China's collateral demands curbing emerging countries' ability to manage finances, study shows
China has lent hundreds of billions of dollars for infrastructure and projects in developing countries, but has been criticised for using earnings of commodity exports from borrower nations as security for the loans, sometimes arranged during times of economic strife for the borrower.
China's government has repeatedly denied that its lending practices towards poorer countries are unscrupulous.
China's total public and publicly guaranteed lending to low and middle-income countries totals $911 billion, said the report by AidData, the Kiel Institute for the World Economy and Georgetown University, together with other partners.
Of that, nearly half - or $418 billion across 57 countries - is secured with cash deposits in Chinese bank accounts, it said.
"As security, Chinese lenders strongly prefer liquid assets - in particular, cash deposits in bank accounts located in China. They also want visibility and control over revenue," said Christoph Trebesch of the Kiel Institute.
The deposits in accounts located in China and controlled by the lending entities can average more than a fifth of the annual payments low-income commodity-exporting countries make to service their external debt, the research found.
"Some of these revenues remain offshore beyond the control of the borrowing government for many years," the report said, adding the lack of access or transparency compromises debtor governments' ability to monitor and steer their fiscal affairs.
China applies the practice to its lending to borrowers in Africa, Asia, Latin America and the Middle East, the study, which covered 2000-2021, found.
"Our research reveals a previously undocumented pattern of revenue ring-fencing where a significant share of commodity export receipts never reach the exporting countries," said Brad Parks, executive director of the AidData research lab.
The International Monetary Fund and the World Bank have in the past raised concerns, opens new tab about the impact of collateralised lending to developing countries.
The practice has the potential to cause debt distress to the borrowers, the two institutions said in a joint paper published in 2023, by constraining their fiscal space, increasing the risk of over-borrowing, and curbing the financing from unsecured creditors available to them.
In cases where countries have had to restructure their external debts due to distress, China's practice of securing infrastructure loans using unrelated commodity revenue flows has complicated the restructuring, the report said.
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