– Bernard Condon and the Associated Press in a major article for Fortune magazine.
Here are some excerpts from the article that struck me:
In the past under such circumstances [debtor countries being unable to make interest payments], big government lenders such as the U.S., Japan and France would work out deals to forgive some debt, with each lender disclosing clearly what they were owed and on what terms so no one would feel cheated.
But China didn’t play by those rules. It refused at first to even join in multinational talks, negotiating separately with Zambia and insisting on confidentiality that barred the country from telling non-Chinese lenders the terms of the loans and whether China had devised a way of muscling to the front of the repayment line.
And
Along with the usual mix of government mismanagement and corruption are two unexpected and devastating events: the war in Ukraine, which has sent prices of grain and oil soaring, and the U.S. Federal Reserve’s decision to raise interest rates 10 times in a row, the latest this month. That has made variable rate loans to countries suddenly much more expensive.
All of it is roiling domestic politics and upending strategic alliances.
In March, heavily indebted Honduras cited “financial pressures” in its decision to establish formal diplomatic ties to China and sever those with Taiwan.
Last month, Pakistan was so desperate to prevent more blackouts that it struck a deal to buy discounted oil from Russia, breaking ranks with the U.S.-led effort to shut off Vladimir Putin’s funds.
And, which I did not expect,
China has also pushed back on the idea, popularized in the Trump administration, that it has engaged in “debt trap diplomacy,” leaving countries saddled with loans they cannot afford so that it can seize ports, mines and other strategic assets.
On this point, experts who have studied the issue in detail have sided with Beijing. Chinese lending has come from dozens of banks on the mainland and is far too haphazard and sloppy to be coordinated from the top. If anything, they say, Chinese banks are not taking losses because the timing is awful as they face big hits from reckless real estate lending in their own country and a dramatically slowing economy.
And
The hunt began in 2011 when a top World Bank economist asked [Brad] Parks to take over the job of looking into Chinese loans. Within months, using online data-mining techniques, Parks and a few researchers began uncovering hundreds of loans the World Bank had not known about.
China at the time was ramping up lending that would soon become part of its $1 trillion “Belt and Road Initiative” to secure supplies of key minerals, win allies abroad and make more money off its U.S. dollar holdings. Many developing countries were eager for U.S. dollars to build power plants, roads and ports and expand mining operations.
But after a few years of straightforward Chinese government loans, those countries found themselves heavily indebted, and the optics were awful. They feared that piling more loans atop old ones would make them seem reckless to credit rating agencies and make it more expensive to borrow in the future.
So China started setting up shell companies for some infrastructure projects and lent to them instead, which allowed heavily indebted countries to avoid putting that new debt on their books. Even if the loans were backed by the government, no one would be the wiser.
In Zambia, for example, a $1.5 billion loan from two Chinese banks to a shell company to build a giant hydroelectric dam didn’t appear on the country’s books for years.
This I did expect:
Another AidData report around the same time suggested that many Chinese loans go to projects in areas of countries favored by powerful politicians and frequently right before key elections. Some of the things built made little economic sense and were riddled with problems.
In Sri Lanka, a Chinese-funded airport built in the president’s hometown away from most of the country’s population is so barely used that elephants have been spotted wandering on its tarmac.
Amusing at first sight, but the consequences are less funny:
As Parks dug into the details of the loans, he found something alarming: Clauses mandating that borrowing countries deposit U.S. dollars or other foreign currency in secret escrow accounts that Beijing could raid if those countries stopped paying interest on their loans.
In effect, China had jumped to the front of the line to get paid without other lenders knowing.
This has led to…
“The other creditors are saying, ‘We’re not going to offer anything if China is, in effect, at the head of the repayment line,’” Parks said. “It leads to paralysis. Everyone is sizing each other up and saying, ‘Am I going to be a chump here?’”