The Threatening Secrecy Behind China’s Loan Provisions

The Threatening Secrecy Behind China’s Loan Provisions

In recent decades, China has become the world’s largest creditor. It accounts for 65% of bilateral debt globally. However, despite this large share of the market it possesses, much of the lending activity insights are hidden from the public eye. Mainstream media is highly unaware of the basic terms contained within Chinese loan agreements and the secrecy associated with these loans has received increased attention recently. It has been found that the terms of agreement for many Chinese loans compel borrowers to prioritize repayment to China prior to other nations borrowed from. Additionally, Chinese lenders are required to sign confidentiality agreements, in turn shielding the bulk of activity occurring within the lifetime of these loans from the public. China’s increasing secrecy around loan payment demands further investigation. China’s perpetual lack of accountability must be addressed, and the power contained in this wealthy nation must be checked. 

This format of lending practice has been common in China for many years, however, it has recently come under scrutiny as a result of the economic shocks prompted by the COVID-19 pandemic. Many countries have been in dire condition following the pandemic. According to the International Monetary Fund, “As of January 2021…about half of all low-income countries were in debt distress or faced a high risk of entering distress.” China has lent money to many countries that have had to default as a result of overwhelming debt, markedly Argentina, Venezuela, and many nations in sub-Saharan Africa. The plethora of examples of nations experiencing such crises surrounding borrowing from China, as well as alarming research surrounding the very terms known about these agreements drive up much curiosity about the true journey China embarked on to be able to advance as the world’s largest creditor. At what cost to other developing nations has China snatched this title, will they ever make public their true actions, and, crucially, what consequences might follow?

China’s lending boasts both a broad reach as well as a relatively strong concentration towards a select few borrowers. Only 10 countries contribute to 60% of the total lending of China. Venezuela is the largest borrower, accounting for over 10% of China’s lending. The distribution of loans that China provides have been mostly directed towards construction or infrastructure projects; almost half of their commitments fall in this category, the monetary amount falling close to 250 billion dollars. These projects mainly work within transportation as well as power generation and distribution sectors. Other projects contribute to oil, gas, and mining extraction and on the surface look perfectly ethical and even quite helpful to these countries. However, much is to be uncovered under the surface. Out of the 615 projects China has contributed to initiating, 124 fall within national protected areas, 261 fall within critical habitat, 133 are within land belonging to indigenous peoples, and 150 overlap with many forms of sensitive territories. Therefore, there are not only ethical concerns within the placement of these projects, with blatant ignorance of property rights, but there are also potentially more serious concerns for the countries so entrenched in the procurement of aid from China. 

This crisis can be illustrated by focusing on China’s hold over some African countries in terms of the debt they owe. Djibouti is quite the striking example. Here, 70% of the country’s GDP consists of debt owed to Beijing in the context of the construction of a free trade zone. However, this expansive project is projected to cost over three and a half billion USD and be in construction until 2029. Government officials of Djibouti feel that Beijing serves as a key actor to aid in modern day development in order to make tomorrow’s nation stronger economically and thus more prosperous. In the short run, the finance minister of Djibouti, Ilyas Moussa Dawaleh, feels that this aid and the project it is financing serve as protection against protest from the poor and unemployed in the nation. They are quite grateful to the Chinese for extending this aid, and assure the public that they are in a position to preserve their control and not find themselves trapped  underneath the heavy weight of their debt. Although partners of Djibouti continuously warn the nation’s officials on the high risk associated with such amounts of borrowing, select officials take this almost as an insult, feeling that the partners are calling the country weak and oblivious rather than supporting their endeavours to build a brighter future for their citizens.

However, failure to consider the risk associated, even to a small degree, leaves much room for concern, something partner countries of Djibouti are right to bring up. The facts are clear: if loan repayment is not consistent from the nation once the aid stops to continuously pour in, the country risks losing grip on their sovereignty, and in the case of default, runs the risk of loss of integral assets. Although China denies allegations surrounding ulterior motive, and there are indicators assuring against any predatory behaviour on part of China, Djibouti as well as many other nations should begin to think twice before accepting such large aid packages – especially when the fine print of the terms of such aid may be trapping them and subjugating them under this increasingly potent world power. 

Ultimately, it is clear that China’s loan provisions raise many concerns. The secret terms of loan agreements has recently gained more traction due to the dire financial condition many countries find themselves in following the shocks of the pandemic. Other concerns include the distribution of funding within countries, especially the ways in which new projects impinge upon highly protected lands. In general, there is concern that countries receiving loans are unable to recognize the totality of the risk they are taking and the hidden strategies that their loan providers have yet to reveal. External encouragement to investigate these happenings more thoroughly must happen so that this problem does not continue to get out of hand in ways the public may not even be aware of. Additionally, project building on sensitive territories must be stopped, and the funding must be put into projects with consideration of the status of the placement. Growing Chinese dominance should be checked given its unethical nature. Without proper surveillance, an extremely dangerous precedent will continue to take root, and the harm this may promote could be irreparable. 

Edited by Sarah St-Pierre

Photo credits:​ “Chinese Development Notice at Lake Assal, Djibouti” by Michael Edward Walsh taken on April 13th, 2018, licensed under CC-BY 2.0. No changes were made.

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