China is the largest bilateral creditor to low- and middle-income countries (LMICs) presently. China’s lending mainly targets infrastructure, transport, energy, and mining sectors in developing countries that are of strategic importance to the Chinese government. Sub-Saharan Africa and South Asia have observed the most substantial increases in borrowing. Chinese financing to LMICs is facilitated through state entities, offering concessional and non-concessional loans, with a significant portion of lending cloaked in confidentiality. These agreements often contain extensive default and cancellation clauses and are marked by collateralized transactions, which, while reducing lender risk, pose substantial challenges for borrowers, including increased risk of debt distress and complications in debt restructuring. Recent studies have highlighted the heightened risks and complexities associated with collateralized sovereign borrowing, emphasizing the need for transparency and proper disclosure to mitigate potential risks. Despite being one of the world's largest bilateral creditors, China is not a member of the Paris Club, an informal group of official creditors focused on finding coordinated solutions to debtor countries' payment difficulties; instead, China opts for direct, often less transparent, bilateral negotiations for debt restructuring and relief, incorporating strategies such as extended loan maturities, interest rate adjustments, debt-for-resource and debt-for-equity swaps, while more recently also endorsing the G20's Common Framework for coordinated debt treatments.

The policy paper provides an overview of various projects financed by China, categorizing them based on the modalities of goods for infrastructure and services for infrastructure, further explored in Annex 1 with comprehensive technical and operational details. It highlights the "Angola mode" or oil-for-infrastructure model, a goods-for-infrastructure transaction where infrastructure construction is compensated by goods exports in a subsequent period. This model, exemplified by the Sino-Angolan joint venture, has historically deemed being beneficial until recent debt treatments surfaced post-2020. On the services side, projects like the Laos-China Railway, the Addis Ababa–Djibouti Railway, and Sri Lanka Hambantota port showcase complex agreements where infrastructure services are expected to generate foreign exchange cash flow for debt repayments. These case studies reveal a pattern of collateralized transactions, often with offtake guarantees and asset pledges, facing debt distresses followed by debt treatments. The lessons drawn from case studies emphasize the importance of sound institutional and legal frameworks for risk management, highlighting problematic collateralization impacts and the necessity for borrower countries to enhance internal and external governance structures to ensure project success and financial integrity.