CHina’s head of state and party leader Xi Jinping likes to pretend to be the good uncle who wants to help other developing and emerging countries on the international stage. This is most evident in the global infrastructure project of the New Silk Road, which Beijing initiated in 2013 and in which dozen countries are still participating today. Xi sells this as “a new option for other countries and nations that want to accelerate their development and maintain their independence.”
But a recent comprehensive analysis of Chinese loans to emerging and developing countries since 2000 reveals that this is not far off. On the one hand, many of the financial commitments that partner countries enter into are hidden and do not appear in international statistics.
The debt of these countries to Beijing is therefore much higher than previously known. In addition, China is pursuing very clear political goals with these loans and is trying to achieve them through pledges that are connected to the loans.
The study was carried out by AidData, a university research institute in Williamsburg, USA, which has compiled development projects from 95 donor countries and organizations since 1945 in a database. The first finding in the data was that China has caught up rapidly since the beginning of this century when it comes to financing development projects and has now clearly overtaken the USA and other Western nations.
But Beijing is taking a completely different path than the West. “China mainly used loans and not financial aid to achieve this dominant position,” write the authors of the study. While countries like the USA, Japan or Germany give two thirds to three quarters of development aid in the form of real grants, in the case of China this is only around three percent. The rest are loans.
Past the supervision of the World Bank
And these are often awarded in tortuous ways that are not immediately recognizable to the public, as the scientists have demonstrated in meticulous work for dozens of countries. As a result, a large part of the debts of emerging and developing countries towards China is not known at all.
“We found that the debt burden on China is much higher than previously known to research institutes, rating agencies or intergovernmental organizations with monitoring tasks,” the study says.
“These debts are systematically not reported to the World Bank’s Debtor Reporting System (DRS), since in many cases the central government institutions of the emerging and developing countries are not the main debtors responsible for repayment.” Rather, the loans are often granted to financial vehicles which are assigned to the state but do not appear in the public budget.
The most glaring example of this is Laos. The country’s total annual economic output is approximately $ 18 billion. A rail link between the southern Chinese city of Kunming and the Laotian capital Vientiane is now being built for 5.9 billion dollars.
The project is being carried out by the Laos-China Railway Company (LCRC). It has taken out a loan of $ 3.54 billion in China, 30 percent of which is borne by Laos. In addition, Laos and China have invested equity in the company. From Laos came 730 million dollars. These, however, were also financed through a Chinese loan – the equity is actually not, but is booked as it is.
Even the official debt of Laos to China is 29 percent of economic output, but there is also a further 35 percent of hidden debt, as the analysts at AidData have now found out. In truth, Laos is indebted to China for almost two thirds of its economic output.
Gag agreements protect the lender
It looks similar in many other countries. Overall, the researchers estimate that China has issued around $ 385 billion in hidden loans to emerging and developing countries, out of around $ 800 billion in loans that were officially issued.
Of course, not only is debt a risk for the debtor, it can also become a problem for the creditor. But it is precisely against this that Beijing protects itself with toggle contracts, as a study in March with the participation of the Institute for the World Economy (IfW) and AidData showed. At that time, the scientists managed to get around 100 actually secret contracts.
The evaluation showed that Beijing consistently builds in clauses that are supposed to make the states politically compliant, subject them to sheer arbitrariness by China – and all of this with an obligation of secrecy. “These are not the classic contracts that a bank would make,” says Christoph Trebesch, professor at IfW in Kiel, summarizing this analysis. Rather, they contained a strong political element.
This is also confirmed by the new study by AidData. “In the interests of securing domestic energy and natural resources that are lacking in sufficient quantities and maximizing investment returns from excess dollars and euros, China has rapidly expanded foreign currency lending to resource-rich countries suffering from high levels of corruption,” write she.
These loans are for the most part secured with future income from raw materials, and are mostly charged with quite high interest rates of just under six percent. The most comprehensive coverage is in the case of Venezuela, which has pledged raw material income for 92.5 percent of Chinese loans, and in most other raw material-rich countries this also applies to well over half of the loan amounts.
Xi Jinping is therefore by no means the good uncle he claims to be. Rather, he is coolly calculating in relation to other emerging and developing countries and is solely concerned with the benefit of China. A Western statesman with this attitude would probably be considered a colonialist, exploiter or imperialist.