Recently released details of Kenya’s 2014 loan agreement with China to finance a controversial railway project have once again highlighted the predatory nature of Chinese lending in developing countries. The contract not only imposed virtually all risk on the borrower (including requiring binding arbitration in China to settle any dispute), but also raised those risks to unmanageable levels (such as by setting an unusually high interest rate). With terms like that, it’s no wonder that multiple countries around the world have become ensnared in sovereignty-eroding Chinese debt traps.

Over the past decade, China has become the world’s largest single creditor, with loans to low- and middle-income countries tripling in this period, to US$170 billion at the end of 2020. Its outstanding foreign loans now exceed 6% of global GDP, making China competitive with the International Monetary Fund as a global creditor. And through loans extended under its US$838-billion Belt and Road Initiative, China has overtaken the World Bank as the world’s largest funder of infrastructure projects.

To be sure, since the start of the Covid-19 pandemic, China’s overseas lending for infrastructure projects has been on the decline (until 2019, it was rising sharply). This is partly because the pandemic left partner countries in dire economic straits, though growing international criticism of China’s predatory lending has likely also contributed.

One might hope that this downward trend augurs the end of colonial-style lending by China. But the decline has been offset by an increase in bailout lending, mostly to BRI partner countries—including Kenya—which were already weighed down by debts owed to China.

The scale of the bailout lending is massive. The top three borrowers alone—Argentina, Pakistan and Sri Lanka—have received US$32.8 billion in rescue lending from China since 2017. Pakistan has been the biggest borrower by far, receiving a staggering US$21.9 billion in Chinese emergency lending since 2018.

This highlights the self-reinforcing debt spiral into which China thrusts countries. Because Beijing, unlike the IMF, doesn’t attach stringent conditions to its loans, countries simply borrow more to service outstanding debts, thus sinking ever deeper into debt.

Crucially, China’s loan contracts are typically shrouded in secrecy; Kenya’s revelations, for example, were technically in violation of its agreement’s sweeping confidentiality clause. In many cases, the loans are hidden from taxpayers, undermining government accountability. China also increasingly channels its lending not to governments directly, but to state-owned companies, state-owned banks, special-purpose vehicles and private-sector institutions in recipient countries. The result is crushing levels of ‘hidden debt’.

Consider Laos, where hidden debts to China eclipse official debts. To stave off default following the pandemic shock, the small, landlocked country was forced to hand China majority control of its national electricity grid. And it may find itself with little choice but to barter away land and natural resources.

There is ample precedent for this. Already, several of China’s debtors have been forced to cede strategic assets to their creditor. Tajikistan has surrendered 1,158 square kilometres of the Pamir mountains to China, granted Chinese companies rights to mine gold, silver and other mineral ores in its territory, and approved the Chinese-funded construction of a military base near its border with Afghanistan.

Sri Lanka’s debt crisis first attracted international attention in 2017. Unable to repay Chinese loans, the country signed away the Indian Ocean region’s most strategically important port, Hambantota, and more than 6,000 hectares of land around it, by granting a 99-year lease to China. In Sri Lanka, the port transfer was likened to a heavily indebted farmer giving his daughter to an unyielding money lender. Despite this sacrifice, Sri Lanka defaulted on its debts earlier this year.

Similarly, Pakistan has given China exclusive rights to run its strategically located Gwadar port for four decades. During that time, China will pocket a whopping 91% of the port’s revenues. Moreover, the China Overseas Ports Holding Company will enjoy a 23-year tax holiday to facilitate its installation of equipment and machinery at the site.

Near Gwadar, China plans to build an outpost for its navy—a move that follows a well-established pattern. Debt entrapment enabled China to gain its first overseas naval base in Djibouti, strategically situated at the entrance to the Red Sea. China is also now seeking a naval base on the West African coastline, where it has made the most progress in Equatorial Guinea, a heavily indebted low-income country.

This is the result of a lending strategy that is focused squarely on maximising leverage over borrowers. As one international study showed, ‘cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies’. China often exercises this policy leverage by reserving the right to recall loans arbitrarily or demand immediate repayment.

In this way, China can use its overseas lending to advance its economic and diplomatic interests. If China can dim the lights in Laos, for example, it has a certain ally in multilateral forums. If it can drive a country to debt default, it can secure all the trade and construction contracts it wants. And if it can control a country’s ports, it can strengthen its strategic position.

The details of China’s loan contracts with developing countries have not yet come fully to light. But it is already clear that China’s creditor imperialism carries far-reaching risks, both for the debtors themselves and for the future of the international order.

The African continent is a key battleground in the global Islamist jihad. The horrific terrorist attacks in Kenya this week perpetrated by al-Qaeda affiliate Al-Shabaab tragically highlight this fact. In the interests of Australia’s long-term national security we must, as a country, become more attuned with the threat that Africa-based Islamist militants pose to international security.

This means Australia needs to equip itself with greater knowledge of and increased engagements with our African neighbours. Our foreign policy must be truly global in nature in order to serve our security needs, not narrowly focused on the Asia–Pacific region. It is clearly evident that Islamist terrorist networks and groups have a very global outlook and their engagement with Africa has been astoundingly strategic. In my posts I usually discuss the opportunities which increased engagement with African countries offer Australia, however this must be combined with a focus on the threats which emanate from the region and which further neglect will only exacerbate.

A map of Africa illustrates just too clearly the extent of the threat Islamist militants pose to vast swathes of the continent. The UN Security Council fears the creation of an African ‘arc of instability’ or ‘terrorism arc’ spanning the Sahel and Sahara region and into the Horn of Africa. Read more