China has been accused of promoting a ‘debt trap’ narrative in its lending practices to poorer countries.
Despite Beijing denying the allegation, it is worth noting that the Dragon has become one of the biggest individual creditor nations globally. Its loans to lower and middle-income countries have tripled in the past ten years and amounted to $170bn by the end of 2020.
However, half of the dragons lending to developing countries is not reported in official debt statistics, with many loans off government balance sheets and instead directed to state-owned companies and banks, joint ventures, or private institutions.
While critics accuse the dragon of using ‘debt traps’ to gain leverage over other countries, there is no evidence of Chinese state-owned lenders seizing a major asset in the event of a loan default.
China’s lending practices
Over 40 low and middle-income countries have debt exposure to Chinese lenders, equivalent to more than 10% of their annual economic output (GDP) because of this “hidden debt”. Most of China’s lending is for large infrastructure projects like roads, railways, ports, and the mining and energy industry.
China’s lending to poorer countries has been heavily criticized, with accusations of ‘debt traps’ to gain leverage over other countries.
Over 40 low and middle-income countries have debt exposure to Chinese lenders, equivalent to more than 10% of their annual economic output (GDP) because of this “hidden debt”. Most of China’s lending is for large infrastructure projects like roads, railways, ports, and the mining and energy industry.
What are ‘debt traps’?
The allegation of a ‘debt trap’ is that China extends loans to other nations, which are subsequently compelled to relinquish control over vital assets in case they default on their loan payments. This accusation has long been denied by Beijing.
Although there is no proof of Chinese state-owned lenders taking possession of a substantial asset if a loan is not repaid, Chinese lending has sparked disputes in various regions of the world.
The contractual provisions of some agreements could offer China leverage over critical assets, fueling concerns. Critics of China often point to the port project in Sri Lanka as an example, where Chinese investment became mired in controversy and struggled to prove viable, ultimately leaving Sri Lanka with growing debts. Sri Lanka eventually agreed to give state-owned China Merchants a controlling 70% stake in the port on a 99-year lease in return for further Chinese investment.
Despite growing concerns over China’s economic involvement in Sri Lanka, there is no evidence that China has taken advantage of its position to gain strategic military advantage from the port.
A Comparison of China’s Lending Practices with Other Nations
Chinese lending usually involves higher interest rates compared to Western governments, with interest rates hovering at about 4%, which is close to commercial market rates and roughly four times the interest rate for a typical loan from individual countries like France or Germany or institutions such as the World Bank.
Additionally, the repayment period for Chinese loans is typically shorter, being less than 10 years, in contrast to the approximately 28-year repayment period for concessional loans from other lenders to developing countries. Borrowers of Chinese state-owned lenders are usually obligated to keep a minimum amount of cash balance in an offshore account that is accessible to the lender.
China’s increased lending to lower and middle-income countries has become a significant issue of concern globally. As one of the world’s largest single-creditor nations, China’s lending practices, including high-interest rates and shorter repayment periods, have sparked controversy. The fear of being caught in a “debt trap” and ceding control of key assets has led to calls for greater transparency and scrutiny of China’s lending practices.
