This Is How Chinese Loans Pose Risks to Developing Countries

Sri Lanka wants the Hambantota port back from China. (Image:  pixabay /  CC0 1.0)
Sri Lanka wants the Hambantota port back from China. (Image: pixabay / CC0 1.0)

Over the past few years, China has become the go-to source of loans for developing countries. According to a study conducted by German think tank Kiel Institute for the World Economy, most of the debt owed by developing nations to China is largely hidden, meaning that they haven’t been recorded by institutions like the World Bank or IMF.  

Chinese loan risk

The study looked at about 2,000 loans China dispersed to 152 nations between 1948 and 2017. “Between 2000 and 2017, other countries’ debt owed to China soared 10-fold, from less than US$500 billion to more than US$5 trillion — or from 1 percent of global economic output to more than 5 percent… For 50 developing countries that have borrowed from China, that debt has increased on average from less than 1 percent of their GDP in 2015 to more than 15 percent in 2017,” according to CNBC.

Most of the lending has been done through two financial institutions, the Export-Import Bank of China and the China Development Bank. Both are state-owned banks. China is believed to account for almost 25 percent of the total bank lending to developing economies. While the main driver for Chinese loan expansion is the rapid economic boom it has enjoyed in the past decade, the trend is also supported by the central policies that aim to make China a prominent financial entity in the world.

Chinese loans pose a risk to developing nations. (Image: pixabay / CC0 1.0)

One such policy is the Belt and Road Initiative (BRI) through which Beijing plans to lay out a worldwide infrastructure that involves shipping ports, airports, railways, and roads that will boost trade between China and other nations. To build the necessary infrastructure, China gives out loans to developing countries. These nations tend to gravitate toward the loans, hoping that it will help in upgrading their infrastructure while also bringing economic opportunities. However, the reality has been harsh for many countries.

Instead of seeing any significant economic gain, they end up being trapped in Chinese debt. Beijing then arm-twists these nations to get what they want. “Whereas Western governments and multilateral organizations generally attach low-interest rates and long repayment periods to their loans, China tends to impose short periods and higher rates. To ensure that the loans are paid back, the contracts guarantee Beijing a number of rights, such as access to foodstuffs, raw materials, or the profits of state-owned companies in the recipient countries,” according to Spiegel.  

Taking back the port

Back in 2017, the then-Prime Minister of Sri Lanka leased out the country’s Hambantota port to China for a period of 99 years. The port was built using loans from China and was expected to bring huge trade to Sri Lanka. After it became clear that it would be difficult to repay the loan, the administration decided to lease it and get out of the debt.  

China's loans end up benefiting China rather than the receiving nations. (Image via pixabay / CC0 1.0)

China’s loans end up benefiting China rather than the receiving nations. (Image via pixabay / CC0 1.0)

However, the new Sri Lankan government has made it clear that it is seeking to undo the lease. “We would like them to give it back… The ideal situation would be to go back to the status quo. We pay back the loan in due course in the way that we had originally agreed without any disturbance at all,” Ajith Nivard Cabraal, a former central bank governor, said to Bloomberg.

The Hambantota port was constructed as part of the BRI project.  It is often held up as an example of the danger involved in recklessly accepting loans from China. Sri Lanka’s neighbor India had previously expressed concerns that the port might be used by Beijing for military purposes. 

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