Questions & answers on China as a major creditor power – CADTM

 What are the scope and amount of loans granted by China?

China is the main public creditor for countries of the Global South

In a report published in November 2023 the research laboratory AidData listed 20,985 projects in 165 countries that had benefited from loans or grants by China. The total amount of credit was $1,340 billion over 22 years [1]. This turns China into the main public creditor for countries of the Global South. The volume of China’s loans is higher than the combined loans granted by 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
, 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.

and 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]. China overtook other public creditors in 2015 [3].

But we have to be aware that private creditors, not China, are the main creditors of public and private debt in both so-called developed countries and developing countries.

It is thus wrong to claim that China is the main creditor whether globally or for countries of the South. Private lenders (notably 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 or Pimco, pension funds
Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, private banks or vulture funds
Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
) are actually the main creditors.

What is true is that China is the main public creditor and consequently the largest official debt collector in countries of the South.

 Does China lend more than the US?

China overtook the US as creditor in the early 2000s

Yes indeed. The volume of credits granted by China from 2020 onward amounts to about $80 billion a year [4] while the US, though they try to catch with China, grant credits for an average of $60 billion a year. China overtook the US as creditor in the early 2000s.

As shown in Figure 1, in 2016, the annual volume of credits granted by China peaked at $140 billion, three times more than those granted by the US. In 2017 and 2018, it amounted to $120 billion, 100 billion in 2019, 80 billion in 2020. We can also notice that official credits granted by the US were less than $40 billion from 2016 to 2020 and increased afterwards to reach $60 billion in 2021. Official financial flows from G7 countries (including the US) were less than those of China in 2016, then China fell behind. From 2020 onward G7 official flows increased steeply to compete with China’s influence.

Figure 1: Official financial flows from China, the US and G7 countries to developing countries during the Belt and Road Initiative era of , 2014-2021, in constant 2021 USD billions [5].

Source : AIDDATA, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 12, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 2: Official financial flows from China and G7 countries to developing countries during the Belt and Road Initiative era, 2014-2021, in constant 2021 USD billions [6]

Source : AIDDATA, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 11, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 2 shows that China’s official credits in 2014-2021 amount to twice those of the US. We can also notice that the 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 Official Development Aid (ODA
ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
) is much lower in Chinese credits than in credits granted by the US, Canada, Germany, Japan, the United Kingdom and France.

 When did China become a major official creditor? What part does the Chinese project known as the Belt and Road Initiative (BRI) play?

From 2013/2014, China launched a major programme of investments and credits on a global level, which it called the Belt and Road Initiative. One of the aims was to create vast economic corridors enabling it to export and import as cheaply, safely and quickly as possible

After the victory of the Chinese Revolution in 1949 China provided loans and grants to Third World countries as they were called at the time. The money went to countries that China tried to bring closer to its area of influence and very much belonged to solidarity cooperation. Beijing’s objectives at the time included neither financial return nor access to raw material. From the 1980s, under Deng Xiaoping, so-called ‘market’ reforms were applied at an accelerated pace, leading to the creation of a major capitalist sector in China, even though the State retained control of the main economic instruments.

In the 1990s, China has gradually become the world’s largest workshop. It has welcomed a huge amount of investment from American, European, Japanese and Taiwanese transnationals, all of which re-export their products to the world market. In this context, China has accumulated huge trade surpluses compared with the United States and the European economic powers. These surpluses, mainly in the form of foreign exchange reserves in dollars, have accumulated, and China has begun to lend these dollar surpluses on an increasingly massive scale to countries in the Global South and, more marginally, to some countries in the North. China has also used a significant part of its reserves to buy companies in both the North and South of the planet. Boosted as it was by a growth rate close to or above 10% a year over more than 20 years (from 1990 to 2013, China’s annual growth rate varied between 7.66% and 14.23%), it has become the second industrial power in the world, and could soon overtake the US.

From 2013/2014, Chine launched a major programme of investments and credits on a global level, which it called the Belt and Road Initiative. One of the aims was to create vast economic corridors enabling it to export and import as cheaply, safely and quickly as possible. It would import the material needed by its industry to manufacture technological products and export them to the world market along those same corridors.

