Vantage | How developing countries came to owe a trillion dollars to China

In recent years, China has emerged as a significant player in the global financial landscape, particularly in the developing world. Its extensive lending practices, often dubbed “chequebook diplomacy,” have raised questions about its intentions and the implications for poorer nations struggling to repay their debts. With more than $1 trillion owed to China, the developing world finds itself in a precarious situation, trapped in a cycle of debt that is not easy to escape. China’s expansive loan portfolio China’s lending portfolio is vast, estimated to range from one to $1.5 trillion. This includes various types of loans, such as bilateral lending and financing for infrastructure projects, most notably the Belt and Road Initiative. This lending practice primarily targets countries in financial distress, predominantly in the Global South. In fact, a staggering 80 per cent of China’s loans to the Global South fall into this category, intensifying their economic woes. China’s motivations Why does China engage in such extensive lending to financially distressed nations? The primary motivation behind China’s actions is to exploit these countries’ situations and extract higher interest rates. Economists estimate that Chinese government loans to low-income countries typically have a 2 per cent interest rate, higher than the 1.54 per cent interest rate offered by the World Bank’s concessional loans. This stark difference in interest rates can be seen as a form of financial exploitation. Penalties for defaulting Defaulting on loans from China comes at a high cost. In addition to the principal amount and the already high-interest rates, China imposes penalty interest rates. These rates are not fixed and have witnessed a substantial increase over the years. For example, in the early years of the BRI (2014-2017), the penalty rate was 3 per cent, but it later surged to a staggering 8.7 per cent, nearly three times higher. This means that countries that default on their loans owe significantly more than the borrowed amount, creating a vicious debt trap. Transparency issues One of the major challenges in understanding the full extent of China’s lending practices is the lack of transparency. The terms and conditions of specific Chinese loans are often shrouded in mystery making it difficult for nations to assess the full implications of these agreements. China usually keeps lending arrangements a secret adding to the confusion and uncertainty surrounding its loans. Another aspect of China’s lending practices that raises concern is the use of adjustable interest rates. This means that the interest rates on these loans can change as per market conditions. In recent years, interest rates have soared, leading to a surge in bad loans. Over the past three years alone, loans worth over $78 billion have turned sour, burdening the debtor nations further. Consequences of default When countries default on their loans, they face dire consequences. Some have managed to renegotiate their loans, while others have seen their debts written off. These defaults have forced China to reconsider its lending practices, leading Chinese officials to spend less on new projects and increase emergency lending to manage the situation. China’s role as the world’s biggest debt collector is a matter of concern, not just for the nations burdened by its loans but also for China itself. Its extensive lending practices, high-interest rates and unclear terms raise questions about the sustainability of this strategy. As China’s massive lending operation slows down, it is evident that the consequences of chequebook diplomacy are becoming increasingly apparent. Both China and the countries entangled in its debt web face challenges that will require careful consideration and strategic planning for the future. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.