China: a usurer or the Good Samaritan? | Business | Economic and financial news from a German point of view | DW


Security hawks in the West, especially the United States, view China as a new imperial power that creates vassal states through predatory lending practices.

China’s colossal Belt and Road Initiative (BRI), a massive global infrastructure development project backed primarily by Beijing, is fueling their anxiety. According to an estimate by mining company BHP, total spending on BRI-related projects could reach nearly $ 1.3 trillion (€ 1.16 trillion) in the decade through 2023, or more seven times the investment made under the American Marshall Plan to rebuild European economies after the World War. II.

Some are touting the Chinese project as a new Marshall Plan that could dramatically lower trade costs, improve connectivity and potentially help lift several countries out of poverty.

Others accuse China of financing poor countries to strengthen its influence, even if it means granting loans to economically unsustainable projects. They cite the Port of Hambantota in Sri Lanka as a warning of the pitfalls of reliance on Chinese funding. China took control of the strategically important port in 2017 after Sri Lanka struggled to repay the Chinese loan.

Read more: How “unconditional” is China’s foreign aid?

Demystifying “Debt Trap Diplomacy”

But a new report from New York-based consultancy Rhodium Group challenges claims surrounding China’s “debt trap diplomacy”.

The report’s authors, who analyzed 40 cases of Chinese debt renegotiations with 24 countries, found that only the Sri Lankan case involved a confirmed asset seizure, while China’s takeover of land in the Tajikistan in 2011 could have been in exchange for debt relief.

The analysis showed that China mainly treats its delinquent borrowers gently. The country has renegotiated $ 50 billion in loans over the past decade, with debt forgiveness and deferrals being the most common results.

Renegotiated loans represent a significant portion of Chinese loans abroad. Scholars at the China-Africa Research Initiative at Johns Hopkins University in the United States tracked $ 143 billion in loans in Africa between 2000 and 2017, while researchers at Boston University identified more than 140 billion dollars in Chinese loans to Latin America and the Caribbean. since 2005.

The report found that creditors had more leverage over China when they had access to alternative sources of finance such as the International Monetary Fund or international capital markets.

Curious case of Africa

Chinese hawks in the West have often expressed unease over the country’s deepening economic and military ties with Africa. China overtook the United States as the continent’s largest trading partner in 2009.

John Bolton, the US national security adviser, said late last year that China was “using debt strategically to keep African states captive to Beijing’s wishes and demands.”

Yet a closer look at Chinese loans shows that joining the BIS has not resulted in African countries receiving more loans from Beijing, Jordan Link, research director at the Research Initiative, told DW. China-Africa.

On the contrary, annual lending to Africa declined dramatically after the BIS announcement in 2013 and has hovered around these levels ever since. The Chinese Eximbank, the largest source of Chinese loans on the mainland, has significantly reduced its lending over the past five years.

“Yes [Chinese President] Xi Jinping is using the BIS to organize a confluence of economic and strategic gains in Africa, the increase in total Chinese loans has not been a key factor, ”Link said.

Read more: Africa jumps aboard the Chinese express train

An infographic showing the results of China's debt renegotiations

Risky business

China lacked leverage in the case of asset-backed lending, according to the report.

The Asian economic powerhouse has struggled to collect its debt from Venezuela, the country’s largest foreign creditor with more than $ 60 billion in loans since 2007. Beijing expected to be paid in oil exports, but the political turmoil in Venezuela and the decline in oil production forced it to only collect interest on its loans.

Likewise, China struggled to get Ukraine to repay a loan, which was supposed to be repaid in the form of grain shipments. Beijing ultimately had to resort to international arbitration to settle the dispute.

“The case of Ukraine shows that despite the size of China and its growing international economic weight, its influence in some of these cases remains quite limited, even in disputes with much smaller countries,” said The report.

“Unsustainable” loans

But the concerns of Western politicians are not completely unfounded.

“The sheer volume of debt renegotiations speaks to legitimate concerns about the sustainability of China’s overseas loans,” the report said, warning that the number of troubled countries could increase over the next few years as many Chinese projects were launched from 2013 to 2016.

Chinese state-owned enterprises are preferred for developing projects funded by China, often without a transparent bidding process. This opacity creates opportunities for corruption and is seen as an incentive to inflate the costs of the project. There are also concerns about the build quality. Overpriced projects and growing dependence on Chinese debt have made many developing countries suspicious of this ambitious project.

Read more: Belt and Road Forum: Is the China-Pakistan Economic Corridor Broken?

The study also found that China’s debt forgiveness is sometimes followed by more, often larger, loans and is not aimed at reducing the delinquent borrower’s debt to China. Beijing canceled $ 7 million in Botswana debt last year to allegedly offer up to $ 1 billion in new infrastructure financing.

Gain influence

The report says that debt waivers were often granted by Beijing without a formal renegotiation process, even when there were few signs that the borrower was facing financial difficulties.

This shows that the cancellations were likely intended to signal support for borrowing countries and improve bilateral relations, he said.

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