- Guy Wang
- BBC Reality Czech
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Controversial Chinese loan schemes
China faces criticism over lending to poor countries. China’s creditors have been accused of failing to repay their debts and of being vulnerable to Beijing’s pressure.
But China rejects that idea. It is alleged that the ambassador provided the information to Hussein.
“As a result of borrowing from China, not a single country has fallen into the so-called ‘debt trap’ environment.” Says China.
What do we know about China’s debt?
China is one of the largest lenders in the world. Its debt to low- and middle-income countries has nearly tripled over the past decade, reaching $ 170 billion by the end of 2020. China’s overall debt may be higher than indicated in these figures.
Research by Aid Data, an international development organization at William & Mary University in the United States, has found that half of China’s loans to developing countries are not reported in credit figures.
It is often excluded from government reference and transferred to state-owned enterprises, banks, joint ventures or private companies.
More than 40 low- and middle-income countries still borrow more than 10 percent of their GDP from China.
Djibouti, Laos, Zambia and Kyrgyzstan borrow at least 20 percent of their GDP from China.
It is noteworthy that the bulk of the debt owed to China belongs to the roads, railways, ports, mines and energy sectors under President Xi Jinping’s Belt and Road program.
What are ‘debt traps’ and what is the evidence for it?
China’s credit growth
In an interview with the BBC, Richard Moore, head of Britain’s foreign spy agency MI6, said China was using debt traps to keep other countries in its hands.
China lends money to other countries and has to relinquish control of key assets when those countries are unable to repay the debt – a accusation that China has long denied.
Sri Lanka is an example often cited by critics of China. A port project was started in Hambantota with Chinese investment several years ago.
Sri Lanka has been embroiled in controversy over a project that has cost billions using Chinese loans and Chinese contractors, failing to prove that it can actually make a profit. It plunged the country into debt.
Finally, in 2017, Sri Lanka agreed to lease 70% control over the port to Chinese merchants for a 99-year lease in exchange for further Chinese investment.
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Sri Lanka
Saddam House, a UK-based think tank, has questioned whether the “debt trap” concept applies in its analysis of the port project. It noted that the agreement was driven by local political motives and that China had never acquired formal ownership of the port.
It also points out that the bulk of Sri Lanka’s total debt is not borrowed from China. It therefore points out that there is no evidence that China used the environment to its advantage to gain military advantage over the port.
There is little doubt that China’s economic intervention in Sri Lanka has increased over the past decade. And there are continuing concerns that it could be used to advance its political ambitions in the region.
China’s lending in other parts of the world has proven to be controversial. It was said that the terms of the loan agreements would be favorable for the transfer of key assets to China.
But in one of the hundreds of credit scandals studied by Aid Data and some other researchers, even if the lender fails to repay the loan, there is no case where the lender actually seizes a large asset.
China’s credit comparison
China is the largest lender in the world
China does not disclose its foreign credit details, and most Chinese loan agreements stipulate that borrowers should not disclose credit details.
It argues that such confidentiality is common practice in international credit agreements.
“Secret deals are very common in international business loans,” says Lee Jones, a professor at Queen Mary University in London.
“And financing China’s development is essentially a business venture.” He says.
Most industrialized nations share information about their lending activities through members of what is known as the Paris Club.
China decided not to join the group. But using the available World Bank data, one can clearly see the rapid growth of China’s debt compared to other countries’ credit details.
Is it difficult to repay Chinese loans?
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Chinese loans
China tends to lend at a higher interest rate than Western governments.
Lends at approximately 4% interest. These loans are commensurate with commercial market rates. This is four times more than the interest rates charged by individual countries and organizations such as the World Bank or France or Germany.
The deadline for repaying Chinese loans is less than 10 years. Concessional loans available to developing countries are available for up to 28 years. Chinese state-owned lenders are required to have a minimum cash balance in a foreign account accessible to the lending institution.
“If a borrower fails to repay his loan, he can withdraw money from this account without incurring bad debts through the court process.” Says Brad Parks, managing director of Aid Data.
This approach is rarely seen in loans from Western countries.
Countries with Largest and Fastest Growing Economies – The G20 countries have launched a program to help poor countries with debt relief to cope with the impact of the epidemic. China has joined it. And China says it has contributed more to debt repayment than any other country participating in the plan.
The World Bank says that since May 2020, the G20 countries have provided a total of $ 10.3 billion in debt relief under this program. When asked by country-wise the World Bank said the information could not be shared.