Figure 3 and the map show that over 140 countries have signed agreements with China in the BRI context, among which an overwhelming majority of countries in Afrique, the Middle East and Asia.

Graph 3 & map: Countries of the Belt and Road Initiative

Source : Green Finance and Development Center, FISF Fudan University, extrait de Christoph Nedopil Wang, “Ten years of China’s belt and Road Initiative (BRI) : Evolution and the road ahead”, FISF, Griffith University, page 7.

Source : Green Finance and Development Center, FISF Fudan University, extrait de Christoph Nedopil Wang, “Ten years of China’s belt and Road Initiative (BRI) : Evolution and the road ahead”, FISF, Griffith University, page 7.

Figure 4: Official financial flows from China to the developing world, 2000-2021, in constant 2021 USD billions

Source : AidData, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 8, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 5: Cumulative financial flows from China to the developing world, 2000-2021, in constant 2021 USD billions

Source : AidData, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 10, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 5 shows that credits as official development aid (ODA) that are granted at concessional rates, i.e. lower than market rates, amount only to about 10% of the Chinese credits. The cumulated total of China’s official external lending amounts to $1,300 billion.

Figure 6: Growth in Chinese external lending in USD trillions (thousands of billions)

In the figure below, published by the Federal Reserve
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/
Bank of New York, we can see clearly a four-fold increase in Chinese external lending from 2012 to 2022, from just under $500 billion in 2012 to close to $2,000 milliards in June 2022.

The part in blue refers to credits that companies owned by China abroad grant to each other. Orange refers to trade credit and grey to other credit, the part that most increases. The volumes presented in this graph do not coincide entirely with those provided by AidData, but they show the same trend and include trade credit and loans between companies owned abroad by China.

Source : State Administration of Foreign Exchange and Bank for International Settlements, both via CEIC (in https://libertystreeteconomics.newyorkfed.org/2022/11/a-closer-look-at-chinese-overseas-lending/ )

Note: Les données vont jusque juin 2022.

 Have Chinese credits strongly decreased as is claimed by the World Bank in its December 2022 and December 2023 reports?

According to AidData, it would be wrong to claim that Chinese lending have decreased sharply since 2021. AidData considers that Chinese loans reached $75 billion in 2021 while the World Bank claims that on the same year loans amounted to $ 7.1 billion. The huge difference, AidData explains, can be accounted for by the fact that China used other channels for lending (see AidData November 2023, chapter 2, pp. 47-54).

 What are the main Chinese bodies granting loans?

China grants loans through various official institutions [7]]: 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, or with the European Bank for Reconstruction and Development (EBRD). … [8]]

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 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 [9].

 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.

 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 [10]. 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, 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 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.

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.

This graph is taken from chapter 2 of AidData’s November 2023 report see 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) [11].

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.

 Can it be said that credits from China and the IMF have reduced the scope of defaults over the past three years? Have they provided solutions??

Since 2020 and the succession of external shocks (the Coronavirus pandemic and the effects of the war in Ukraine, in particular on the prices of grain, chemical fertilisers and fuel), the number of countries in financial difficulty has increased greatly. This has not resulted in a generalized crisis of debt repayment, since the International Monetary Fund and China have provided many emergency loans and/or rescheduling of payments. The IMF and China have not been alone in doing this, but they have had the most impact due to their financial weight.

This has provided short-term solutions for creditors, who until now have avoided a generalized payment crisis; but it has not provided a structural solution. What is more serious is that in the case of the IMF, the institution has taken advantage of the situation to impose extension and hardening of the neoliberal policies it has applied for close to 40 years now: reduction of social expenditures, removal of subsidies on basic products and services, increases in VAT (sales taxes), further privatizations, even less protection for local producers struggling against imported products, and so on. All this has contributed to a worsening of living conditions for hundreds of millions of people.

In the case of China, which does not impose this type of conditionalities – which in itself is positive –, postponement of repayment does not provide a fundamental solution because the debt of the “beneficiary” countries continues to increase. In certain cases, China has been given direct control over infrastructures, such as in Kenya with a railway line, or in Sri Lanka, with the port of Hambantota,  [12] for which it has obtained a 99-year operating lease.

