[Part 2] Questions/Answers on China : How does China lend ? – CADTM

 What are the main Chinese bodies granting loans?

China grants loans through various official institutions [1]]: its strategic public banks (China Development Bank and China Eximbank), while increasingly drawing on its central bank
Central Bank
The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
(People’s Bank of China) and on State commercial banks (such as Industrial and Commercial Bank of China, Bank of China and China Construction Bank). There are also syndicated loans. Under syndicated loans, Chinese public banks lend jointly with private Western banks, such as the French bank BNP-Paribas or the British bank Standard Chartered Bank, and/or with the International Finance Corporation (IFC), which is part of the World Bank
World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, or with the European Bank for Reconstruction and Development (EBRD). … [2]]

It is also to be noted that Chinese official bodies buy debts owned by countries of the South on the secondary market
Secondary market
The market where institutional investors resell and purchase financial assets. Thus the secondary market is the market where already existing financial assets are traded.
via investment funds
Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
such as BlackRock, Pimco, AllianceBernstein, Fidelity Investments and Amundi Asset
Asset
Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts).
Management [3].

 What kinds of projects do they support?

China’s objective through such loans is to strengthen the capacity of African countries receiving them to extract their natural resources and to export them with little or no processing

During an initial period most Chinese loans went to infrastructure projects such as roads and motorways, bridges, airports, railways, harbours, dams and hydraulic plants, coal-fired power plants and the like.

According to an article by the official Chinese press agency Xinhua published on 7 February 2023: “Statistics showed that since the Forum on China-Africa Cooperation was founded almost 23 years ago, Chinese companies have built or upgraded more than 10,000 km of railways, nearly 100,000 km of roads, roughly 1,000 bridges and 100 ports, and several hospitals and schools in Africa, creating more than 4.5 million jobs.” Source: Xinhua, “Key Facts U.S. Deliberately Ignores about African Debt,” 7/02/2023, https://english.news.cn/20230207/2e2f36625525400f90b8ea4993ffa4d6/c.html

The aim is clearly to strengthen the capacity of African countries receiving Chinese loans to extract their natural resources and export them with little or no processing.

It is striking to note that in this article from the Chinese press agency, the emphasis is on infrastructures that are related to the extractivist-exportation model. The article mentions, for example, “1,000 bridges and 100 ports,” and then adds “several hospitals and schools.” There is an obvious disproportion. It’s clear where the priorities lie.

Building hospitals, universities, and factories for the production of manufactured goods is not a priority for China’s investors

Similarly, in the same article, we find the following: “During trips to Africa, American officials may not have realized that when they disembarked from a plane, they were likely headed toward a terminal built by a Chinese company. And their cars were also driving on roads or bridges built by a Chinese contractor. Modern infrastructure built by China is ubiquitous across Africa.” Xinhua did not choose to put the accent on pharmaceutical labs, or hospitals, universities, or factories for the production of manufactured goods with high added value built by China. Not that credit from China totally excludes those types of investments – to suggest that would be exaggeration –, but because such investments are simply not a priority. Those types of projects are a small minority.

And what is true for Africa is also true of the countries of Latin America and Asia. Those who direct Chinese policy see Sub-Saharan Africa as a territory from which raw materials are extracted to be sent to China or to other consumer countries without further processing. This perpetuates the role that has been imposed on Africa in the world economy by the traditional imperialist powers: that of being a source of cheap raw materials produced by low-paid labour. China is reproducing the same policies used by the Western capitalist powers and institutions like the World Bank and the IMF
IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
.

 Does China grant credit under more advantageous financial terms than other lenders?

