Kenya revelations shed light on China’s predatory lending practices

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Recently released details of the 2014 loan agreement between Kenya and China to fund a controversial rail 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 the requirement for binding arbitration in China to settle any disputes), but also increased those risks to unmanageable levels (for example by setting a rate of abnormally high interest). With terms like that, it’s no wonder that several countries around the world have found themselves trapped in sovereignty-eroding Chinese debt traps.

Over the past decade, China has become the world’s largest lender, with lending to low- and middle-income countries tripling over that period, reaching $170 billion by the end of 2020. Its foreign loan stock exceeds now 6% of global GDP. , making China competitive with the International Monetary Fund as a global creditor. And thanks to loans under its $838 billion Belt and Road Initiative, China has overtaken the World Bank as the world’s largest infrastructure project financier.

Admittedly, since the start of the Covid-19 pandemic, Chinese loans abroad for infrastructure projects have been declining (until 2019 they were increasing sharply). This is partly because the pandemic has left partner countries in dire economic straits, although growing international criticism of China’s predatory lending has likely contributed as well.

Hopefully, this downward trend heralds the end of China’s colonial-style lending. But the drop was offset by an increase in rescue loans, mainly to BRI partner countries, including Kenya, which were already weighed down by debts owed to China.

The scale of rescue loans is huge. The top three borrowers alone – Argentina, Pakistan and Sri Lanka – have received $32.8 billion in bailout loans from China since 2017. Pakistan is by far the biggest borrower, receiving a a staggering $21.9 billion in Chinese emergency loans since 2018.

This highlights the spiral of self-perpetuating debt into which China is plunging countries. Because Beijing, unlike the IMF, does not attach stringent conditions to its loans, countries simply borrow more to pay off outstanding debt, thus sinking deeper and deeper into debt.

Basically, China’s loan contracts are generally shrouded in secrecy; Kenya’s revelations, for example, were technically in violation of the confidentiality clause of its agreement. In many cases, loans are hidden from taxpayers, undermining government accountability. China is also increasingly channeling its loans not directly to governments, but to state-owned enterprises, state-owned banks, special purpose vehicles and private sector institutions in recipient countries. The result is an overwhelming level of “hidden debt”.

Consider Laos, where hidden debts to China dwarf official debts. To avoid default in the wake of the pandemic shock, the small landlocked country was forced to hand over majority control of its national power grid to China. And he may have no choice but to barter land and natural resources.

There are ample precedents for this. Already, several debtors of China have been forced to cede strategic assets to their creditor. Tajikistan ceded 1,158 square kilometers of the Pamir Mountains to China, granted Chinese companies the right to extract gold, silver and other minerals on its territory and approved construction financed by China from a military base near its border with Afghanistan.

Sri Lanka’s debt crisis first came to international attention in 2017. Unable to repay Chinese loans, the country ceded the Indian Ocean region’s most strategically important port, Hambantota, and more than 6,000 hectares of land around, granting a 99-year lease to China. In Sri Lanka, transferring the port has been compared to a heavily indebted farmer giving his daughter to an inflexible moneylender. Despite this sacrifice, Sri Lanka defaulted on its debts earlier this year.

Similarly, Pakistan granted China exclusive rights to manage its strategically located port of Gwadar for four decades. Meanwhile, China will pocket 91% of the port’s revenue. In addition, the China Overseas Ports Holding Company will benefit from a 23-year tax holiday to facilitate the 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 trapping enabled China to acquire its first overseas naval base in Djibouti, strategically located at the entrance to the Red Sea. China is also now seeking a naval base on the West African coast, where it has made the most progress in Equatorial Guinea, a highly indebted low-income country.

It is the result of a lending strategy that is firmly focused on maximizing leverage on borrowers. As an international study has shown, “cancellation, acceleration and stabilization clauses in Chinese contracts potentially allow lenders to influence the domestic and foreign policies of debtors”. China often exercises this political leverage by reserving the right to arbitrarily recall loans or demand immediate repayment.

In this way, China can use its overseas loans 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 he can drive a country into default, he can get all the trade and construction contracts he wants. And if he can control a country’s ports, he can strengthen his strategic position.

Details of China’s loan deals with developing countries have yet to be fully disclosed. But it is already clear that China’s creditor imperialism carries considerable risks, both for the debtors themselves and for the future of the international order.