Recently released details of Kenya's 2014 loan agreement with China to finance a controversial railway project have once again highlighted the predatory nature of Chinese lending in developing countries. The contract not only imposed virtually all risk on the borrower (including requiring binding arbitration in China to settle any dispute), but also raised those risks to unmanageable levels (such as by setting an unusually high interest rate). With terms like that, it is no wonder some countries around the world have become ensnared in sovereignty-eroding Chinese debt traps.
Over the last decade, China has become the world's largest single creditor, with loans to lower- and middle-income countries tripling in this period, to US$170 billion at the end of 2020. Its outstanding foreign loans now exceed 6% of global GDP, making China competitive with the International Monetary Fund as a global creditor. And through loans extended under its $838-billion Belt and Road Initiative (BRI), China has overtaken the World Bank as the world's largest funder of infrastructure projects.
To be sure, since the start of the Covid-19 pandemic, China's overseas lending for infrastructure projects has been on the decline. One might hope that this downward trend augurs the end of colonial-style lending by China. But the decline has been offset by an increase in bailout lending, mostly to BRI partner countries -- including Kenya -- which were already weighed down by debts owed to China.
The scale of the bailout lending is massive. The top three borrowers alone -- Argentina, Pakistan, and Sri Lanka -- have received $32.8 billion in rescue lending from China since 2017. Pakistan has been the biggest borrower by far, receiving a staggering $21.9 billion in Chinese emergency lending since 2018.
China, unlike the IMF, does not attach stringent conditions to its loans. Countries simply borrow more to service outstanding debts, thus sinking ever deeper into debt.
Crucially, China's loan contracts are typically shrouded in secrecy; Kenya's revelations, for example, were technically in violation of its agreement's sweeping confidentiality clause. In many cases, the loans are hidden from taxpayers, undermining government accountability. China also increasingly directs its lending not to governments directly, but to state-owned companies, state-owned banks, special-purpose vehicles, and private-sector institutions in recipient countries. The result is crushing levels of "hidden debt".
Consider Laos, where hidden debts to China eclipse official debts. To stave off default following the pandemic shock, the small, landlocked country was forced to hand China majority control of its national electricity grid. And it may find itself with little choice but to barter away land and natural resources.
There is ample precedent for this. Already, several of China's debtors have been forced to cede strategic assets to their creditor. Tajikistan has surrendered 1,158 square kilometres of the Pamir mountains to China, granted Chinese companies rights to mine gold, silver, and other mineral ores in its territory, and approved the Chinese-funded construction of a military base near its border with Afghanistan.
Sri Lanka's debt crisis first attracted international attention in 2017. Unable to repay Chinese loans, the country signed away the Indian Ocean region's most strategically important port, Hambantota, and more than 6,000ha of land around it, by granting a 99-year lease to China. In Sri Lanka, the port transfer was likened to a heavily indebted farmer giving his daughter to an unyielding money lender. Despite this sacrifice, Sri Lanka defaulted on its debts earlier this year.
Similarly, Pakistan has given China exclusive rights to run its strategically located Gwadar port for four decades. During that time, China will pocket a whopping 91% of the port's revenues. Moreover, the China Overseas Ports Holding Company will enjoy a 23-year tax holiday to facilitate its installation of equipment and machinery at the site.
Near Gwadar, China plans to build an outpost for its navy -- a move that follows a well-established pattern. Debt entrapment enabled China to gain its first overseas naval base in Djibouti, strategically situated at the entrance to the Red Sea. China is also now seeking a naval base on the West African coastline, where it has made the most progress in Equatorial Guinea, a heavily indebted low-income country.
This is the result of a lending strategy that is focused squarely on maximising leverage over borrowers.
In this way, China can use its overseas lending to advance its economic and diplomatic interests. If China can dim the lights in Laos, for example, it has a certain ally in multilateral forums. If it can drive a country to debt default, it can secure all the trade and construction contracts it wants. And if it can control a country's ports, it can strengthen its strategic position.
The details of China's loan contracts with developing countries have not yet come to light fully. But it is already clear that China's creditor carries far-reaching risks, both for the debtors themselves and for the future of the international order. ©2022 Project Syndicate
Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research and Fellow at the Robert Bosch Academy in Berlin, is the author of 'Water, Peace, and War: Confronting the Global Water Crisis' (Rowman & Littlefield, 2013).
