How Can China’s Debt Sustainability Analysis Better Serve Global South’s Development Goals?

By Tianyi Wu

The current debt and development crisis in the Global South has resurfaced a long-standing tension in sovereign development finance: do tools designed to assess fiscal risk account for the investment needs countries must meet to grow out of debt?

Recent debates often ask whether developing countries are facing unsustainable debt burdens. An equally important question is whether current debt sustainability assessment (DSA) and lending practices are consistent with the developmental logic they are supposed to serve. In recent years, the tension between development finance needs and debt distress has become one of the defining challenges facing developing countries. Governments need large-scale financing for infrastructure, energy systems, climate adaptation, industrial upgrading and basic public services. Yet at the same time, many face shrinking fiscal space, higher borrowing costs, tighter global financial conditions and repeated external shocks.

China, an important lender for developing countries, is the largest creditor among official lenders (excluding private sector and multilateral development banks). The country’s overseas lending has often focused on infrastructure and long-term productive investment, filling in a key financing gap for developing countries.

Three working papers recently published by the Boston University Global Development Policy (GDP) Center discuss how China’s risk assessment could be more aligned with the nature of its long-term lending goals. Their findings suggest that better analytical tools and contract design matter to ensure long-term debt sustainability in developing countries.

DSA with Chinese Characteristics: Innovations and Limitations

Following the 1998–2002 Russian and Argentine financial crisis, DSA emerged in the early 2000s as international creditors sought more systematic ways to assess sovereign credit risk. Over time, IMF and WB became the principal institutional forces behind its development, and their framework gradually became the dominant global reference point. Today, the IMF–WB approach influences concessional lending decisions, debt restructuring processes and broader assessments of sovereign risk across the globe.

This expanding influence makes DSA politically and developmentally consequential. At one level, the framework is designed to answer a straightforward question: can a country service its debt without default, arrears or exceptional adjustment? But in practice, the answer depends on a set of assumptions about growth, public investment, export earnings, fiscal consolidation, interest rates and vulnerability to shocks.

The current IMF-WB template remains cautious on sovereign debt, treating it often as a liability and privileging fiscal consolidation as the default response to distress. Nevertheless, this approach fails to account for different types of sovereign debt and public asset, which carry varying implications for structural economic change and long-run repayment capacity. As a result, DSA has become a policy area where competing visions of development are negotiated, even when it is presented as a purely technical exercise.

In 2019, China launched the Belt and Road Initiative (BRI) Debt Sustainability Framework (DSF) for low-income countries. A new paper by my GDP Center colleague Marina Zucker-Marques and I shows that China largely adapted its BRI-DSF from the IMF–WB template. China has often been described as a distinctive or alternative development financier, yet in this case it borrowed heavily from an existing multilateral framework rather than creating its own separate one.

While based on the IMF–WB framework, China did not simply replicate the model. The BRI-DSF diverges in important ways, particularly in its assumptions about public investment, fiscal consolidation and present-value debt calculations. Its adoption is also selective. In practice, it plays a more visible role in non-concessional sovereign lending, especially through export credit insurance mechanisms, than in concessional lending or the determination of grant elements.

Our research shows that China’s adoption of the IMF-WB DSF is not unique. Our comparison with France and India shows that China occupies an intermediate position. France displays stronger alignment with IMF–WB practices, relying directly on those signals in sovereign lending decisions. India, by contrast, shows much weaker convergence and relies more heavily on its own internal tools and classifications.

These different trajectories can be explained through an institutionalist lens. In China and France, rising debt-servicing pressures and legitimacy concerns created pressure to move closer to internationally recognized debt-sustainability practices. In India, those pressures were weaker. Even so, China’s convergence remains partial. It is limited by institutional fragmentation, selective implementation and a continuing commitment to a development-finance logic that does not fully map onto the IMF–WB framework.

That finding points to a deeper issue. If more creditors are now using DSA, does that mean the framework itself is serving development better? Or is it still too narrowly focused on short-term repayment and debt containment?