Chinese rates are similar to those of the IMF and the World Bank

It depends. In any case, contrary to what several authors claim, the rates charged by China are not double the rates associated with the credits granted by the IMF and the World Bank. The rates for credit extended by the IMF vary between at minimum 4% and often 8% due to surcharges [4]. The rates charged by the World Bank, excepting the subsidized-credit branch, the IDA, are around 6% to 8%. Chinese rates are in the same range, even if some credits are granted at a subsidized rate of a little below 3%. In comparison with the rates charged by private lenders on the financial markets during the decade or so of quantitative easing – that is, from 2012 to 2022 –, Chinese rates were equal or a little higher. Beginning in 2022, when the Fed
FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
, the ECB
ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
and the Bank of England abandoned the policy in favour of quantitative tightening, there was a large increase in rates. Those Chinese loans granted at fixed rates are therefore at lower than market rates. But keep in mind that a large share
Share
A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings.
of Chinese loans are at variable rates, and in that case, they follow along with the evolution of rates dictated by the Western central banks (see below).

There are three main factors that make Chinese loans attractive:

1. They are not subject to the conditionalities generally imposed by the IMF and the World Bank and supported by most of the bilateral lenders who make up the Paris Club
Paris Club
This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

.

2. They provide another source in addition to other lenders and create competition with the latter.

3. Chinese loans come with grace periods of 5 to 7 years, which means that the countries need not begin repayment until the end of that period. This is highly practical for a sitting government, since repayment does not begin until the end of the term of a given legislature, or at the start of the term of the succeeding legislature.

 If the rates charged by China are not so different from those charged by other creditors, what additional factor intervenes in the decision to go to China for credits?

The period of execution of the projects financed by Chinese credit is significantly shorter than the time needed for projects financed by the World Bank or the lenders of the Paris Club. Concretely, a road, a bridge, or an airport financed with Chinese credit will be built in a much shorter time than the same type of project financed by other lenders.

 Does China require other conditionalities than those imposed by the IMF and the World Bank? Are Chinese loans a means of exercising “soft power” while increasing influence?

At the level of international relations, China, as guarantee for the credits it extends, expects a government to adopt policies that are favourable to China, or at least not hostile to China

At the level of international relations, China, as guarantee for the credits it extends, expects a government to adopt policies that are favourable to China, or at least not hostile to China. China, thanks to its loans, has persuaded a series of countries to no longer recognize Taiwan as an independent State, and to close Taiwan’s embassy in their country. As a result, in Africa, only Eswatini still recognizes Taiwan. According to AidData, the more credit a country receives from China, the more likely it is to vote with China in the United Nations General Assembly (see the AidData report already cited, p. 29, and Figure 1.16, p. 31 https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf). China clearly exercises soft power through its loan policy.

 In what currencies are Chinese loans granted?

For a long time, China recycled its enormous dollar reserves in the form of foreign loans, and also used them to acquire foreign companies. Since 2013/2014, China has reduced its grants of bilateral long-term loans denominated in dollars to sovereign borrowers, while increasing the number of loans denominated in Renminbi (RMB)/Yuan, over the short or middle term. This is shown in Figure 7.

Figure 7: Breakdown of China’s loan portfolio by currency. Percentage of loan commitments of China’s public sector (in constant 2021 USD) to countries with low and middle income.

Tableau tiré de AidData, “Belt and Road Reboot: Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, chapitre 2.

Notes: The “Other” category includes all other currencies, including the Euro, GBP, and local currencies in countries with low and middle income (LICs and MICs).

 How does China finance the credits it extends?

Unlike the World Bank, China does not finance its credits by borrowing on the international markets itself. As stated earlier, it uses part of its huge reserves of dollars to grant loans. China is also a creditor of the USA; it officially holds a total of slightly under 1,000 billion USD in the form of US Treasury bonds.

And when, as is often the case, China makes loans in its own currency, it encounters no difficulty – it needs only to print money or open a line of credit.

 Aside from infrastructure, etc. projects, is it true that China grants emergency credits?

Yes, China provides a large quantity of emergency loans which assist indebted countries in continuing repayments to China and also to the IMF (see below regarding the IMF). This is shown in Figure 8.

Figure 8: Comparison of China’s loan portfolio by financial instrument. Percentage of loan commitments of China’s public sector to countries with low and middle income.

Ce graphique provient du chapitre 2 du rapport d’AidData de novembre 2023 voir https://www.aiddata.org/publications/belt-and-road-reboot.

