China’s Loans to South Africa - Brief II

This is the second brief in a series of five that takes a look at South Africa’s recent loans from China; it looks at the experiences other countries have had with Chinese debt, namely Sri Lanka, Pakistan and Argentina.

The first brief gave an overview of South Africa’s debt situation, how the loans from China fit into this, and why we need to look at the experiences other countries have had with Chinese debt. The third brief covers the experiences of Zambia, Kenya and Ethiopia, while the fourth brief summarises the lessons learned from the countries analysed. The final brief looks at why the BRICS Bank was not used, on what basis government is able to refuse disclosing further information on the loans, and finishes with a conclusion for the series.

“In a time of deceit telling the truth is a revolutionary act.” – George Orwell.

Sri Lanka

The Hambantota Port in Sri Lanka is the most vivid example of China’s use of debt in gaining global influence, and how forceful it can be in reclaiming what is owed.

Following the 26 year civil war, China became an indispensable partner to Sri Lanka’s government. Due to accusations of human rights violations in the final years of the war, Sri Lanka became heavily reliant on China for economic, military and political support, while India remained a key trading partner throughout.

When the war ended in 2009, President Rajapaksa and his family were in control of numerous government ministries, and around 80% of government spending. So when the president decided to build a large port in his home district of Hambantota, little could stop him. Feasibility studies on the port indicated it would not work, and lenders such as India refused to advance any loans. The Chinese government’s Export-Import Bank (Exim) then agreed to the first loan of $307 million.

Typical of most Chinese infrastructure loans, a condition was that a Chinese state owned company, China Harbour, was to build the port. Other strings attached had to do with the geostrategic position of the port, and not only in relation to its position to Chinese competitor, India; in 2014, on the same day Prime Minister Shinzo Abe of Japan was visiting Sri Lanka, Chinese submarines docked in the harbour.

From the start, officials questioned the wisdom of a second major port when the main port in the capital was thriving and had room to expand. As predicted, the port failed to attract enough business and was an economic failure. The initially moderate lending terms become more onerous as timelines and additional financing had to be renegotiated. Interest rates moved from a variable 1-2% to a fixed 6.7%. In comparison, interest charged on Japanese infrastructure loans are below 0.5%.

In order to get debt to manageable proportions, the Sri-Lankan government looked to remove around $1 billion in debt off their balance sheets. To do this, the only terms that could be agreed upon was to hand over 85% of the port’s equity to China, as well as 15 000 acres of surrounding land on a 99 year lease. This however was possibly not the only assault on Sri Lanka’s sovereignty resulting from Chinese debt.

In the run up to the 2015 Sri Lankan elections, it was reported that the Chinese, eager to keep Rajapaska in power, transferred over $7.6 million from China Harbour’s bank account in support the incumbent’s campaign. The effort failed and a new government came into power, with a mandate to scrutinize Sri Lanka’s financial deals with China. The new government tried to reorient toward India, Japan and others, but soon realised that they could not fill the economic space of China. There was no choice but to keep taking Chinese loans ‘until economic discipline is introduced,’ said the new finance minister.[1] At the end of 2018 Sri Lanka’s debt-to-GDP was 77%[2] and around 8.7% of total debt was Chinese.[3]


As China’s flagship project in its Belt and Road Initiative, the China Pakistan Economic Corridor (CPEC) runs 3 000 kilometre from West China, through Pakistan and ends at the Arabian Sea. The infrastructure required for the CPEC was initially estimated at $46 billion, but its value in mid 2017 came to around $62 billion.

A hallmark of CEPC has been secrecy and a lack of transparency, squashing any attempt at a real cost-benefit analysis and fuelling speculation that the terms may be skewed heavily in favour of China. In fact, all materials (except for cement from Pakistan), equipment and labour are sourced from China.