The IMF–WB framework, despite its global authority, has long been criticized for its narrow conception of sustainability. A core concern is that DSA tends to focus primarily on the liability side of the public balance sheet with a lack of attention to the asset side. Borrowing undertaken to finance productive investment is often treated mainly as an increase in debt stock, even though it creates infrastructure, productive capacity and future revenue streams. This can create a systematic anti-investment bias. Countries may be judged to be at a greater risk precisely because they are borrowing to address infrastructure bottlenecks, expand energy access or build the foundations for future growth.

Another working paper by GDP Center pushes this critique further in relation to China’s own debt sustainability framework for market-access countries. The paper shows that, despite some innovations, China’s DSA framework on market-access countries remains close to the IMF’s underlying logic, such as that the framework does not adequately capture the growth and fiscal revenue effects of productive public investment.

New Approaches to Debt Sustainability Analysis and Debt Instrument Design

New approaches to DSA are needed in addressing its current technical defects. Much of China’s overseas lending has been directed toward infrastructure and other long-term investments intended to raise productive capacity. If a debt sustainability framework treats such borrowing simply as a larger debt burden, failing to incorporate the roads, railways, ports, power systems and export capacity financed alongside it, the result can skew DSA and push away productive debt conducive to LIC’s economic growth and long-term fiscal capacity. Liang’s work suggests that this problem remains present even in China’s attempt to adapt the DSA framework.

Rethinking DSA, however, requires more than improving models. It also requires reconsidering the design of debt instruments themselves. Even the best debt sustainability framework will struggle if countries are locked into rigid repayment structures that amplify shocks. Non-Resident Senior Fellow Ying Qian examined the potential of commodity-price-linked bonds in his new paper. The central argument is that many commodity-dependent developing countries face debt distress not simply because they borrow excessively, but because their repayment capacity is highly exposed to forces beyond their control, especially global commodity prices, exchange-rate fluctuations and shifts in international financial conditions. Conventional sovereign bonds worsen this problem because they impose fixed payment obligations even when export earnings collapse.

Commodity-price-linked bonds would work differently. Debt service would adjust with the commodity cycle: when prices fall, repayment obligations ease; when prices rise, repayments increase. This introduces a degree of automatic risk sharing between borrowers and creditors and reduces the procyclical pressure that can turn an external shock into a full-blown debt crisis.

As the world’s largest importer of many primary commodities, China has a direct interest in more stable commodity markets and more resilient trading partners. Qian’s paper suggests that renminbi (RMB)-denominated commodity-price-linked bonds, including possible Panda bond structures, could better align debt service with trade patterns for exporters heavily connected to China. Chinese development finance institutions, together with multilateral development banks, could also play a role in piloting, standardizing and scaling these instruments. A takeaway is that the future of debt sustainability may depend not only on how we assess debt, but also on how we structure it.

The Way Forward

New GDP Center research point toward a coherent set of reforms that a more development-oriented DSA would require. First, DSA frameworks, including China’s BRI–DSF and DSF for market-access countries, should account for the asset side of the public balance sheet, not just its liabilities. Much of BRI financing creates productive public assets whose revenues strengthen repayment capacity. Failure to include them understates fiscal health and reproduces a narrowly creditor-oriented assessment of solvency.

Second, the framework should better capture the growth-enhancing effects of public investment. The current anti-investment bias, carried over from the IMF–WB template into the current BRI–DSF, relies on historical multiplier averages that cannot reflect the structural transformation that major infrastructure projects generate. A reformed approach would allow multiplier assumptions to vary with project type and the degree of capital scarcity in the recipient economy.

Third, the framework should distinguish between domestic- and foreign-currency-denominated debt. Conflating the two under a presumption of continuous market access may produce assessments that incompletely capture the risks, particularly for economies vulnerable to spread spikes and sudden market exclusion. External and domestic debt sustainability should be assessed separately, with explicit attention to whether foreign-currency borrowing strengthens a country’s capacity to earn foreign exchange.

Fourth, debt contracts should be redesigned to smooth out repayment obligations over commodity cycles. Current fixed schedules are mostly procyclical, concentrating debt service burdens precisely when export revenues are weakest. Standardized commodity-price-linked bonds, particularly those tied to transition-critical minerals and issued in RMB, offer a practical instrument for achieving this, as these bonds help distribute risk more fairly between borrowers and creditors and reduce the frequency of crisis-driven restructuring.

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