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Inside the murky world of China’s resource-backed loans
China has been accused of acting like a neocolonist as it lends $126bn to developing states
For nearly 20 years, China’s state-controlled banks have extended billions of dollars in “payday” loans to developing countries, often with only one caveat: if that country failed to pay back its loan, the bank was entitled to its natural resources.
Lenders like China Eximbank and the China Development Bank (CDB) – financial institutions set up to advance China’s economic and foreign policy interests around the world – issued more than $126bn (£98bn) in resource-backed loans to countries such as Angola, Venezuela, and Congo between 2004 and 2018, according to a new report from the Natural Resources Governance Institute (NRGI).
In almost all of these cases, the loans were then tied to the production of oil, meaning that the banks could either be paid directly in natural resources or the country’s natural resources acted as collateral against the loan.
This phenomenon is contributing to crippling levels of debt in developing countries, the report’s authors argue.
Many analysts say that these loans – often attached to exorbitant interest rates and structured in exceedingly complex ways – represent the face of neocolonialism in Africa and Latin America, designed to coerce underdeveloped, natural-resource-rich countries into dependency on Chinese money and expertise.
Such resource-backed loans have become a “major public finance risk” to these countries, says co-author David Mihalyi.
Of the 14 recipient countries that were examined for the study, 10 experienced serious debt problems after the commodity price crash of 2014, with resource-backed loans “often an important contributor,” he says.
“Resource-backed loans are high-stakes gambles against a sophisticated opponent,” adds co-author Jyhjong Hwang. These banks have strategic interests in securing natural resources and will “throw all their experience and capacity into negotiating a good deal”.
While the money allows borrowing countries to jump-start essential and expensive infrastructure projects that few others are willing to support, the terms of the deal can often come laden with risk.
Also, because of their private nature, the loan agreements do not have to adhere to usual sovereign borrowing rules governing issues like debt restructuring and transparency.
The report identifies a number of factors that make such arrangements unsuitable for developing countries. Often, such loans have hidden terms, or undermine the country’s debt stability, exacerbating financial stress.
One example came in 2010, when the CDB lent the government of Venezuela more than $20bn to finance electricity, heavy industry, housing, and agriculture projects. In return, Venezuela would pay the bank more than 200,000 barrels of oil every day.
But the advance from the banking titan represented nearly 7pc of Venezuela’s entire GDP, and exploited a country with already poor control over its natural resources, which the report’s authors warn is dangerous.
The banks could not be reached for comment.
“Out of the countries listed with resource-backed loans adding up to more than 10pc GDP, we found that in all cases where debt sustainability problems emerged, [these loans] were cited as an important contributor to those problems,” the report’s authors wrote.
An early example of the practice of resource-backed loans is the Peruvian government’s mid-19th century borrowing from British investors, which it repaid from the state’s proceeds of the then-flourishing fertiliser trade.
Since that time, it has become a common financing tool for countries that struggle to access global capital markets.
Mihalyi says that such deals can often make sense, offering the country much-needed financing for critical infrastructure.
“If they select and execute these projects well, they should, in theory, generate positive returns for the country’s economy,” the report states.
However, in many cases developing countries take on too many loans, or fail to allocate the money to a specific project. Nowhere is this more evident, the report’s authors state, than when the global commodity trading giants get involved in the practice.
Their loans are even more opaque than the Chinese banks.
The study points to one particular instance in South Sudan, where Swiss commodity trader Trafigura leant the government $75m to finance its Green Horizon farming project and provide general budget support.
In an Organised Crime and Corruption Reporting Project investigation, the group alleged that these funds were instead used for military spending. The company denies any wrongdoing.
“When multimillion-dollar deals are kept off the books and oversight institutions are sidestepped, the money’s either being used to line the pockets of politicians or support military operations,” says J.R. Mailey, investigations director at The Sentry, a Washington-based advocacy group.
The only reason we know any of this, says Mihalyi, is because of the controversy the loan has attracted. Without it, the terms – including interest rates and repayment periods – would never have come to light.
“We typically don’t have details on these loans until there’s problems with them,” he says.
In only a single case studied by the NRGI is the key contract document public.
Even basic information such as the loan’s interest rate was identifiable in just 19 out of 52 cases surveyed. And sometimes, even with the loans that have come to light, no one knows what the money was spent on.
The report also highlights how these massive loans from Chinese banks often go hand-in-hand with a sudden surge in Chinese corporate activity in that country’s natural resources industry.
In most states that have borrowed through Chinese RBLs, the study shows, Chinese companies are also very active in the resource sector linked to the loan.
A separate study by China expert Cristina Alves highlights how the provision and scaling up of oil-backed loans in Angola has coincided with the increased participation of Chinese companies in upstream production in that country.
The same flurry of Chinese business activity was also seen in other countries that have received Chinese resource-backed loans, like Niger, Congo, Venezuela and Brazil, to name a handful.
The deals often come with requirements or additional agreements regarding the use of Chinese construction companies and other suppliers in delivering infrastructure financed by the loan, the researchers say.
This kind of Chinese debt-trap diplomacy is having far-reaching consequences throughout the developing world, activists say, warning of the potential consequences of freezing countries out of traditional financing routes.
“These deals, sometimes labelled as oil advances, often resemble payday loans,” says Mihalyi. “They have short maturities, high interest rates, and no commitments on how the money will be used.”
“Countries should be particularly cautious of such advances.”