Furthermore, following the kidnapping and murder of two Chinese nationals by Islamic State in the Pakistan’s Balochistan province,[4] and the fact that since 2003 more than 2 600 people have been killed or wounded in suicide attacks in the area,[5] the Pakistan army have had to raised a new division called the Special Security Division (SSD) in order to protect Chinese nationals working on CPEC. With the funding coming from from Pakistan’s fiscus, the SSD comprises 9 000 Pakistan Army soldiers and 6 000 para-military forces.[6]

While CEPC will modernise Pakistan’s infrastructure, concern has been raised about Pakistan’s ability to leverage the assets in order to repay the resulting debt.[7] For example, Pakistan has a port similar to Hambantota in Sri Lanka, the Gwadar Port. Gwadar too has a strategic position near the Strait of Hormuz, through which around 40% of the worlds oil passes. The port however does not seem necessary as it has failed to bring in business, and will therefore likely be unable to raise revenue to pay back its debt.[8]

In 2018 Pakistan voted in a new government, also with a mandate to scrutinise the financial deals with China. The former Prime Minister Nawaz Sharif, who championed Chinese funded projects, was jailed for corruption in 2018. But the new government, like the new Sri Lankan government in 2015, has found itself with no choice to but to persist with taking on Chinese debt. The country’s debt-to-GDP ratio is an estimated at 70.1%,[9] and around 20% of total debt is Chinese.[10]

The International Monetary Fund issued a recent report stating that CEPC has been a mixed blessing to Pakistan, in that it has brought in needed investment, but at the same time greatly increased the country’s current account deficit and external debt.[11]


In 2001 after being unable to pay its debts, resulting in the world’s largest sovereign default at $100 billion, the Argentinean government was shut out of international credit markets.[12] In 2007 the leftist President Cristina Fernández de Kirchner came into power and set about forging close ties with China, which was not the case for Argentina before.[13] In 2009 Argentina found itself in another crisis, with high inflation, billions of dollars due in debt payments and public anger over the nationalisation of $30 billion in private pension funds. It was at this point that the government sought China’s help. First was a $10.2 billion currency swap in order to stabilise the peso, and then a promise of $10 billion to fix its dilapidated railways. At the same time secret talks began between the governments around China’s armed forces building a satellite-tracking hub in Argentina’s Neuquén Province. In 2012 and in secret, the Argentinean government agreed to China’s right to the land rent free for 50 years.[14]

In 2015 the centre-right presidential candidate Mauricio Macri won Argentina’s elections, with a promise to restore relations with the United States and Europe. Macri delivered by settling some of the country’s debt problems via a repayment deal to hedge funds. This in turn allowed Argentina re-entry into international credit markets and a record emerging market bond sale of $15.6 billion.[15] However, prior to this during the final months of Kirchner’s presidency, Kirchner agreed to take on over $20 billion in Chinese loans to finance infrastructure projects. Macri sought to review and possibly cancel these debt agreements, citing their lack of transparency and possible negative impact on the environment.

In 2016 Macri met Chinese President Xi Jinping to discuss the deals, with the outcome of that meeting being that China were ‘willing to revisit [the] agreements’ in order to ‘deepen the relationship instead of reducing it.’ China however had tied Argentina’s hands in the negotiations with a cross-default clause connected to the hydropower dam contracts Macri wanted to cancel. If cancelled, the loans for an important railway project would be halted too. Macri was therefore unable to cancel any of the mega-deals but did manage to renegotiate the terms in order to avoid cost overruns and soften the environmental impact. In this regard China agreed to lower the capacity of the dams.

Argentina also managed to renegotiate the space station agreement, with China agreeing to use the base for civilian purposes only. This was after claims that the former government had given away too much by failing to specify that the base could only be used for peaceful purposes.[16]

While the deals with China have managed to avoid allegations of corruption, former president Kirchner is facing corruption charges for accepting bribes from local construction companies in exchange for public works contracts.[17]

Argentina continues to rely on China as a lender and a major customer for its commodities. Trade between the two countries has quadrupled since 2001, and in the last decade China has financed $18.2 billion in mainly infrastructure projects, with interest rates reported between 3 and 4 percent. The financial ties further extended to currency swaps, which now come to $18.7 billion.[18] The country’s debt-to-GDP was last report at 50.6% at the end of 2017[19] and estimated by the IMF to have jumped to 65% for 2018.[20] Assuming the above Chinese debt figures represent Argentina’s total debt to China, this comes to 11.3% of total debt in 2018.[21]

Charles Collocott


[14] Op cit note 6.

[16] Op cit note 9.