Fabien Baussart
Fabien Baussart

Myths of China’s Overseas: Debt or death trap?

China has for some time now been the largest global overseas creditor accounting for close to 65 per cent of the world’s official bilateral debt. With outstanding foreign debt estimated to be around USD 5.6 trillion in 2020, Chinese loans surpass lending by the World Bank and the International Monetary Fund combined.

China has always maintained that its overseas lending follows a no-strings-attached approach and respects other countries right to select their own development path with a focus on developing countries control. In a White Paper released in January 2021, China dubbed its lending as international development cooperation within the framework of south-south cooperation which it is undertaking as a responsible member of the global community. It also reaffirmed its commitment to transparency, accountability and sustainability in its overseas lending. The empirical evidence could not be further from the truth.

Contrary to Chinas claims of its lending being a “global public good” laying the foundation of a robust “development cooperation” framework, it has been seen that Chinese loans are predatory and opaque in nature, with terms that are heavily skewed against the borrowing country. Besides, the highly unsustainable levels of debt created by Beijing in the developing world allow it to create economic dependencies and political leverages in these countries, with serious implications for the degree of their sovereignty vis-a-vis Beijing. Moreover, contrary to common perception, the bulk of Chinese loans (nearly 60 per cent) are offered at commercial rather than concessional rates, which is unusual for overseas “development assistance”.

The stark differences between the rhetoric and reality of Chinese overseas lending are further revealed in a recent (April 2021) report titled How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments. The study by Germany’s Kiel Institute and the Washington-based Centre for Global Development, Aid Data, and Peterson Institute for International Economics, analyses a hundred Chinese loan contracts with 24 developing countries, between 2000 and 2020, and compares it with 142 non-Chinese foreign debt contracts across 28 commercial, bilateral and multilateral creditors.

Developmental Lending with “Chinese characteristics”

As per the study, a comparison of Chinese and non-Chinese loan contracts reveals that the former are characterised by extremely stringent terms of lending. These include strict confidentiality clauses barring borrowers from revealing loan terms and often even the very existence of a loan. This is not in line with the disclosure standards of the development assistance extended by OECD countries and creates a problem of “hidden debt” in the recipient country resulting in underestimation of actual levels of debt distress. It also leads to a tendency for governments to over-borrow since the public is unaware of the actual debt.

The study also finds that close to 75 per cent of the Chinese debt contracts in the study sample categorically commit to a “No Paris Club” clause exempting the debt from restructuring in the Paris Club of official bilateral creditors. (The Paris Club is a group of major creditor countries with policies for extending coordinated debt relief to developing countries in addition to ensuring sustainable debt levels). Despite being the largest global overseas lender at present, China has stayed away from joining the Paris Club, thereby precluding it from the responsibility of ensuring either transparency or debt sustainability in the borrowing country, while guaranteeing that repayment of its own loans gets priority over other creditors.

The study also finds that in comparison with other foreign creditors, Chinese lending contracts have more stringent security clauses. Borrowing countries are compelled to maintain “special bank accounts” in Chinese banks where revenues from the projects financed by China are held as collateral. Chinese lending contracts also include a cross-default clause that allow the lender to terminate the contract and demand immediate and full repayment if the borrower defaults on any of its other lenders. They also have a stabilization clause wherein the creditor can demand immediate repayment or compensation in case of a significant change in the laws of the borrowing country, including labour or environmental policies. This has the potential to significantly restrict the policy space of the borrowing country and impinge on its sovereignty. It also rings hollow China’s claims about being a major proponent of “green development” or an altruistic lender with a focus on “developing countries’ control”.

Interestingly, Chinese lending contracts, which are ostensibly commercial in nature, also have political clauses which allow the lender to cancel or accelerate a loan repayment if the borrowing country engages in any actions that are perceived to be adverse to the interests of “a PRC entity”. This clearly indicates that Chinese lending terms are designed not just to maximise pure commercial interests, but also to protect the politico-strategic objectives of the Chinese state. Such terms amplify the lender’s influence over the debtor’s foreign policies and ensure that they always toe the Chinese line.

Are Chinese loans really with “no strings attached”?

The stark disparity between what China claims defines its overseas development cooperation and the actual nature of such lending, which is predatory and tailored to serve Beijing’s strategic, geopolitical and economic interests, is therefore, clearly brought out as above. Chinese loans are far from having “no strings attached” as is evident from the amalgam of inbuilt clauses including confidentiality, stringent security, need for collateral, little scope for restructuring, cross-default and acceleration of loan repayment if found incompatible with Chinese interests.

Unlike Paris Club members, China often additionally demands collateralization of official lending, which means that in the event of default, repayment is secured by ceding some other asset, usually of strategic significance for Beijing. This raises further doubts over Chinese intent to acquire overseas strategic assets under the garb of lending. Instances are galore including the Hambantota Port in Sri Lanka; Chinese acquisition of majority control over Laos’ national electric grid; Tajikistan having to cede disputed territory to Beijing in lieu of debt forgiveness; Chinese acquisition of strategic islets of the Maldives in the Indian Ocean and of the Solomon Islands in the South Pacific. China also puts other kinds of political pressure on countries, apart from kickbacks, to win tenders for strategic projects. For instance, in the case of the Jakarta-Bandung High-Speed Rail project, China offered an interest rate of 2 per cent, as against Japan’s 0.1 per cent; yet the project was accorded the former.

