Chinese-Style Financial Colonialism
Beijing is the largest creditor of the developing world, which carries a huge risk of a new debt crisis. Beijing’s loans to developing countries dominate global markets in the same way as Chinese toys, smartphones, and electric scooters. Roads, dams, and power plants are being built from Kenya to Montenegro and Belarus and from Laos to Ecuador and Venezuela, with loans from billions from China. They will have to be paid in the coming years. With interest.
China is the world’s largest lender, exporting more capital to developing countries and emerging economies than any other industrialized country combined. These are the findings of a new study by a German-American team of economists led by Harvard professor Carmen Reinhart, quoted by Spiegel. Co-authors are Christoph Trebesch and Sebastian Horn of the Keel Institute for World Economics. For months, economists have collected and analyzed periods, interest rates and collateral on nearly 5,000 Chinese loans and development aid to 152 countries. The sources are a dozen databases collected with the help of aid organizations, banks, and the CIA. Spiegel does not indicate the total amount of these Chinese loans, but according to The Economist, the British magazine, they are currently worth $ 700 billion, after being almost zero in 2000.
Enslaving Conditions
Loan contracts include terms that, according to the study’s authors, increase the burden of paying them off. In principle, Western governments and multinational institutions set low-interest rates and long maturity periods for their loans, while the Chinese principle has higher interest rates and a shorter period. To guarantee their repayment, Beijing includes several rights, such as access to food, raw materials or profits of state-owned enterprises in borrowers. Often, the Chinese government directs the money directly to Chinese companies involved in the construction of infrastructure projects, which creates a closed domestic financial circle without the use of any bank accounts abroad. All this, given Beijing’s reluctance to fully open its public accounts to financial institutions such as the IMF and the World Bank, limits the transparency of Chinese lending abroad. The country’s foreign exchange reserves are currently worth $ 6 trillion, but except for the Beijing government, no one else is fully aware of where the money was invested and the conditions and risks that accompany the loans, the study said.
Besides, over 75% of direct loans in recent years have been made by two state-owned banks: China’s Export-Import Bank and China’s Development Bank. According to the authors, this allows Beijing to closely monitor each phase of its development projects and, if a crisis hits the recipients, it will be in a position to obtain collateral before other lenders.
The railway from the border with China makes its way through the jungles of Laos for over 400 km, through bridges and tunnels to the capital of Vientiane. It will be ready in 2021 and will be China’s newest project, funded with $ 6 billion. But what if this loan is not repaid, as it has precedents? In Sri Lanka, for example, China took ownership of a port after the government failed to repay its debt. In Ecuador, the Chinese have secured 80% of their oil export revenue to offset the cost of building a huge dam. In Zambia, which owes Beijing about $ 6 billion, the opposition fears China may take control of state-owned energy supplier Zesco. In South Africa, the same fate could befall the state-owned electricity company Eskom after President Cyril Ramafoza contracted loans and subsidies for about 24 billion euros during his visit to Beijing last fall. This gave rise to the label “colonialism, a maid in China”. China has often been described as a “credit shark”, similar to the one of the Goat Nostra, but since it began to apply its credit policy from the beginning of the century, which US senators have described in a letter to Secretary of State Mike Pompeo as “turning capital into a weapon”, the country has participated in over 140 restructurings and old debt write-offs.
What Africa needs
It is widely believed that China’s capital flow has helped prevent the global economy from depression after the Lehman Brothers bankruptcy and the ensuing financial crisis. According to some economists, billions of Chinese dollars are a welcome contribution to helping to build the infrastructure of poor countries in Asia and Africa. For others, however, China’s loans have made half the world economically and politically dependent on the Asian giant. The study found that many poor countries have accepted much larger loans from China than previously thought. “The West is not yet aware of how deeply the Chinese upswing has changed the international financial system,” Trebisch told Spiegel. The amount of foreign debt held by China is about 50% higher than reported in official statistics. And the difference is greatest in already heavily indebted countries. In Côte d’Ivoire, for example, it is $ 4 billion higher, in Angola — by 14 billion, and in Venezuela — by 33 billion. Due to the high-interest rates imposed by Beijing, several developing countries are suffering from “increasing annual debt service obligations”, which increases the risk of bankruptcy and a new debt crisis, as the World Bank points out.
The first signs of an imminent crisis are already there. Pakistan has recently been forced to seek emergency IMF credit as it is no longer able to service its large debt to China. And the government of Sierra Leone stopped building an airport that China wanted to fund. They are likely to be followed by other beneficiaries because the 50 largest borrowers owe Beijing an average of 17% of their annual GDP at just 1% in 2005. Djibouti’s debt, for example, is close to 70%, Congo’s 30%, and Kenya — 15%.
Why then do African countries, in particular, accept Chinese loans? Beijing gives exactly what Africa needs, according to Rwanda President Paul Kagame. He is one of the growing African leaders trying to emulate the successful Chinese model of “autocracy of development”. According to a recent Afrobarometer survey, among 36 African countries, 63% see China as a positive financial commitment. African rulers, Spiegel writes, prefer cooperation with China partly because it is not bound by moral obligations similar to those required at least on paper by Western democracies. The Chinese ignore human rights and other Western values, ignoring environmental concerns and minimum standards for working conditions.
Either way, Beijing is too far from the international transparency standards that are imperative, especially in terms of its international lending. But it needs to change its position because clarity can help prevent a new debt crisis in developing countries. After all, Beijing will be directly threatened if that happens.
