China has been massively investing in Africa as the new plethora of unexplored markets and the market of opportunity. Indeed, Africa is the continent where every opportunity for value creation is still at its early stage, and China has been capitalizing on these unexplored markets to maximize its profits. China has been loaning funds to a dozen of low-income and low-middle-income countries such as Pakistan, Kenya, and Zambia to help them develop their economies. For many Western financial experts, China loaning money to these countries is a predatory and deceiving method to exploit them because the Chinese government knows that most of these countries will likely default on their loans.
The substantial reason why Chinese loans are considered predatory is because the Chinese government is very unforgiven. It does not give any leniency or clemency to the debtor. Once a country takes a loan from the Chinese government, it is trapped because if it cannot pay back the loan, some of its assets will become China’s property. And this is how China is expanding its asset portfolio in low-income countries, especially in Africa. It is a very hard situation for the countries in debt because paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity, and pay for food and fuel.
China’s loans are extremely secretive. We don’t know how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. Moreover, the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid. The countries indebted have more than 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying foreign debt.
Zambia has already defaulted on its loan; unable to make even interest payments on loans financing the construction of ports, mines, and power plants. In Kenya, the government has held back paychecks to thousands of civil service workers to save cash to pay foreign loans.
Zambia borrowed billions of dollars from Chinese state-owned banks to build public infrastructure. The loan initially boosted Zambia’s economy but also raised foreign interest payments so high there was little left for the government, forcing it to cut spending on healthcare, social services, and subsidies to farmers for seed fertilizers. By 2020, with little reserves left, Zambia stopped paying interest and defaulted, locking it out of future borrowing and setting off a vicious cycle of spending cuts and deepening poverty. Inflation has since soared 50%, unemployment hit a 17-year high and the nation’s currency lost 30% of its value. China’s unwillingness to take losses on the hundreds of billions of dollars it is owed, has left many countries on a treadmill of paying back interest, which stifles the economic growth that would help them pay off the debt.
The Chinese government argued that its reluctance to forgive defaults is based on the fact that it offered relief in the form of extended loan maturities and emergency loans. Furthermore, the Chinese government added that it forgave 23 no-interest loans to African countries in the past.
China is undeniably consolidating its economic and geopolitical position in Africa by forcing African countries to pay back their loans rather than forgiving them. This will maintain debtor countries dependent on China, and China is legally authorized to acquire whatever resources it wants as part of the collateral put forth to secure the initial loans. From the Chinese perspective, African countries defaulting on their loans is a boon for their expansion in the continent. The more countries will default, the better it is for them. From the African perspective, being a debtor to China is perhaps one of the worst economic and financial decisions ever made. They sacrificed their financial freedom to a country to which they will be tied for a very long time. And this relationship will never be a relationship of equals so long as African governments will continue to owe China.