 Has China followed the example of the USA during the period 1980-1990 with Latin American countries facing a serious debt crisis?

The People’s Bank of China grants more and more emergency loans in order to avoid problems as much as possible for Chinese public creditors in case of failure to repay.

It is true that in many ways, China has made use of formulas like those used by the USA when faced with the debt crisis in Latin America beginning in the 1980s. To protect the interests of its lenders, in particular the US banks, who were Latin America’s main creditors, the USA intervened actively to restructure debts and grant emergency credits to the countries concerned so that they could continue or resume payments to the banks.

The US Treasury used taxpayer money to bail out private US creditors – that is, major private banks [13]. In the case of China, the People’s Bank of China (the Chinese central bank) itself grants more and more emergency loans in order to avoid problems for Chinese public creditors as much as possible in case of failure to repay.

Nevertheless, there is an important difference between China and the USA – namely that in China’s case, the overwhelming majority of lenders are public whereas in the case of the USA with the crisis in the 1980s, the creditors were almost exclusively private.

 What is the volume of Chinese loans in Africa?

According to Eugène Berg, ex-ambassador of France to Namibia and Botswana, “Between 2000 and 2018, 50 African countries out of 54 borrowed 132 billion dollars from China, of which 80% was from Ex-Im Bank of China and China Development Bank (CDB), in various forms. In 2018, China held nearly 21% of the continent’s outstanding external public debt, with many of these loans going to finance infrastructures whose relevance is questionable.” (source: Eugène Berg, La percée chinoise en Afrique a des effets délétères (China’s Entry Into Africa has Deleterious Effects), Le Monde, 31 December 2021, translation CADTM)

The Chinese press agency Xinhua gives lower figures on the extent of Chinese loans: “A report published last July by the British NGO Debt Justice showed that 12 percent of the external debt of African countries is owed to Chinese lenders, compared to 35 percent to Western private lenders. The average interest rate of these private loans is 5 percent, compared with 2.7 percent for loans from Chinese public and private lenders.” Source: Xinhua, Key Facts U.S. Deliberately Ignores about African Debt, 7/02/2023.

 China lends at variable rates. What are the consequences?

A significant share of credits granted by China confirm that the variable interest rate corresponds to the Libor, plus an additional 2% to 4%. That currently works out to an interest rate of 7% to 9%.

Over recent years, more and more loans have been granted at variable rates. Chinese variable-rate contracts adopt the index known as the Libor (London Interbank Offered Rate) implemented by the big private banks in the 1970s. Note that one of the causes of the Third World debt crisis in the 1980s was the decision by the Federal Reserve of the USA to radically increase its rates, which caused a similar sudden leap in the Libor, which served as the index for variable-rate credits granted by private banks in the North to so-called “Third World” countries.

In a way, the same phenomenon is happening again. The credits from China at variable rates since the launch of the Belt and Road Initiative (BRI) were granted at a time when the Libor was near 0, since it corresponded to the rates in force at the US Federal Reserve, the European Central Bank and the Bank of England between 2012 and 2022. Following the unilateral decision by these three major central banks to raise their rate to 5.5% in the case of the Fed for the USA and the Bank of England, the Libor shot from 0 to over 5%. See the chart below.

Chart 9: Historical LIBOR rates between 1999 and 2024

Source : https://www.global-rates.com/fr/taux-de-interets/libor/

A significant share of credits granted by China confirms that the variable interest rate corresponds to the Libor, plus an additional 2% to 4%. An example is a loan granted by China’s Ex-Im Bank to Cameroon in 2014. The contract calls for an interest rate of the Libor plus 3% to 4%, which, if that clause of the contract is applied, means a rate of 8% to 9%, since the Libor now stands at more than 5%.

Another loan granted to Cameroon, this time by the China Development Bank, calls for a variable rate corresponding to the Libor plus 2% to 3%. A third loan granted to Cameroon, by the Chinese public bank ICBC, calls for a rate corresponding to the Libor plus 1% to 4%.

