The Dragon’s Trap: China’s loan-snare threatens a progressive world order

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April 05, 2021 6:00 AM

China’s Geopolitical usury—an analysis of 100 Chinese loan contracts with 24 low- and middle-income countries (LMICs) cited in a Reuters report makes this clear—is the threat that developed and emerging economies need to fight to preserve a progressive world order.

China has enough room to cancel loans or change repayment deadlines.

China’s Geopolitical usury—an analysis of 100 Chinese loan contracts with 24 low- and middle-income countries (LMICs) cited in a Reuters report makes this clear—is the threat that developed and emerging economies need to fight to preserve a progressive world order. US- and Germany-based researchers compared Chinese loan contracts with that of other major lenders and found many non-standard terms, which outline the punishing ramifications of borrowing from China. Bear in mind, Chinese lending accounts for nearly 65% of the official bilateral debt—in the tune of hundreds of billions of dollars—across some of the poorest regions of the world, including Africa, Asia, Eastern Europe and Latin America. Often enough, its borrowers are countries that are already struggling under large debt burdens, and their is likely to have gotten worse with the pandemic.

China uses loan-contract tools to enhance chances of repayment and shroud the real leverage from such credit in secrecy—borrowers are debarred from revealing loan-terms, ‘informal’ collaterals are often built into the loan deals to ensure the Chinese lender is privileged over others if a loan sours, and indeed, the borrowing nation is even contract-bound to keep the Chinese debt out of collective restructuring or other such negotiations. Not just that, per the contracts, China has enough room to cancel loans or change repayment deadlines. And, more likely than not, borrowing nations suffer because of such terms.

Tonga, a small island-nation in the Pacific Islands suffered a debt-crisis over 2013 and 2014 as the Exim Bank of China didn’t forgive loans; eventually, the loans claimed nearly half of the country’s GDP. Many point to the fact that China, between 2001 and 2017, forgave loan repayments for 51 countries (most of which were participants in its Belt and Road Initiative) without seizing their assets and claim that allegations of Chinese debt-twisting are unfounded.

However, the larger picture may not be as cut and dried—a Harvard paper from 2018 points out the use of debt as a key influence-purchase tool by China for strategic and geopolitical reasons. Sri Lanka’s debt-crisis over its Hambantota port is also illustrative. While some argue that the country’s debt crisis had more to do with its borrowing in Western capital markets than with the Chinese loan (just 5% of its total annual foreign debt repayments), the fact is island-nation got arm-twisted into giving the port to China in a 99-year lease.

Against such a backdrop, there are serious questions over China’s role in the G20 that intends to help poorer nations cope with the economic impact of the pandemic by easing debt burdens; the common framework the G20 has adopted, among other things, calls for similar treatment for all creditors. Predatory lending—something that the West is also accused of via the IMF and World Bank— in the hands of a China can be deadly for the world, particularly for LMICs.

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