Toxic Assets? How Credit Rating Agencies Assess Chinese Debt Exposure in Developing Countries

The rise of China as a major official creditor has transformed the external financing landscape of developing countries. How do credit rating agencies (CRAs) respond as sovereign borrowers become increasingly reliant on Chinese lending? This article examines the relationship between creditor composition and sovereign ratings issued by Moody's, Standard \& Poor's (S\&P), and Fitch. I argue that greater dependence on Chinese creditors can heighten concerns about repayment capacity and crisis resolution. As Chinese claims become more dominant, their lending terms, limited transparency, and restructuring arrangements become more consequential for borrowers' financial vulnerabilities and access to relief. Home bias among CRAs embedded in Western financial markets may further amplify these concerns. Using a panel of 65 developing countries between 2000 and 2023, I find that official debt portfolios more heavily tilted toward China are associated with lower ratings from Moody's and S\&P in the baseline models, while the corresponding relationship for Fitch is not statistically significant. These findings suggest that creditor dependence is relevant to formal assessments of sovereign risk, linking China’s growing role in official finance to the institutions through which international financial markets evaluate developing countries.