China is not the only lender who lends at variable rates and uses the Libor as reference. So, for example does the Export Credit Bank of Turkey, which also granted a loan to Cameroon with an interest rate indexed on the Libor plus 4%. And a loan granted by the international Islamic Trade Finance Corporation calls for a rate of the Libor plus 3%. A similar loan to Cameroon from the private bank CommerzBank AG Paris, provides for a rate of the Libor plus 1.6%.

Other creditors use another index called the Euribor
EURIBOR
Euro Interbank Offered Rate
The interbank rate used in the Eurozone. Established daily, it is the average of the transactions realised by a panel of the 57 most representative banks in the Eurozone. There are fifteen EURIBOR rates for terms ranging from one week to twelve months.

EURIBOR : http://www.euribor-rates.eu/panelbanks.asp
. In Cameroon’s case, the Agence Française de Développement (AFD) requires the Euribor rate plus a margin that has not been made public. Note that in the context of this loan, AFD imposed on Cameroon an equivalent clause to the one explained above regarding China – that is, an account is opened in which part of the income generated by the financed project is deposited and from which AFD can draw in case of a suspension of payment.

To return to the Euribor index, in the case of Cameroon, it is used by the African Development Bank (ADB), which calls for the Euribor rate plus 0.6%; by the World Bank (IBRD, with Euribor plus 1.3%; and by the private bank Deutsche Bank, at Euribor plus 3.05%. The use of the Euribor as index has the same consequences as the use of the Libor; see the chart below:

 

Graphique 10 : Évolution de l’Euribor entre 1999 et 2024

Source : https://www.euribor-rates.eu/fr/graphiques-euribor/

These two charts provide a clear visualization of the fact that during the period of “quantitative easing,” the Libor and Euribor rates were close to 0 and that from 2022 onward the increase was both sudden and very drastic.

China is not responsible for the drastic increases in interest rates. Responsibility lies only with the central banks of the USA, the Eurozone and the UK.

It should be underlined that China is not responsible for the drastic increases in rates. Responsibility lies only with the central banks of the USA, the Eurozone and the UK. Yet China’s decision to adopt the Libor and the principle of variable rates is still regrettable and open to criticism, given the precedent of the crisis in the 1980s and the fact that the Libor had been manipulated during the financial crisis of 2008-2010, resulting in penalties against several of the major banks who define the rate.

It is fundamental to see whether China, faced with the catastrophic effects of the increase in the Libor, will reconsider how its contracts are applied in order to radically attenuate the effects of that increase. Until now, there has been no official Chinese announcement that China will not require application of the rate increase.

 The IMF and the World Bank are calling on China to participate more actively in debt restructuring. What is the reality?

China is no worse than other creditors, but is far from being fundamentally different.

China’s coming of age as a major lender radically altered the balance
Balance
End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds.
of power among creditors. Until the start of the decade of 2010, if there was an agreement between the IMF, the World Bank and the Paris Club, it was difficult for any poor country of which they were the main creditors to find any source of alternative financing, and no government of the Global South except for Cuba’s had the courage to suspend repayment unilaterally. It’s true that there is the case of the government of Ecuador, which suspended payment on a part of its debt and imposed a very significant debt reduction on its creditors [14], but only on debts held by private creditors, and not those held by the World Bank, the IMF and the Paris Club. Argentina also suspended payments to external private creditors from the end of 2001 until 2005. It did the same with the Paris Club from the end of 2001 until 2014.

Beginning in the decade of 2010, the dizzying increase in Chinese loans changed relations among creditors. For a significant number of countries, China played a larger and larger role, and in certain cases supplanted traditional creditors such as the former colonial powers (France, the UK, Belgium, Japan, Spain, etc.), the other major imperialist powers like the USA and Germany, and the World Bank and IMF.

