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Chinese debt trap: World Bank president expresses concerns over Beijing’s loans to developing countries

China has become a major player in global lending, with its Belt and Road Initiative (BRI) involving investment in infrastructure projects in over 100 countries. It's loans to lower and middle-income countries have tripled over the past decade, reaching $170 billion by the end of 2020.

In a recent development, the President of the World Bank, David Malpass, has expressed concerns over China’s loans to developing countries and the possibility of a “Chinese debt trap” that Beijing is notorious for in asserting its dominance over countries seeking funds to shore up their respective economies.

The statement comes at a time when China is increasing its lending to developing nations, which has raised concerns about the long-term financial sustainability of the countries that are borrowing from China.

China’s expanding economic presence in the developing world has led to increasing concerns over what is commonly referred to as the “Chinese debt trap”. This phenomenon refers to China’s practice of offering large loans to developing countries for infrastructure projects, which are often accompanied by opaque terms and conditions that leave borrowers vulnerable to economic and political pressure leading to a situation where a borrowing country becomes trapped in a cycle of debt due to its inability to repay loans from China. This situation is often caused by the borrowing country’s inability to generate sufficient foreign exchange to service its debt obligations.

Malpass noted that China is one of the largest bilateral lenders to developing countries. While these loans have helped finance much-needed infrastructure projects, they have also saddled many countries with unsustainable debt burdens. In some cases, the debt has been so overwhelming that countries have been forced to hand over control of key assets to China, leading to accusations of “debt-trap diplomacy”.

Malpass emphasized the need for greater transparency and accountability in the lending practices of China and other lenders to ensure that developing countries are not being taken advantage of. He also stressed the importance of debt sustainability and urged borrowers to be more cautious in taking on new debt.

China becomes the leading lender to developing countries

China has become a major player in global lending, with its Belt and Road Initiative (BRI) involving investment in infrastructure projects in over 100 countries. However, the initiative has come under scrutiny for saddling countries with unsustainable debt burdens, leading some to accuse China of using debt as a tool of geopolitical influence.

China’s loans to lower and middle-income countries have tripled over the past decade, reaching $170 billion by the end of 2020.

Source: World Bank International Debt Statistics/ BBC

China’s entire credit commitments, however, are probably much higher than these numbers imply. Half of China’s loans to developing nations are not included in official debt data, according to research by AidData, an international development organisation at William & Mary University in the United States. Instead of flowing from one government to another, cash is frequently diverted through joint ventures, private institutions, state-owned businesses, and banks.

China is the world’s largest lender to developing countries, according to data from the World Bank. This marks a significant shift in global finance, as China has rapidly increased its lending to developing countries over the past decade through its Belt and Road Initiative (BRI).

The BRI is a massive infrastructure development project that claims to seek improvement in connectivity and trade across Asia, Europe, and Africa, but in reality is an instrument to trap countries into Beijing’s geopolitical orbit through the means of “debt trap diplomacy”. As part of this initiative, China has invested heavily in developing countries, providing them with loans for infrastructure projects, energy production, and other areas.

According to data from the World Bank, China’s total lending to developing countries reached $462 billion between 2000 and 2020. This surpasses the lending of traditional lenders such as the World Bank and the International Monetary Fund (IMF). In 2020 alone, China provided $87 billion in loans to developing countries, compared to the World Bank’s $28 billion and the IMF’s $20 billion.

Source: World Bank International Debt Statistics/BBC

Why Chinese loans are difficult to pay

There are several reasons why Chinese debt is difficult to pay off. First and foremost, the loans come with high interest rates, which can make repayment difficult for countries with already limited resources.

Another issue is that many of the projects funded by Chinese loans are not economically viable. These projects are often designed to boost a country’s infrastructure, but they may not generate enough revenue to repay the loans. This leaves countries with a significant debt burden that they cannot sustain.

Another factor that contributes to the difficulty of paying off Chinese debts is the collateral that China requires in exchange for its loans. This collateral often takes the form of natural resources or strategic assets, such as ports or airports. This means that if a developing country is unable to repay its debt, it may have to surrender control of these resources or assets to China. This could have long-term consequences for the country’s economic and strategic interests.

Furthermore, there is often a lack of transparency in China’s lending practices. Many countries do not fully understand the terms of the loans they are taking on, which can lead to unsustainable debt burdens. Additionally, China has been accused of using its loans to gain political leverage and strategic influence in developing countries, which can further complicate the repayment process.

Despite these concerns, China’s lending to developing countries shows no signs of slowing down. The BRI continues to expand, with new projects and investments being announced on a regular basis. This suggests that China’s role as the world’s largest lender to developing countries is likely to continue in the years to come, with significant implications for the global economy and international relations.

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OpIndia Staff
OpIndia Staff
Staff reporter at OpIndia

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