Sri Lanka President Gotabaya Rajapaksa is facing pressure from protesters to step down.
Over the past few years, the U.S. has accused China of using "debt diplomacy" to make developing nations across the world more dependent on Beijing.
Yet the cases of Sri Lanka and Pakistan -- both friends of China facing dire financial situations as inflation soars -- show that President Xi Jinping's government is becoming more reluctant to pull out the checkbook. China still hasn't made good on a pledge to re-issue loans totaling $4 billion that Pakistan repaid in late March, and it hasn't responded to Sri Lanka's pleas for $2.5 billion in credit support.
While China has pledged to help both countries, the more cautious approach reflects both a refining of Xi's signature Belt and Road Initiative as well as a hesitancy to be seen interfering in messy domestic political situations. Pakistan got a new prime minister on Monday after parliament booted out former cricket star Imran Khan, and Sri Lanka's leader is facing pressure from protesters to step down.
"Beijing has for the past couple of years been rethinking its external lending because their banks realized they were carrying a lot of debt with countries whose prospects of paying back were quite limited," said Raffaello Pantucci, a senior fellow at the S. Rajaratnam School of International Studies at Nanyang Technological University. "This came on top of a tightening economic situation at home which also required a lot of spending, so there was less appetite to just throw money around wantonly."
China is currently facing its own economic troubles, with lockdowns to contain the country's worst Covid outbreak since early 2020 shutting down the technology and financial hubs of Shanghai and Shenzhen. Premier Li Keqiang on Monday told local authorities they should "add a sense of urgency" when implementing policies as analysts warn the official growth target of a 5.5% is now in jeopardy.
China has become the world's largest government creditor over the past decade, with its state-owned policy banks lending more to developing countries than the International Monetary Fund or the World Bank in some recent years. The opacity around the terms and scale of some of that lending has been criticized, especially as the pandemic exacerbates debt problems in poorer countries.
Sri Lanka was downgraded deeper into junk by Fitch Ratings, which said on Wednesday the nation's decision to suspend payments on its foreign debt has kicked off a sovereign default process. S&P said Sri Lanka's next interest payments are due on April 18 and the failure to cover them will likely result in default, as would an outright debt restructuring.
Sri Lanka's top diplomat in Beijing this week said he was "very confident" that China will come through with credit support, including $1 billion for the country to repay existing Chinese loans due in July. In an interview with Bloomberg, Ambassador Palitha Kohona said the process often takes months and he didn't see any delay.
"Given the current circumstances, there aren't that many countries that can step out to the pitch and do something," he said. "China is one of those countries that can do something very quickly."
Still, China's role in helping to resolve ongoing crises in South Asia may be limited despite its status as a major creditor. A Shanghai-based scholar who researches China's overseas lending said new credit lines are harder to approve as authorities emphasize risk management at financial institutions including policy banks. The scholar asked not to be named due to rules for speaking with the media.
Xi highlighted the importance of a more cautious approach at a high-level Belt and Road symposium in November. "It is necessary to implement risk prevention and control systems," Xi said. He called on participants to make "small but beautiful" projects a priority for foreign cooperation and "avoid dangerous and chaotic places."
Earlier this month, Jin Liqun, president of the China-backed Asian Infrastructure Investment Bank, encouraged Sri Lanka to turn to the IMF for help in a meeting with Kohona.
The most "burdensome debt" in terms of maturity and rates is typically owed to international sovereign bonds, mostly private market participants, according to Meg Rithmire, an associate professor at Harvard Business School who specializes in comparative political development in Asia and China. Therefore many in China view Beijing as being "unfairly blamed" for the fiscal choices made by political leaders in other countries, she said.
"China is wary of its actions being misinterpreted or backfiring, and is, I think, waiting to see what efforts other actors, like the international financial institutions, can undertake before it jumps in to offer credit support," Rithmire said.
China's development banks are acting to preserve returns and it "would be difficult for them to easily accede to Sri Lanka's requests for deferrals," said Matthew Mingey, a senior analyst at Rhodium Group's China Macro & Policy team who researches economic diplomacy.
"Credit conditions back in China aren't making things any easier for them," he added. "Ultimately, Sri Lanka needs the IMF."
Sri Lanka said Tuesday it would expedite talks with the IMF after it halted payments on foreign debt to preserve dollars for essential food and fuel imports. Pakistan's new government also plans to work with the IMF to stabilize the economy, according to Miftah Ismail, a former finance minister and a senior ruling party leader.
China's ability to assist either country with a balance-of-payments crisis is limited, particularly as Beijing's financial assistance is almost always tied to specific projects, said Muttukrishna Sarvananthan, principle researcher at the Point Pedro Institute of Development in Sri Lanka. China's policy of non-interference in internal affairs prevents it from offering the type of advice needed for countries to emerge out of a financial crisis, he added.
"Even the IMF appears to be moving very slowly -- if not abandoning -- the requests of both Pakistan and Sri Lanka for their assistance," Sarvananthan said. "Which sane bilateral donor country or international financial institution would pour money into sinking ships in both Pakistan and Sri Lanka."