Trouble Could Be Brewing Over China Development Loans
On June 3, President José Eduardo dos Santos of Angola appeared in Beijing to ask for a repayment moratorium for at least two years and new credit for the country’s debt to Chinese banks for infrastructure development. With the price of crude having descended from above U$115 in June 2014 to below US$65 today, Angola is having serious problems meeting its debt obligation to China’s Export-Import Bank.
Angola is hardly alone. Across the planet, Chinese banks including the China Export Import Bank, the China Development Bank and others have been showering billions of dollars for infrastructure development, much of it to meet China’s goals for its One Belt, One Road development initiative. In Africa, development loans are expected to amount eventually to US$1 trillion.
However, money for development from China is not free, especially with Chinese lending institutions charging as much as 6 percent interest. It is unsure how big the problem is. Queries from Asia Sentinel to the World Bank and the Asian Development bank as to a comprehensive list of Chinese lendings didn't turn up an answer. There doesn't appear to be one outside perhaps the Chinese Ministry of Finance.
With the prospect that interest rates are going start creeping up, it might be time to take a look at the massive debt some developing countries have taken on and what they got out of it. While only a few borrowers like Angola and Sri Lanka have woken up to the magnitude of the bills coming due, the situation has the potential to grow worse, as western bankers found out in the 1970s and 1980s when they discovered that the sovereign countries they loaned to, like Argentina, weren’t going to be able to pay the money back.
There are also concerns about the projects that China is lending to. Although 57 countries have signed on to the Asian Infrastructure Investment Bank spearheaded by Chinese President Xi Jinping, theoretically to break the dominance of the World Bank, an American creation, and the Asian Development Bank, headed by a Japanese, the fact is that both the World Bank and the ADB make loans in the region but too often it is a scramble to find projects that are worthy and not dominated by endemic corruption.
Huang Yiping, a professor at Peking University National School of Development, wrote in Caixin Online in February that “China has only two types of companies that are competitive: infrastructure builders and labor-intensive manufacturers. China has become the third-largest direct investing country, but more than half of its deals do not provide financial returns. In this situation, it would be worrisome for Chinese firms to follow this new strategy to invest overseas.”
Sri Lanka is finding that out. The incoming Mathripala Sirisena government has discovered that the country is nearly buried in Chinese megaprojects that may not be economically viable. They include the Colombo Port City project, being built by China Communication Construction Company (CCCC), a subsidiary of China Harbor Engineering Company, in cooperation with the Sri Lanka Port Authority. The project amounts to a US$1.4 billion investment.
Other Chinese projects have also drawn criticism for being unproductive investments and are considered bad loans. Chinese companies built the Hambantota Port, Mahinda Rajapaksa International Airport (MRIA) and a cricket stadium in the former president Rajapaksa’s political constituency, Hambantota. These are now incurring losses because they are not commercially viable. In September 2013, the interest rate for MRIA, which cost US$209 million to build, was increased from 1.3 per cent to 6.3 percent.
“China has invested around US$5 billion in Sri Lanka,” Dr. Smruti S. Pattanaik, a research fellow at the Institute for Defense Studies and Analyses in New Delhi wrote in East Asia Forum on June 4. “The Sirisena government faces a dilemma. While the government is not in a position to spurn Chinese investment or to repay the huge loans, it also does not know how to ensure these mega infrastructure projects make profits that would help pay back the loans.”
In April, it was announced in Jakarta that China is to provide the equivalent of US$50 billion in loans for infrastructure development according to a memorandum of understanding signed during the 60th anniversary of the Asian-African Conference. Most of the loans are to be used by the state electricity firm PLN, other SOEs such as Aneka Tambang to construct a smelting plant, to construct high speed rail, light rail transit, toll roads and harbors. Indonesia is one of the most notoriously corrupt countries in Southeast Asia, ranking 107th of 175 countries in the world according to Transparency International.
In Pakistan earlier this year, China and Pakistan signed more than 50 agreements worth US$28 billion to finance infrastructure projects to connect the Gwadar deep sea port across to western China. The bulk of the money – US$22 billion, will be commercial loans from Chinese banks to Pakistani power generation companies. Chinese contractors will get the lion’s share, selling equipment for coal-fired power generation units to Pakistani utilities.
China has also provided US$503 million in concessionary loans through its Ex-Im Bank to the Philippines to finance the construction of the North Rail project extending out of Manila to the north. That is part of a total US$2.33 billion in loans by China for various Philippine projects, The China National Machinery and Equipment Corporation and the China National Technical Import and Export Corporation have been designated the North Rail project’s contractors, raising criticism, as in large swaths of Africa, that Chinese loans and investments are used to aid Chinese companies.
In the Caribbean, the Bahamas – a country with an annual gross domestic product of only $9.034 billion – in 2011 received funding from China to build a new US$3.4 billion hotel resort. In Jamaica, with a debt-to-GDP ratio of about 130 percent and a stagnant economy, China has financed major infrastructure projects via loans and grants amounting to more than US$600 million according to Damien King and David F. Tennant, in their 2014 book Debt and Development in Small Island Developing States.
The bulk of Chinese financing in Africa falls under the category of development finance, not aid. This fact is privately acknowledged by Chinese government analysts, although Chinese literature constantly blurs the distinction between the two categories. In a 2014 study titled China’s Aid to Africa: Monster or Messiah, for the US-based Brookings Institution, scholar Yun Sun wrote that: “The billions of dollars that China commits to Africa are repayable, long-term loans. From 2009 to 2012, China provided US$10 billion in financing to Africa in the form of “concessional loans.”
On Chinese President Xi Jinping’s first overseas trip to Africa in March 2013, Xi doubled that to US$20 billion from 2013 to 2015. The head sovereign risk analyst of Export-Import Bank of China announced in November 2013 that by 2025, China will have provided Africa with US$1 trillion in financing, including direct investment, soft loans and commercial loans. It remains to be seen what strings will be attached to the repayment of that money.
“Much Chinese financing to Africa is associated with securing the continent’s natural resources.” according to Yun Sun. “Using what is sometimes characterized as the ‘Angola Model,’ China frequently provides low-interest loans to nations who rely on commodities, such as oil or mineral resources, as collateral. In these cases, the recipient nations usually suffer from low credit ratings and have great difficulty obtaining funding from the international financial market; China makes financing relatively available—with certain conditions.”
Commodity prices have begun to crash, at least partly because China, the world’s biggest importer, is running into economic trouble. Indonesia, for instance, has seen a 15 percent fall in its exports year on year. Exports across the region are weakening. Those like Dos Santos, who have expected high commodity prices to shoulder interest payments at a time when the interest rate environment is starting to change, may be in Beijing suing for more time.