model — internal Keynesianism paired with external neoliberalism — operated smoothly during the commodity super-cycle between 2000 and 2018, securing an expansive global market share for China’s industrial capacity while fueling the largest postwar infrastructure boom on the African continent.

But this architecture, which interfaces internal Keynesian capital generated under tight state control with an anarchic international market governed by neoliberal rules, harbors an inherent structural mismatch. That mismatch eventually produced a sovereign debt crisis across much of Africa.

When operating the Keynesian model domestically, the Chinese government has near-total control over the financial system. Systemic debt distress within state-owned enterprises is managed largely through administrative coordination: The central state can orchestrate debt rollovers, direct liquidity injections, enforce financial repression, or mandate state-backed commercial banks to absorb non-performing loans.

In effect, the system assumes that a single sovereign coordinator can always socialize the costs of financial distress. The international debt system, however, operates under structural anarchy: There is no global sovereign authority to underwrite or bail out a bankrupt state.

When the external macroeconomic environment shifted sharply in the early 2020s — particularly amid the Federal Reserve’s aggressive interest rate hikes — global liquidity flowed rapidly back to Washington, triggering a sharp depreciation of non-dollar currencies and volatile swings in commodity prices.

For African countries heavily reliant on dollar-denominated debt and narrow, single-industry economies, this amounted to near-fiscal suffocation.

Once systemic sovereign defaults occurred, the limitations of relying purely on commercial contract design — without sovereign enforcement mechanisms — became apparent. Zambia was the first African country to experience a serious sovereign default, and its debt structure was extremely complex.

Several major Chinese banks had accumulated billions of dollars in claims in Zambia, much of it secured by resource collateral or escrow accounts. But when Zambia’s national finances collapsed, its foreign exchange reserves were depleted as well, and severe social unrest followed. China then encountered what some Western political economists call the “creditor’s dilemma.”

On one hand, China cannot deploy military or extrajudicial force to seize physical assets in a defaulting state — doing so would violate Beijing’s diplomatic narrative of South-South solidarity and risk igniting anti-Chinese sentiment, damaging its standing among the Global South.

On the other hand, Chinese banks initially resisted participating in multilateral debt-relief frameworks such as the Paris Club, preferring confidential, bilateral negotiations that would preserve their specific collateral structures.

That approach ran into resistance from the IMF and Western private bondholders, who demanded comparable treatment and full transparency around Chinese collateral agreements, accusing Chinese lenders of nondisclosure. Beijing, in turn, countered that private bondholders sought high yields without accepting equal losses on their holdings.

This back-and-forth has made clear to Chinese banks that in the world of overseas neoliberal markets, no contract, however carefully designed, can fully hedge against the systemic risk posed by the bankruptcy of a sovereign state.

4. The shift toward ‘small and beautiful’ lending

Facing the backlash from sovereign debt defaults, alongside domestic structural changes and subnational debt clearing, China’s sovereign lending network to Africa entered a period of strict rebalancing between 2024 and 2026, gradually abandoning its earlier era of aggressive expansion.

During the peak expansion phase of the BRI, the annual disbursement of new Chinese sovereign loans regularly exceeded the total principal and interest payments remitted by African states.

Today, due to tighter credit risk assessments by Chinese banks, the debt service African nations pay annually on legacy loans has outpaced the inflow of new Chinese sovereign credit. In short, China has shifted from an aggressive liquidity provider into a protective creditor focused on recovering capital from a mature loan portfolio.

In September 2024, the Chinese government announced financial support of 360 billion yuan (about $50 billion) over the following three years. A closer look at the details, however, reveals that the core of this funding differs fundamentally from the lending of a decade ago.

This shift rests on at least three new anchors for China-Africa financial relations in the coming decade.

First, to shield bilateral credit networks from Western monetary shocks and Federal Reserve interest rate cycles, Beijing has steadily increased its allocation of yuan-denominated sovereign loans and bilateral currency swap lines.

By extending credit in yuan, Beijing encourages African borrowers to procure Chinese industrial equipment directly in yuan, later servicing the debt with yuan revenue earned from commodity exports to China.

Second, massive, capital-intensive transportation and logistics projects have given way to targeted, high-yield interventions. Individual project financing caps are strictly monitored, with credit redirected toward two primary sectors: the green energy transition and Digital Silk Road financing for 5G telecommunications infrastructure such as cloud data centers. These “small and beautiful” projects carry high strategic value, in part because they help lock in Africa’s future digital dependence on Chinese technology.

Third, to counter criticism that its lending model mirrors historic extractive patterns — extracting raw materials while exporting finished goods back to Africa — China has also been gradually shifting its investment strategy toward localized industrial value-addition.

Chinese credit is increasingly directed toward funding processing plants, smelters and special economic zones within Africa. Chinese firms are also establishing more downstream assembly units for electric vehicles and lithium battery components in regional hubs such as Nigeria and Egypt, integrating African industrial bases directly into China-led green energy supply chains and helping route around Western trade barriers.

5. Toward a third credit paradigm

In sum, the 20-year history of China’s sovereign lending to Africa is neither the “history of geopolitical intrigue and debt traps” portrayed in some Western narratives, nor the purely altruistic “history of South-South charity” that transcends the laws of capital, as depicted in China’s official messaging.

It is, at its core, the product of a large, policy-driven state capitalist economy. Faced with domestic overcapacity and the limits of credit expansion, China has pursued a distinctive and inherently tense experiment: internal Keynesianism paired with external neoliberalism in the globalization of its capital overseas.

Over the next decade, the world may see the emergence of a new, third credit paradigm — one centered on yuan-denominated pricing, comprehensive risk control, a dual engine of digital and green technologies, and deep integration with local supply chains.

Only by moving beyond Cold War-style framing and examining the institutional details of China’s credit duality can observers accurately grasp the direction of its future overseas financing.

Jiahao Yuan is an economist focusing on international development finance and Chinese macroeconomic policy.