The USA holds 16.5% of the voting rights in the IMF and 15.51% in the World Bank, while China has only 6.08% of voting rights in the IMF and 5.92% in the World Bank

China did not become part of the Paris Club. And, while it is a member of the IMF and the World Bank, the USA and its allies are blocking China from attaining its legitimate goal of increasing its percentage of voting rights in proportion to the size of its economy. Keep in mind that the USA holds 16.5% of the voting rights in the IMF and 15.51% in the World Bank, while China has only 6.08% of voting rights in the IMF and 5.92% in the World Bank [15]. Consequently, China, understandably, is not ready to adhere to the agreements made between the Paris Club and the two Bretton Woods institutions, all three of which are dominated by the USA and the Western European powers. China prefers to negotiate bilaterally with each debtor country separately. The World Bank’s and the IMF’s criticisms of the Chinese, whom they accuse of “egoism,” lack credibility because the two institutions systematically refuse to allow any debt cancellation agreement to apply to debt they themselves hold in the countries concerned. The World Bank and the IMF do not cancel debts. They create a specific fund financed by a certain number of member countries, generally the richest ones, from which they draw to secure repayment. [16] Criticisms of China levelled by the Paris Club are no more legitimate than those of the IMF and the World Bank, because it negotiates with each indebted country separately, just as China does.

Having pointed out the bad faith of the leaders of the IMF, the World Bank and the Paris Club regarding China, it should be added that China’s own behaviour is not fundamentally different from that of other creditors. It has established itself as a creditor who is capable of setting conditions that are in its interest. As a result China has changed the balance of power among creditors. But relations between creditors and indebted countries have not changed. China is in the same camp as other creditors, and wants to ensure that its interests are respected along with the interests of the USA and other major powers. China could take the side of the peoples of the Global South and set an example by granting cancellations of debts, observing transparency in its contracts and refusing the nefarious discipline and policies imposed by the World Bank and the IMF. But quite often, China requires indebted countries to submit to the conditionalities and policies imposed by the IMF and the World Bank. It does not impose them itself, but it does support them.

In the final analysis, China is no worse than other creditors, but is far from being fundamentally different.

 Could China change its lending policy from what it is currently?

China’s discourse regarding South-South solidarity is in contradiction with the reality of Chinese policy in recent decades

China has the economic power to become a true alternative to the World Bank, the IMF and the major imperialist countries. But it has not acted to do so. China’s discourse regarding South-South solidarity is in contradiction with the reality of Chinese policy in recent decades. The situation is the opposite of what it was in the 1950s, at the time of Mao Zedong and Zhou En-lai and the non-aligned nations movement stemming from the Bandung Conference, when the Chinese government took an orientation that was opposed to capitalist-imperialist programmes and ideology and, beginning in the early 1960s, harshly criticized Moscow’s strategy of peaceful co-existence.

That was a long time ago, and the perspective of promoting an anticapitalist, anti-imperialist revolution has been abandoned. But if we really want to find the way out of the global capitalist crisis, the environmental catastrophe, and the barbarity of the Zionist State toward the Palestinian people, for example, we must return to defending a revolutionary socialist, self-managed, environmentalist, feminist and truly internationalist perspective.

We should be inspired by the words of Ernesto “Che” Guevara during the Algiers conference in February 1965 [17] regarding the type of relations that should be established between developing countries, imperialist developed countries and the so-called socialist countries of that period. His speech was delivered during the second economic seminar on African-Asian solidarity. The conference, held in Algiers, brought together representatives of 63 African and Asian governments, as well as 19 national-liberation movements. The meeting was opened by Algeria’s president, Ahmed Ben Bella. Cuba was invited to the conference as an observer and Ernesto Che Guevara, who represented the Cuban government (in which he served as Minister for Industry), was part of the presiding committee. He stated that between countries who were supposed to be fraternal and in solidarity, there should be no question of applying worldwide capitalist market prices. Che Guevara declared: “How can it be ‘mutually beneficial’ to sell at world market prices the raw materials that cost the underdeveloped countries immeasurable sweat and suffering, and to buy at world market prices the machinery produced in today’s big automated factories? If we establish that kind of relation between the two groups of nations, we must agree that the socialist countries are, in a certain way, accomplices of imperialist exploitation.” Che Guevara was referring mainly to the bloc of countries led by Moscow.

During the conference, Che Guevara proposed cancellation of debts and argued for grants in place of loans. He said: “We could begin a new stage of a real international division of labor, based not on the history of what has been done up to now but rather on the future history of what can be done. The states in whose territories the new investments are to be made would have all the inherent rights of sovereign property over them with no payment or credit involved.” Che Guevara also affirmed: “Foreign trade should not determine policy, but should, on the contrary, be subordinated to a fraternal policy toward the peoples.”

