A recent study has revealed that China’s method of securing loans to low-income nations is hampering their ability to manage finances effectively. The analysis highlights that China often ties its loans to commodity revenue streams and cash kept in restricted escrow accounts, which severely limits the borrowing countries’ fiscal autonomy.
China has invested hundreds of billions in infrastructure projects within developing economies, but it has faced criticism for leveraging commodity export earnings as collateral, particularly during economically stressful periods for the borrowers. The Chinese finance ministry has denied any wrongdoing regarding its lending practices, although it did not respond to inquiries for further comment.
The report, produced by AidData, the Kiel Institute for the World Economy, and Georgetown University, indicates that China’s total public and publicly guaranteed lending to low and middle-income countries has reached $911 billion. Notably, nearly half of this amount—approximately $418 billion—across 57 nations is secured by cash deposits in Chinese banks.
Christoph Trebesch from the Kiel Institute noted that Chinese lenders prefer liquid assets, especially cash holdings in China, and require oversight of revenue streams. The study found that these cash deposits can represent over 20% of the annual payments that low-income commodity-exporting countries owe on their external debts.
Some revenue remains outside the control of these governments for extended periods, which undermines their ability to effectively monitor and manage their fiscal situations. The practice extends across regions, including Africa, Asia, Latin America, and the Middle East, as the study spans from 2000 to 2021.
Brad Parks, AidData’s executive director, emphasized that many commodity revenues are ring-fenced, never reaching the exporting countries. Both the International Monetary Fund and the World Bank have expressed concerns regarding collateralized lending, which poses risks of debt distress and complicates debt restructuring efforts for borrower nations.