Study says Chinese loans, though higher in interest rates, would not lead to ‘debt trap’

While loans from China to its bilateral partners like the Philippines carry higher interest rates than the World Bank’s, Washington-based Center for Global Development (CDG) said these would not lead to a debt trap.

In a new report, CDG said “China’s loans tend to have shorter grace periods and maturities and higher interest rates than loans from the World Bank.”

“With developing countries taking an economic hit from the COVID-19 pandemic, there’s a real concern about debt risks in developing countries, many of which were already at risk of debt distress,” said one of the authors of the report, Scott Morris, a senior CGD fellow.

“China is now the largest bilateral lender in the world, so decisions made in Beijing have a huge impact on the economies of developing countries,” Morris said in the report, titled “Chinese and World Bank Lending Terms: A Systematic Comparison Across 157 Countries and 15 Years.”

“We found that China’s loans have consistently contained harder terms than the World Bank, particularly for the poorest countries,” said another author of the CDG report, Brad Parks, also executive director of research lab AidData.

“Most of the discussions of debt vulnerability in developing countries have focused on the overall amount of borrowing, but the shift in loan terms matters a lot too,” said Parks.

“That said, while we have concerns, we don’t find evidence for the ‘debt trap’ narrative. A few percentage points more in interest compared to the World Bank hardly seems usurious,” Parks added.

The CGD report compared a total of 2,453 Chinese loans and 4,859 World Bank loans per country.

In the case of the Philippines, CGD found that 16 projects funded by $1.48 billion in loans from China had an average of 3-percent interest rate maturing in eight years on top of two years’ grace period.

The World Bank (WB) had extended $8.74 billion in loans to the Philippines, currently a lower middle income country, for 46 projects with an average interest rate of 2.85 percent, longer mean maturity period of 14.2 years and grace period of 8.7 years.

The average WB loan size was $190 million, higher than China’s $150 million.

But CGD noted that borrowings from the private sector were more expensive than both China and the World Bank, with an average interest rate of 6.67 percent for loans maturing in an average of 11.6 years with 11 years of grace period on average.

“It’s clear that developing country governments find value in China’s lending, compared to what they can get on the markets,” Morris said.

“But it’s incredibly important that the Chinese government, which has a stated commitment to debt sustainability, carry out its lending program in a way that doesn’t heighten debt risks in its partners,” Morris said in a CDG statement sent to Inquirer.

Last February, Socioeconomic Planning Secretary Ernesto M. Pernia expressed lament at the “rather slow” flow of Chinese loans into the Philippines. China had promised at least $9 billion in official development assistance, including grants.

Also in February, Chinese Ambassador Huang Xilian that the mainland would continue to extend loans and grants for big-ticket infrastructure projects in the Philippines even as the Chinese economy took a hit from the COVID-19 pandemic that started in Wuhan, a city in China’s Hubei province.

China had signed with the Philippines just two loan agreements to date—$62.1 million for the Chico River Pump Irrigation Project and $211.2 million for the New Centennial Water Source-Kaliwa Dam.

Also, China had given away grants to build bridges crossing Pasig River and other infrastructure in Mindanao, including for rehabilitation and reconstruction of war-torn Marawi City.

The initial phase of the Mindanao Railway Project spanning Davao region would likewise be partly funded through Chinese ODA.

Edited by TSB