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Opinions of Tuesday, 19 October 2021

Columnist: Pushkar Sinha

China's debt trap policy to tame developing countries

China's loans are largely concentrated in Africa China's loans are largely concentrated in Africa

A new report on China's sinister development projects has completely exposed its nefarious agenda.

Initiated between 2000 and 2017, these development "loans" carry high interest, lent out by state-owned Chinese banks. Many developing countries across the world are struggling under onerous debt load. Unfortunately, many of these projects are incomplete and are facing major implementation problems.

The study also delved into the extent to which Bejing has invested its foreign currency reserves into the loans it has given out. If we take a look at the terms and conditions of these loans, it's clear they are designed in a way to turn a profit for China. On the other hand, funds from the western government usually carry conditions that are beneficial to the developing country.

The Belt and Road Initiative is a major project undertaken by China, though the study has found that it is designed mainly lock in China's access to natural resources and other commodities that it does not or cannot produce internally.
Out of the 165 countries where China has given out development loans since 2000, the study finds that 42 now carry debt to China equal to or greater than 10% of gross domestic product!

Clearly, fundamentally, China's approach to funding projects in the developing world have a different orientation than that of Western countries. It has been primarily designed to benefit China. China, primarily, is a banker - not a benefactor. Lending by western countries primarily focuses on the economic development of the host country. On the other hand, China lends only to earn an economic return.

The average loan from a Chinese creditor is 4% while from an OECD (Organisation for Economic Co-operation and Development ) country it's just 1%. The average payment is 28 years for western powers, but for China, it is less than 10 years.

China’s state-owned banks are profit-maximizing surrogates of the state. They are hunting for revenue-generating, profitable projects. There may be some ancillary economic development or social welfare benefit for host countries, but that's not the primary motivation. As the primary motivation is greed, the drive for profit has left many nations which had eagerly borrowed from China in deep debt.

Since 2013, China's lending practices have changed. Loans that were earlier given directly to foreign govt are now channelled through state-owned companies, state-owned banks and other borrowers.

This makes it difficult or understand and estimate even to the debtor government themselves exactly how much money they owe to China. This effectively means that the true number of debt burden is never reported to other lenders and global credit rating agencies. On an average, the countries that have received Chinese loans have a total debt to China equal to 5.8% of their GDP.

China's loans are largely concentrated in Africa. 47% of Chinese financed individual development projects account for 207 billion dollars in loans. Asia only has 26% of the projects but has the largest value - 246 billion dollars.

Laos, Angola, Kyrgyzstan, Djibouti, Suriname, the Maldives, the Congo and Equatorial Guinea all have debt to China that equals more than 30% of GDP.

China's PR department paints a rosy picture of these loans. It says that China attaches great importance to debt sustainability affiliated to the BRI. Looking at the debt figures, we know this isn't true.

It is also speculated that China is purposefully setting up debt traps for poor countries. The debt trap hypothesis states that China is deliberately lending loans that it knows developing countries cannot repay, in order to gain diplomatic leverage over debtor governments or to simply seize possession of major infrastructure projects that haven’t been paid off.

This is partially true. China actually has a preference for collateralizing its loans with liquid assets rather than physical infrastructure.

China often creates repayment arrangements that involve contracts for the delivery of a country's natural resources. These contracts can run parallel to the infrastructure projects. China “pays” for this by depositing money in an account that it controls, and uses those funds to collect scheduled loan payments.

BRI projects take 36% longer to finish than non-BRI projects and face a higher chance of being shut down by host countries due to corruption and overpricing concerns. There has been a major change in public sentiment against China all over the world, which has further aggravated the situation. Buyer's remorse has kicked in many countries.

With the G7 starting its own Build back better world program and the European Union's Global gateway program, China's days seem numbered.