Contrary to China’s claims in its White Paper on Development Cooperation that its lending is a “global public good”, clauses like maintenance of confidentiality actually increase the public debt burden of the borrowing country since there is no government accountability of debt incurred. A good example of China’s double standards, wherein it calls for confidentiality while claiming altruism, is the case of COVID-19 vaccines. Despite China harping over how it has made vaccines a “global public good”, recent reports (May 31) revealed how Beijing is asking countries (Nepal, Bangladesh, Sri Lanka) to sign non-disclosure agreements about the prices of vaccines before making them available.

Since China is not a member of the Paris Club, it does not have any obligations vis-a-vis debt sustainability in borrowing countries. In 2018, close to fifty countries owed more than 15 per cent of their GDP to China; eight countries in particular, were assessed to be at particularly high risk of default vis-a-vis Beijing, with some of them owing close to 45 per cent of their GDP to China. Such high levels of debt burden have implications for the degree of sovereignty of these countries vis-a-vis Beijing, lending greater credence to the debt-trap theory.

It is also seen how Beijing’s stringent repayment safeguards as compared to other official creditors as well as refusal to join the Paris Club, pressurizes borrowing countries into treating Chinese loans on a first-priority basis. This is contrary to China’s commitments (November 2020) under the G20 Debt Service Suspension Initiative (DSSI) and the “Common Framework” (wherein major global creditors agreed to temporarily suspend debt service of 73 developing countries amid the COVID-19 pandemic). Even though China accounted for nearly 29 percent of total debt service of developing countries in 2020, it was initially unwilling to join the DSSI. Even after it declared with much fanfare that it has joined the DSSI, Beijing’s pledge is assessed to be more of a lip-service since it covers only interest-free loans (which account for only 5 per cent of China’s total lending).

US Treasury Secretary, Janet Yellen, recently (June 10) voiced concerns that Chinese lenders could actually be the ones benefiting from international debt relief initiatives aimed at developing countries which she said would “defeat the very purpose” of reducing their burden and helping them revitalize their economies amidst the pandemic. In COVID times, therefore, China’s debt trap could very well become a “death trap” as developing countries grapple with a slowing economy, burgeoning cost of managing the pandemic at home (including buying vaccines which China claims are free but which countries are charged for at differential and “undisclosed” rates), while also having to service their debt to China. Clearly, therefore, no meaningful global restructuring of debt is possible without China’s genuine intent and largesse that goes beyond optics.

It is also commonly overlooked that only a small proportion of China’s total loans is concessional, with Chinese non-concessional loans more expensive and inflexible (LIBOR plus 2-4 per cent, 2-18 years maturity period) as compared to the World Bank and the IMF (0.5-1.5 per cent above LIBOR), or even other bilateral donors like Japan (up to 0.5 per cent interest for developing countries). This is neither benign “development assistance” nor is it unconditional lending as portrayed by China. In fact as per OECD’s definition, Chinese lending by the CDB and Exim Bank are closer to the definition of “other official flows” rather than “official development assistance”. In contrast, India’s concessional loans are offered at 1.75 per cent with a 20 year maturity period; in some cases at as low as one per cent to neighbouring countries.

Countries should be even more wary of depending predominantly on Chinese “development assistance”, given China’s recent embrace of “wolf warrior” diplomacy and more frequent and unabashed use of economic warfare against countries that do not toe its line (eg: Beijing’s recent spate of trade tariffs against Australia). However, China has made sure to keep out other investors in developing countries wherever possible. Despite China’s claims of encouraging “triangular partnerships”, there have been several instances, most notably in Pakistan, where China has dissuaded the borrowing country from involving other bilateral and multilateral lenders in strategic projects.

The other worrying aspect of China’s overseas lending is the fact that loans are more often than not also accompanied by Chinese labour, material and an insistence on use of Chinese currency in the borrowing countries. This has caused a lot of local resentment and protests against Chinese projects in many countries including in Bangladesh, Sri Lanka, Pakistan, Myanmar, apart from several African and South East Asian countries. A recent (April 2021) report by US based China Labour Watch also revealed the highly problematic terms on which Chinese workers in overseas BRI projects are employed, including low pay, no medical benefits, and in some cases forced labour, with the workers’ passports being confiscated by subcontractors of Chinese SoEs. This really leads one to question who indeed the actual beneficiaries of Xi’s BRI are!  

The Way Forward

A multi-pronged and multilateral approach is needed to counter China’s debt trap diplomacy and “weaponization of aid” under the garb of development cooperation. In the specific context of the COVID-19 pandemic, Western donors in particular have a chance to ease Chinese stranglehold over the developing world by offering effective debt relief to countries most indebted to China, thereby in a way weaponizing debt forgiveness.

Alongside this, pressure should also be mounted on China to join the Paris Club and align its policies and practices on lending and on debt relief with OECD members. It is all the more important to do so before Beijing formulates its own rules and builds an alternative system of international lending with “Chinese characteristics” and garners global support for the same from countries over which it has leverage.

In the medium-term, other countries need to collectively forge a new development cooperation paradigm providing viable and credible alternatives to Chinese lending for developing countries. A multitude of creditors would increase the negotiating power of borrowing countries vis-a-vis Beijing and indirectly compel the latter to adhere to higher standards, greater transparency and more concessional lending. Apart from the US’ Blue Dot Network, recently there have been deliberations under various groupings like the QUAD and G-7 on a Western-led infrastructure plan to counter China’s BRI (most recently the Build Back Better World Initiative). India should watch out for these emerging alignments, see where it can join in (as it did with the Asia-Africa Growth Corridor and Partnership for Quality Infrastructure with Japan), and try to get a consortium of countries to make strategic investments in our immediate neighbourhood.

About the Author
Fabien Baussart is the President of CPFA (Center of Political and Foreign Affairs)
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