China has been demonized by several commentators: it is said to be the main creditor of many countries of the South and to get the best of them through ruthless exploitation, whereas the World Bank, the IMF, and the Paris Club, which comprise the traditional creditor powers, are supposed to do their best to help countries burdened by too much debt.
China uses propaganda of its own. It parades as an ally of countries of the South, regularly announces debt cancellation and debt relief, and claims that it does not impose neoliberal conditionalities as do the IMF and the World Bank. It also stresses its efficiency.
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, [1] 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 [2]. 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.
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. 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 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 [3], 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 [4]. 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. [5] 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.
The author would like to thank Gilbert Achcar, Maxime Perriot and Claude Quémar for document research and/or proofreading.
Translated by Snake Arbusto and Christine Pagnoulle
