SHANGHAI — More than half of China’s $1.1 trillion of loans to low- and middle-income countries have entered their principal repayment periods, a new study found, prompting a reboot by Beijing to reduce exposure to distressed debt.

The report published on Tuesday by AidData, a research lab at U.S. university William & Mary, comes after Beijing pledged last month to promote “small yet smart” projects as its Belt and Road Initiative (BRI) marked its tenth anniversary.

About 55% of outstanding debt owed by developing nations — including principal but excluding interest — has entered principal repayment periods and the figure could increase to 75% by 2030, the report said.

“Beijing is navigating an unfamiliar and uncomfortable role as the world’s largest official debt collector,” AidData said, adding that some 80% of the lending involved countries in financial distress.

The report was compiled from AidData’s granular dataset of international development finance from China, which covered over 20,000 projects across 165 low- and middle-income countries financed with grants and loans over a 22-year period.

China has not revealed the total debt owed by BRI participants, which spanned more than 150 nations and 30 international organizations as of June 2023. While these countries have benefited from infrastructure projects, some such as those in the Maldives and Sri Lanka have fallen into debt distress.

Beijing has denied accusations that the BRI has created debt traps, instead hailing it as a driver for global development.

But in a move that suggests partial recognition of the problems, China said future BRI projects would be “small yet smart.” They will be backed by loans on the “basis of market and business operation” to mitigate risks, and Beijing has promised to strengthen multilateral cooperation in areas including anti-graft, finance and taxation.

Bad debts are not the only issue. China-financed infrastructure projects with significant environmental, social and governance risk exposure swelled to 1,693 projects worth $470 billion in 2021, up from 17 projects worth $420 billion in 2000, the report said.

China’s public approval rating among lesser developed countries also declined to 40% in 2021 from 56% two years earlier. Beijing is also receiving less favorable media coverage, according to the AidData report.

“Yet [China] has proven very capable of winning and retaining the foreign policy support of governing elites,” the report said.

Tallying votes cast in the U.N. General Assembly between 2000 and 2021, the report found that governments of low- and middle-income countries aligned their foreign policy positions with China 75% of the time compared to 23% with the U.S.

Faced with a daunting set of challenges, AidData said Beijing is now learning from mistakes and becoming “an increasingly adept international crisis manager.”

The Chinese government has also outsourced risk management to foreign institutions with stronger due diligence standards instead of relying on its own banks. International Finance Corporation, the European Bank for Reconstruction and Development, Standard Chartered Bank and BNP Paribas are among the organizations engaged to vet borrowing and proposed transactions.

Some of the Western institutions were invited into collaborative lending arrangements as Beijing reduced the use of bilateral lending instruments. “50% of China’s nonemergency lending portfolio in low- and middle-income countries is now provided via syndicated loan arrangements — and more than 80% of these arrangements involve Western commercial banks and multilateral institutions,” the report said.

Other precautionary measures put in place by Beijing include raising cash collateral to safeguard bilateral lending. Collateralized lending stood at 72% in 2021 compared to 19% in 2000.

“When illiquid or insolvent borrowers fall behind on the repayment, [Chinese] policy banks are paying themselves overdue principal and interest by unilaterally sweeping foreign currency out of the escrow accounts of their borrowers,” the AidData report said.

“These cash seizures are mostly being executed in secret and outside the immediate reach of domestic oversight institutions — such as the auditor general and public accounts committee within parliament.”

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