New report on China’s international development projects launched between 2000 and 2017 shows high-interest loans from Chinese state-owned banks have left countries in much of the developing world struggling with onerous debt, even as some of the development projects these financed loans face significant implementation problems.

The study conducted by AidData, a research lab at the College of William & Mary in Virginia, provides a clearer picture than it previously was of the extent to which China has invested its huge foreign exchange reserves in lending to the world in development.

Unlike funds provided by many Western governments, these loans are primarily intended to generate profits for China, Parks said.

The Belt and Road Initiative is a major part of Chinese President Xi Jinping’s plan to place his country in a dominant position at the center of the global economy. It is designed not only to cement new trade relationships with countries around the world, but to lock down China’s access to natural resources and other commodities that it does not produce in-house, the authors conclude. .

In four years, 135 people associated with AidData have scoured public archives around the world to gather documentation on 13,427 Chinese development projects in 165 countries. The researchers looked at $ 843 billion in Chinese government loans to low- and middle-income countries (LMICs).

Of the 165 countries where China has provided development loans since 2000, the study found that 42 now have debt to China equal to or greater than 10% of gross domestic product.

“A banker, not a benefactor”

Brad Parks, executive director of AidData, said the information reveals that Beijing’s approach to funding projects in the developing world reflects a “fundamentally different orientation” to the process than, for example, countries that belong to the Organization for Economic Co-operation and Development.

“China is a banker, not a benefactor,” Parks said.

Since 2000, most OECD countries have moved towards providing grants and low-interest loans to developing countries.

And in the event that they lend money, the focus is on further economic development in the host country. China, on the other hand, is ready for an economic return, Parks said.

“The average loan from an OECD creditor has an interest rate of 1%,” Parks said. “The average loan from a Chinese official creditor is over 4%. It is the same with reimbursement. The average repayment period is 28 years for Western powers, and it is less than 10 years for a Chinese loan.

He added, “China’s state-owned banks are substitutes for the state to maximize profits. They are looking for profitable and income-generating projects. There may be ancillary economic development or social benefits for host countries, but this is not the primary motivation. “

Excessive debt

In recent years, this pursuit of profit has left many countries that were initially keen to borrow from China with more debt than expected.

AidData found that in the years since the advent of China’s Belt and Road Initiative in 2013, China’s lending practices have changed. Instead, loans that had been made directly to foreign governments were distributed among various crown corporations, state-owned banks, joint ventures, and other borrowers.

One of the consequences of this is that it is often not clear, even to debtor governments themselves, exactly how much money they owe China exactly. This means that their actual debt is not accurately communicated to other lenders such as the World Bank or to global rating agencies.

The authors estimate that, on average, LMICs where China has provided most of its loans underreport their total debt to China by an amount equal to 5.8% of their GDP.

Focused on Africa

While China’s development loans are spread across the globe, the greatest concentration in number of projects is in Africa, where 47% of China’s individual development projects funded with $ 207 billion in loans are located. . Asia represents only 26% of projects in number, but the largest share in value, with 246 billion dollars.

A number of countries are facing particularly high debt to China.

According to the study, Laos, Angola, Kyrgyzstan, Djibouti, Suriname, Maldives, Congo and Equatorial Guinea all have debt to China which totals over 30% of GDP.

This week, China’s Foreign Ministry issued a statement to The Wall Street Journal that said in part, “China attaches great importance to the issue of debt sustainability of countries which jointly build the Belt and Road.”

The Foreign Office described the BRI as “the largest platform for international cooperation in the world today”.

The “debt trap” debunked

Parks said his group’s research should put an end to the widely held idea that China is deliberately setting “debt traps” for poor countries. The Debt Trap Hypothesis suggests that China is granting loans that it knows borrowers cannot repay, in order to gain diplomatic leverage over debtor governments, or simply to grab big projects. infrastructure that have not been reimbursed.

China, he said, clearly has a strong preference for securing its loans with liquid assets rather than physical infrastructure.

“It was extremely rare to see Beijing guarantee an illiquid physical asset,” Parks said. “They’re smarter than that. What they prefer to do is guarantee assets that are cash, fully liquid and ready to use. “

A common repayment arrangement, Parks said, involves contracts for the delivery of a country’s natural resources. Along with the granting of a loan, Beijing will set up a parallel agreement for the ongoing purchases of resources produced by the host country. However, when it takes delivery of the resources, Beijing “pays” by depositing money into an account it controls, and uses those funds to collect scheduled loan payments.

“Buyer’s remorse” plague the BIS

The change in lending strategy that China implemented when announcing the Belt and Road Initiative in 2013 appears to have resulted in less successful projects than those outside the program.

For example, 35% of BRI projects encountered serious implementation problems, including corruption scandals, labor law violations, environmental risks and public protests, according to the study. This compares to 21% of non-BRI projects.

BRI projects take 36% longer to implement than non-BRI projects, and face a higher likelihood of being shut down by host countries due to ‘corruption and overpricing issues, as well as major changes in public opinion that make it difficult to maintain close relations with China, ”the report notes.

Upcoming competition

The United States and some Western powers have used the dissatisfaction of some BIS borrowers to promote competing initiatives, such as the Biden administration’s Biden administration’s Build Back Better World (B3W) proposal pushed by the G-7, or the program. Global Gateway recently announced by the European Union. .

Speaking to the United Nations earlier this month, US President Joe Biden appeared to criticize the BRI, saying that “poor infrastructure or that fuels corruption or exacerbates environmental degradation can only help greater challenges for countries over time “.

How the combination of the spread of dissatisfaction among its existing borrowers and new Western competition will affect the BIS is not clear at this point, Parks said.

“The jury is out on whether the remorse dynamic of this settling buyer among borrowing countries will undermine the long-term sustainability of Belt and Road,” Parks said. “But if Beijing is to maintain its support for the initiative, it must act quickly and decisively to respond to this type of growing discontent among the participating Belt and Road countries, and it must watch its flank, because soon there will be more choice in the infrastructure finance market.