Is China putting poor countries in the ‘debt trap’?

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Is China putting poor countries in the 'debt trap'?

BBC: Is China putting poor countries in the ‘debt trap’?

China has been accused of luring poor countries into a “debt trap.” Countries struggling to pay their debts are allegedly vulnerable to pressure from Beijing.

China denies these allegations, saying the West is spreading them to damage its image.

“There is not a single country that falls into the so-called ‘debt trap’ because it borrows from China,” the Beijing administration says.

What do we know about China’s loans?

China is one of the world’s largest single creditor nations.

Its loans to lower and middle-income countries have tripled over the past decade, reaching $170bn (£125bn) by the end of 2020.

China’s credit commitments, however, may be much larger than these figures reflect.
A study by AidData, an international development organization at William & Mary University in the US, reveals that half of China’s debts to developing countries are not shown in official debt statistics.
These debts are excluded from state balance sheets, often directed to state-owned companies and banks, joint ventures or private institutions, not directly from the government to the government.
Today, as a result of this “hidden debt,” more than 40 low- and middle-income countries owe China more than 10% of its annual Gross Domestic Product (GDP), according to AidData.
Djibouti, Laos, Zambia and Kyrgyzstan owe China at least 20% of their GDP.
China pays most of these debts by funding major infrastructure projects in the fields of roads, railways, ports, as well as mining and energy as part of Chinese President Shi Jinping’s “Belt and Road Initiative”.

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What are ‘debt traps’, do they have any proof?

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In an interview with the BBC, Richard Moore, head of Britain’s Foreign Intelligence Service (MI6), said China was using what he called “debt traps” to gain leverage over other countries.
China’s claim that it lends money to other countries and seizes key assets when countries cannot repay their debts is an accusation long denied by Beijing.
An example often repeated by Critics of China is Sri Lanka, which began a massive port project in the city of Hambantota years ago with Chinese investment.
The project, in which China has provided billions of dollars in loans and sent its contractors, has failed to move forward due to controversy. The project, whose viability has become questionable, has left Sri Lanka with rising debts.
Finally, in 2017, Sri Lanka agreed to borrow more from China by leaseing 70% of the port to a Chinese state-owned group for 99 years.
In an analysis of the port project, UK-based think tank Chatham House examined whether political targets were behind the deal. Chatham House questions whether the “debt trap” narrative applies, given that China has never taken official ownership of the port.
The report notes that a large part of Sri Lanka’s total debt is to non-Chinese lenders, and there is no evidence that China is taking advantage of the port’s location to gain strategic military advantage.
Despite this, China’s investments in Sri Lanka have increased over the past 10 years, and concerns remain that it could be used to advance its political ambitions in the region.
There are other controversial contracts under which China is a party in other parts of the world, paving the way for leverage over important assets.
However, among the hundreds of loan arrangements examined by AidData and some other researchers, there are no cases of the Chinese state effectively seizing a large asset in the event of a credit default.

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How does China’s lending compare with others?

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China does not publish records of its foreign loans, and the majority of its contracts contain non-disclosure clauses which prevent borrowers from revealing their contents.
It argues that such confidentiality is common practice for international loan contracts.
“Confidentiality agreements are very common in international commercial loans”, says Professor Lee Jones at Queen Mary University of London.
“And much of China’s development financing is fundamentally a commercial operation.”
Most of the major industrialised nations share information about their lending activities through membership of what’s known as the Paris Club.
China has chosen not to join this grouping, but using available World Bank data, the rapid growth in China’s reported lending compared to others can be clearly observed.

Are Chinese loans harder to repay?

China tends to lend at higher rates of interest than western governments.

At around 4%, these loans are close to commercial market rates and about four times that of a typical loan from the World Bank or an individual country such as France or Germany.

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The required repayment period for a Chinese loan is also generally shorter – less than 10 years, compared to around 28 years for other lenders’ concessional loans to developing countries.

Chinese state-owned lenders also typically require borrowers to maintain a minimum cash balance in an offshore account to which the lender has access.

“If a borrower fails to repay its debt,” says Brad Parks, Executive Director of AidData, “China can simply debit funds from [this] account without having to collect on bad debt through a judicial process.”

This approach is rarely seen in loans issued by western lenders.

There’s currently an initiative by G20 nations – those countries which have the largest and fastest-growing economies – to offer debt relief for poorer countries to help them deal with the impact of the pandemic.

China has joined this and says it has contributed “the highest amount of debt repayment” of any country taking part in the plan.

The World Bank says that since May 2020, a total of more than $10.3bn has been delivered in debt relief by G20 countries under this scheme.

But when we asked the World Bank for a breakdown by country, it said it could not share the information.



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