Chinese Loans Are Only To Acquire The Country Economy

The World Bank is offering China a new loan for health care as part of its efforts to combat the coronavirus epidemic, the lender’s president, David Malpass, said Monday. For decades, researchers have been frustrated by the lack of comprehensive and high-quality data on what China is lending abroad and the extent to which it is causing debt problems in poor countries. Debtor countries themselves often do not collect on debts owed by state-owned enterprises, which are the main recipients of Chinese loans. Chinese loans for infrastructure projects make it more difficult for developing countries to award construction contracts to Chinese companies.

Chinese firms borrow abroad by relying on foreign direct investment, as long as China continues to lend to foreign companies at low-interest rates. US debt provides a “safe sky” for Chinese foreign-exchange reserves, which in effect means that China can offer the United States loans at lower interest rates than it would without it, in order to continue to buy the goods it produces. This system has the potential to generate unnecessarily low returns.

Many Chinese loans are collateralized, meaning that income, such as that derived from commodity exports, is secured against debt repayment. World Bank loans can be attractive because the only thing that is linked to the interest rates of the International Monetary Fund (IMF) and the World Trade Organization (WTO) is the low borrowing rates from China. Many of them are also backed by collateral in the form of loans from the United States, which means that the income from such commodity exports is secured for debt repayment.

Second, World Bank loans to China are considered relatively risk-free – compared to loans to other developing countries. Second, they are seen as comparatively less risky than the US compared to other advanced economies.

While many of those who spoke to Euromoney rejected the Chinese concerns, it is clear that temporary relief by tolerating credit will not be enough for some countries. Commercial loans are viewed as a relief because of their low-interest rates, but at the same time, low-cost loans account for only a small percentage of China’s total loans to developing countries. This so-called “debt-trap diplomacy” wrongly implies that China is imposing its loans on passive and helpless developing countries. Debt-trap diplomacy advocates claim that it serves China’s “geostrategic” interests when its partners are struggling with debt.

China’s lending to Latin America has geopolitical motives, according to economist Ariel Slipak, who says, “Chinese firms seek access to key primary resources and hope to secure markets for their products.

But a closer look at Chinese loans shows that signing the BRI will not lead to African countries receiving more loans from Beijing, David Link, director of the International Development Research Institute (IDRI) in Johannesburg, told DW. Link says Xi Jinping is using the “BRI to organize a pooling of economic and strategic benefits” in Africa, but increasing the amount of credit is not the deciding factor. The problem is the $3 billion Eurobonds, not the Chinese loans, “he says.

China’s lending to Africa tends not to be interest-rate-based, concessions, i.e. market-linked, “he says. Given the financial strains highlighted by the pattern of “China’s debt renegotiation,” Chinese lending abroad has slowed rather than accelerated. China, however, is reluctant to take a unilateral approach to debt relief, with concession and commercial loans accounting for the bulk of Africa’s debt to China, he notes. Demand for Chinese exports will take many months to materialize, which will affect not only Africa’s economic growth, but also the global economy as a whole.

China may pursue its own debt trap, but it is less experienced than the IMF in leveraging debt in highly indebted countries. Nevertheless, it is true to say that Zambia has behaved as if a debt crisis were imminent, but the Chinese are not the main culprits.

China does not report its international lending, and systematic under-reporting of its loans has created a hidden debt problem, meaning that debtor countries and international institutions alike have no idea how much countries around the world owe to China. Chinese loans are not covered by the data – they are collected by institutions such as the International Monetary Fund (IMF) and the World Bank.

One can justifiably worry that some countries may sink into debt that they may borrow from the Chinese more than they can possibly repay. Indeed, China may believe that borrowers should not be forced to repay their loans, because a total default would severely limit developing countries “future access to credit. What would not be good – would be – if people believed that, because China is the largest lender to African countries, it should write down its debt and accept the pain. If China continues to demand interest payments on these loans, it will force poorer countries to choose between servicing their debts or importing more of its own goods and services.