An Associated Press analysis of dozens of countries that are China's biggest debtors — including Pakistan, Kenya, Zambia, Laos and Mongolia — found that paying back that debt takes away even more of the tax revenue needed to maintain schools, provide electricity, water and fuel. That debt drains the foreign exchange reserves that those countries use to pay interest on loans, leaving some countries with only a few months before they run out of money.
In the background is China's refusal to forgive the debt and its extreme secrecy about how much money was lent and under what conditions, as a result of which other major creditors are reluctant to come to the rescue, the American agency points out.
In addition, it was recently revealed that debtors were required to put cash into hidden so-called "escrow accounts" that put China in the first line of creditors for payment.
The countries analyzed by the AP agency had as much as 50 percent of their foreign debt to China, and most of them dedicated more than a third of their state income to repaying their foreign debt. Two of them, Zambia and Sri Lanka, are already unable to repay their debt, not even the interest on loans that financed the construction of ports, mines and power plants.
In Pakistan, millions of textile workers have been laid off because the country has too much foreign debt and cannot afford electricity to run the machines.
In Kenya, the government has not paid the salaries of thousands of civil servants to save money to pay off foreign loans. The president's chief economic adviser tweeted last month, “Wages or Bankruptcy? Choose”.
Experts predict that unless China softens its stance on loans to poor countries, there could be a wave of bankruptcies and political turmoil.
"In most of the world, the clock has struck midnight," Harvard economist Ken Rogoff told the AP. "China has intervened and left this geopolitical instability that could have long-term consequences."
The AP did a case study of how the situation played out in Zambia, a country of 20 million in southern Africa that has borrowed billions of dollars from Chinese state-owned banks over the past two decades to build dams, railways and roads.
The loans boosted Zambia's economy, but they also raised interest rates so much that little was left for the government, forcing it to cut spending on health care, social services and subsidies to farmers for seeds and fertilizer.
In the past, in such circumstances, large state creditors such as the USA, Japan and France would make contracts for forgiveness of part of the debt, and each creditor would clearly show how much was owed to him and under what conditions so that no one would feel cheated, reminds AP.
However, China does not play by those rules. It first refused to get involved in the multinational negotiations at all, negotiating separately with Zambia and insisting on confidentiality, barring that country from disclosing the terms of the loan to non-Chinese creditors and whether China had devised a way to push its way to the front of the debt repayment queue.
China rejects claims that it is an inexorable creditor and points out that if it heeds the demands of the IMF and the World Bank and forgives part of its loans, multilateral creditors, whom Beijing sees as representatives of the US, should also do the same.
In the wake of that confusion, a group of non-Chinese creditors rejected Zambia's desperate pleas in 2020 to suspend interest payments, even for a few months. That refusal further depleted Zambia's foreign exchange reserves, and by November of the same year, the country stopped paying interest and went bankrupt, AP writes.
Since then, inflation in Zambia has jumped by 50 percent, unemployment has reached a 17-year high, and the national currency has lost 30 percent of its value in just seven months.
A few months after Zambia's bankruptcy, investigators found that the country owed Chinese state-owned banks $6,6 billion, double what was originally thought and about a third of the country's total debt.
"We're flying blind," said Brad Parks, chief executive of AidData, the research arm of William & Mary that uncovered thousands of secret Chinese loans and participated in the AP analysis. "When you look under the couch cushions, you suddenly realize, 'well there's a lot here that we missed. In fact, things are much worse”.
Poor countries have been hit by foreign currency shortages, rising unemployment and widespread hunger before, but rarely as much as today.
In addition to the usual combination of mismanagement and corruption, there were two unexpected and devastating events: the war in Ukraine, which caused grain and oil prices to rise, and the US Federal Reserve's decision to raise interest rates ten times in a row, most recently this month , reminds the American agency. As a result, variable rate loans have become much more expensive.
All this shook the internal politics and reflected on the strategic alliances.
In March, heavily indebted Honduras cited "financial pressures" as the reason for the decision to establish official diplomatic ties with China and cut ties with Taiwan.
Last month, Pakistan was so desperate to prevent further blackouts that it struck a deal to buy oil from Russia, backing away from a US-led effort to cut off funds to Vladimir Putin.
In Sri Lanka, rioters took to the streets last July, set fire to the houses of ministers and stormed the presidential palace, as a result of which the leader associated with affairs with China fled the country, reminds AP.
In a statement to the AP, China's Ministry of Foreign Affairs disputed the claim that China is an unforgiving creditor and repeated earlier claims blaming the US Federal Reserve.
The announcement states that if it heeds the requests of the IMF and the World Bank and forgives part of its loans, the multilateral creditors, which China views as representatives of the US, should also do so.
"We call on these institutions to actively participate in relevant actions in accordance with the principle of "joint action, fair burden" and make greater contributions to help developing countries overcome these difficulties," the ministry's statement said.
China claims that it has offered relief in the form of extended loan maturities and emergency loans, and that it has made the largest contribution to the program for the temporary suspension of interest payments during the coronavirus pandemic.
They also point out that they have forgiven 23 interest-free loans to African countries, although AidData's Perks claims that these loans are mostly from two decades ago and amount to less than 5 percent of the total loan amount.
In talks between senior officials in Washington last month, China considered dropping a request that the IMF and World Bank forgive loans if the two lenders commit to offering grants and other aid to troubled countries, multiple media reported. However, after that there were no announcements and both creditors expressed their dissatisfaction.
In March, heavily indebted Honduras cited "financial pressures" as the reason for the decision to establish formal diplomatic ties with China and cut ties with Taiwan
"My position is that we should drag them - maybe that's a rude term - we should walk together," IMF director Kristalina Georgijeva said earlier this month. "Because if we don't, it will spell disaster for many, many countries".
China has also rejected the idea, popularized by the Trump administration, that it engages in "debt trap diplomacy," in which countries borrow so much that they can't afford it and then it can seize ports, mines and other strategic assets.
AP points out that experts who studied the topic in detail sided with Beijing. Chinese loans come from dozens of banks and are so intricate that it would be difficult to coordinate them from the top.
"There's not one person behind this," Til Emery, a former government credit analyst who now manages the Til Insights consulting group, told the AP.
"They kind of make it up along the way. There is no master plan," said Perks from AidData.
Meanwhile, Beijing is conducting a new type of covert lending that has caused further confusion and mistrust. Perks and his colleagues found that China's Central Bank is actually lending tens of billions of dollars through what appears to be a simple foreign exchange.
Foreign exchange allows countries to borrow currencies that are more widely used, such as the dollar, to cover temporary shortfalls in foreign reserves. They are intended for liquidity needs and last only a few months. However, in the case of China, they imitate loans since they last for years and a higher than usual interest rate is charged. Most importantly, they do not appear on the books as loans that increase the national debt.
Certain poor countries that are struggling to repay their debt to China are now in a kind of credit limbo: China will not accept the loss, and the IMF does not offer loans with low interest rates if the money will only be used to pay the interest on the Chinese debt.
"You have an increasing number of countries that are in a difficult financial situation," Perks said, attributing it to the astonishing rise of China, which in just one generation has gone from being a recipient of foreign aid to becoming the world's largest creditor.
"Somehow they managed to do it out of the public eye," Perks points out. "So, unless people understand the way China lends, how its lending practices work, we will never get rid of this crisis," Perks concluded for the AP.
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