Workers of a Chinese company receive on-site training for a railroad project in Mozambique, Sept. 2019 [Photo China Daily]
Increasingly dependent on China for financing, many low- and middle-income countries succumb to its political influence. A recent international study conducted by researchers from various countries, first reported by Le Monde (9/29/2021), shows the extent of this indebtedness, and its effects on world geopolitics.
Over the past two decades, China’s grants and loans to 163 low- and middle-income countries have averaged $85 billion annually, double the amounts provided by the U.S. and others world powers during the same period. The amount of debt to China already represents more than 10% of 42 developing countries’ GDP.
These estimates come from a report by AidData, a research and innovation lab located at the American public College of William & Mary (Virginia), which examines more than 91,000 official documents from 13,427 projects financed by Beijing.
According to the reports’ authors, over the past two decades, China has provided $843 billion to 163 countries, in grants and (mostly) in loans. Unlike development aid from wealthy countries, which is mostly financed in the form of grants and loans at low interest rates, Chinese aid comes mainly through commercial loans.
Interest rates on Chinese loans are sometimes high, as “disproportionately lends to countries that perform poorly on conventional measures of creditworthiness,” the report details. For example, Pakistan has received loans from China at an average interest rate of 3.76%, while a typical OECD loan is usually at 1.1%.
The amount of debt to China already represents more than 10% of 42 developing countries’ GDPs
Beijing can require these countries to take out credit insurance policies, or ask them to deposit a third of the amount or guarantee collateral to protect itself Even if it does not enforce these guarantees, China can gain geopolitical advantages from them. In this way, when Sri Lanka was unable to make payments on its debt to China in 2019, the Hambantota port, a key location for maritime traffic on the Indian Ocean, , was handed over to a Chinese company for 99 years.
Favors and secrecy
In most cases, Chinese lenders require that a sum equal to a portion of the loan be deposited into an offshore bank account, so that, in the event of default, they can recover the sum without going through the courts.
When governments of debtor nations can no longer borrow any more, China proposes other formulas. For example, it lends to companies or parastatal organizations –with loans that don’t appear on the public accounts–, but demands guarantees from the State. More than two-thirds of the loans analyzed in the report are attributed to joint ventures or entities that do not directly depend on governments. At the slightest sign of something going south, these private debts can become public debt. That’s why in 2020 China demanded the Maldives government pay-up part of a businessman’s loan which had been granted with State guarantees when he defaulted.
According to the International Monetary Fund’s latest balance of payments, 36 countries are close to or are already in default, and 47 have benefited from a moratorium on debt-service payments as part of the framework of the G20 Debt Service Suspension Initiative. China, which in the space of thirty years has become the world’s leading creditor, could take advantage of the tenuousness of many of these countries. Le Monde recalls that when in 2019 China tried to impose its candidate as the head of FAO, it quietly canceled Cameroon’s $70 million debt; thereafter, the African country shortly withdrew its candidate.
The lack of transparency surrounding Chinese loans complicates collective debt restructuring procedures. As Beijing requires that credit amounts be confidential, how can the creditors of a country on the verge of payment suspension evaluate their solvency or ability to repay debt? Furthermore, this murkiness also undermines the transparency required in a democracy, as governments have to hide the sums that they will have to pay back sooner or later from their taxpayers.
In 2020, China pledged for the first time to collaborate with the Paris Club, a space designated for discussion between creditor nations and debtor countries, to renegotiate debts in a coordinated manner. But the results remain to be seen.
Translated from Spanish by Lucia K. Maher