“The states in whose territories the new investments are to be made would have all the inherent rights of sovereign property over them with no payment or credit involved.” From Che Guevara’s speech in Algiers in February 1965

One last quotation from Che’s Algiers speech: “We must advocate the establishment of new relations on an equal footing between our countries and the capitalist ones, creating a revolutionary jurisprudence to defend ourselves in case of conflict, and to give new meaning to the relations between ourselves and the rest of the world. We speak a revolutionary language and we fight honestly for the victory of that cause. But frequently we entangle ourselves in the nets of an international law created as the result of confrontations between the imperialist powers, and not by the free peoples, the just peoples, in the course of their struggles. For example, our peoples suffer the painful pressure of foreign bases established on their territories, or they have to carry the heavy burden of massive foreign debts. The story of these throwbacks is well known to all of us. Puppet governments, governments weakened by long struggles for liberation or the operation of the laws of the capitalist market, have allowed treaties that threaten our internal stability and jeopardize our future. Now is the time to throw off the yoke, to force renegotiation of oppressive foreign debts, and to force the imperialists to abandon their bases of aggression.” Che’s words in Algiers unleashed fury in Moscow and Washington, but were well received in the Arabic region, in sub-Saharan Africa and in Beijing. His proposals should again become part of the agenda of the peoples of the world.

One year before the speech in Algiers, in March 1964, at the United Nations Conference on Trade and Development
UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

(UNCTAD) in Geneva, Che Guevara also made declarations that are still just as valid. Here is an excerpt:

“ It is inconceivable that the underdeveloped countries, which are sustaining the vast losses inflicted by the deterioration in the terms of trade and which, through the steady drain of interest payments, have richly repaid the imperialist powers for the value of their investments, should have to bear the growing burden of indebtedness and repayment, while even more rightful demands go unheeded.

The Cuban delegation proposes that […] all payments of dividends, interest, and amortization should be suspended .” [18]

Sixty years after Che Guevara’s speech in Geneva, it is high time that the proposals he made were compared with Chinese foreign policy and its effects in the area of credit and investment. It is not acceptable to say that Chinese policy constitutes an alternative to the destructive policies of the USA, Western Europe, Japan, the World Bank and the IMF and an element of the struggle against them.

Chinese credits and investments perpetuate the capitalist model of exploitation of nature and of peoples

Chinese credits and investments in fact perpetuate the capitalist model of exploitation of nature and of peoples. And that model only strengthens the dependence of so-called “developing” countries on industrialized countries, including China. That model exhausts natural resources, imposes low wages, aggravates the environmental crisis, and keeps a majority of the population in poverty.

Of course, the ill-intentioned and disingenuous attacks on China by the USA, Western Europe, Japan and their allies must be denounced, but not to the detriment of an untrammelled right to critique the model promoted by China, which prolongs and reinforces the same model followed by the very powers who demonize China.

China could develop solidarity with the peoples of the Global South and adopt another development model that is also in the interest of the Chinese people

Loans granted by China, like those from other countries, should be subject to audit with active participation of the citizens of the debtor countries concerned. Their effects on the living conditions of the population and on nature must be evaluated. The purpose of this audit with citizen participation is to identify illegitimate debt the country is supposedly required to repay in order to cancel it.

China should set an example by making public the content of all loan contracts it has entered into. This would challenge the countries of the North to do the same, which would greatly assist in fighting corruption and illicit enrichment by the elites in power.

China, which has at its disposal 3,000 billion USD in official foreign-exchange reserves and a further equivalent amount via other channels, is perfectly capable of handling cancellation of the illegitimate debts that it holds in countries of the Global South, especially since a considerable share of these debts is denominated in Chinese currency and held by the Chinese central bank and other public entities. China could maintain currency swap lines in renminbi. China could, if it truly wanted to, develop solidarity with the peoples of the Global South and adopt an alternative development model that is also in the interest of the Chinese people.

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

Translated by Christine Pagnoulle and Snake Arbusto

Here is the same article in Chinese :

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