In 2013, one year before the first full year of BRI implementation, emergency rescue lending represented only 5% of China’s overseas lending to LICs and MICs. By 2021, 58% of China’s overseas lending to LICs and MICs consisted of emergency rescue lending. The People’s Bank of China (PBOC) – China’s central bank – is by far the most important financier of international emergency rescue lending operations, which explains why it had assumed a dominant role in Beijing’s LIC and MIC lending portfolio by 2020. In March 2023, a team of researchers from AidData, the World Bank, the Harvard Kennedy School, and the Kiel Institute for the World Economy published a study that explains why Beijing has undertaken rescue lending operations worth nearly $250 billion in 22 countries.

 

They find that most of these operations have taken place in BRI participant countries with high levels of outstanding (infrastructure project) debt to Chinese banks and companies. They also find that bailouts from Beijing are directed to distressed government borrowers at times when their foreign exchange reserve levels are low and their credit ratings are weak. (Horn et al. 2023a) [5].

AidData estimates that 80% of China’s loan portfolio with developing countries is with countries in financial difficulty

According to the AidData report published in November 2023, China plays a role that is unfamiliar and uncomfortable for it: that of being “the world’s largest official debt collector.” 55% of its loans to LICs and MICs have already reached the period when principal must be repaid, and that figure will increase to 75% by 2030. Total outstanding debt – including principal but not interest
Interest
An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set.
– from borrowers in the developing world to China is at least $1.1 trillion and potentially even as high as $1.5 trillion (in nominal US dollars). Beijing is finding its footing as an international debt collector at a time when many of its biggest borrowers are illiquid or insolvent. AidData estimates that 80% of China’s loan portfolio with developing countries is with countries in financial difficulty. Overdue repayments to China are also soaring – in absolute terms and as a proportion of total overdue loan repayments to official (i.e. bilateral and multilateral) creditors.

 Among emergency credits, what are currency swaps lines?

For China this is a means of offering the possibility of access to a line of credit in case of need. A concrete example is that of Argentina. Argentina, which has a debt of more than 40 billion dollars with the IMF, and which cruelly lacks dollar reserves, has taken on a line of credit with China to borrow a large amount in renminbi (RMB) to be used to repay the International Monetary Fund in time. That is possible since the Chinese currency is one of the five currencies in which the IMF accepts repayment (dollars, euros, pounds sterling, Japanese yen and renminbi). Recall that during the banking and financial crisis of 2007-2008, when the crisis spread from the USA to the big European private banks, the Federal Reserve of the USA (“Fed”) allowed the European Central Bank to use this type of swap to obtain dollars and supply them to private European banks who might otherwise have failed, which in turn would have caused failures of other big banks in the USA.

At least 17 countries have used the swaps offered by the Chinese. That is significant. But keep in mind that the emergency credits granted by the IMF are larger than China’s.

 Are contracts entered into with China and its lending entities transparent?

China behaves as most creditors do and imposes confidentiality clauses on governments and entities who go to it for credit. Whereas twenty or so years ago certain contracts were public, it’s clear that from now on China will demand secrecy regarding the conditions under which it grants loans. Citizens should have the right to information that enables them to form an opinion about the terms of a contract and the relevance and quality of the projects and policies supported by Chinese funding. The secrecy imposed by Chinese lenders constitutes an obstacle that social movements and elected officials must endeavour to overcome. This policy of secrecy applied by China is not exceptional; other creditors have practised it for a long time. Nevertheless, that does not excuse placing obstacles in the way of exercising the right to audit.

 Is it true that China can draw on a deposit account to secure payment in case of failure to meet a payment?

Yes, over the past ten years, China has required public authorities of countries receiving credits that they open a specific account in which they must deposit the equivalent of one or several scheduled repayments. In certain cases, this account is credited with a part of the income from the project financed by China. China, in case of a delay in payment, is authorized to draw on this account unilaterally to secure payment.

Other creditors impose the same conditions, but it appears that China makes use of the procedure much more often.

The author would like to thank Gilbert Achcar, Maxime Perriot and Claude Quémar for document research and proofreading.

Translated by Christine Pagnoulle and Snake Arbusto

Here is the same article in chinese :