Chinese ‘No Strings’ Loans Come at a Cost

As government borrowing from China continues to increase, a new study released yesterday showed that Chinese concessional loans carry higher interest rates than any others.

According to the study, re­leased by the NGO Forum on Cam­bodia at a workshop in Phnom Penh, China’s average in­­terest rate on concessional loans—which have substantially more generous terms and conditions than commercial loans—is five times higher than the rates coming from Japan and South Korea, and four times higher than those from the European Union.

“Of all donors, China offers the least favorable terms at an interest rate of 2 percent on most of its loans,” the study said. “China also provides the shortest grace period and amortization periods.”

Not only are China’s loans the least competitive, but they also make up nearly a third of all concessional lending to Cambodia. Out of $2.47 billion in outstanding concessional loans, 38.5 percent came from the Asian Develop­ment Bank (ADB), 28.4 percent from China, 11.6 percent from the World Bank, 10.1 percent from Japan, 7.6 percent from South Kor­ea and 3.8 percent from the EU, according to the study.

The average interest rate provided by the ADB amounts to 1.23 percent, whereas the EU, South Korea and Japan all provide loans with interest rates at 0.5 percent or less.

“[T]he significance of this is to help Cambodian citizens with their current assessment of how much these loans will cost the country as they will ultimately bear this taxpaying burden in the repayment of these loans, into the future,” the study said.

The figures underscore just how much China stands to gain from Cambodia, even as it ex­tends a helping hand. They also show how much Cambodia is wil­ling to pay in order to get its hands on new funds to supplement its modest budget of $2 billion a year.

While Cambodia is restricted in how much money it can raise—in­creasing taxes has proved difficult to implement here, and issuing bonds is still not possible—Chinese loans are often perceived as more favorable than those from other donors due to the lack of conditions and safeguards at­tached to them.

All the country’s major donors except for China participate in the Cambo­dia Development Cooper­a­tion Forum, which extracts pro­m­­ises of political and economic re­form from the government in ex­change for yearly infusions of cash.

In late 2009, China bestowed $1.2 billion in interest-free loans on Cambodia just a day after the government deported 20 ethnic Uighur asylum seekers from Phnom Penh, a move Beijing had been pressing for.

“Obviously, there is a reason for that [choosing Chinese loans]. I guess there are a lot of things tied to those loans and a lot of things not tied to those loans,” said Peter Brimble, senior country economist for the ADB in Cambodia.

“I think that the Chinese are probably in general a generous lender. Not only on the interest rates but also in other terms,” he added.

Pen Thirong, director of the de­partment of investment and co­operation in the Ministry of Fi­nance, said the government had a policy of borrowing from a wide range of sources and was not fo­cusing on any particular country.

“Actually, we won’t discriminate if we have a source we can borrow the money from,” he said, adding that the government was considering borrowing more from Japan. “The government’s policy is that we borrow from whatever source.”

According to leaked US Em­bassy cables published by the anti-secrecy group WikiLeaks, Prime Minister Hun Sen has frequently played his donors off each other, holding up China’s “no strings attached” largesse in an apparently successful effort to unnerve other governments.

In April 2006, during a visit from Chinese Prime Minister Wen Jia­bao, a US cable complained that Mr Hun Sen’s frequent public praise of Chinese aid amounted to “a slap” to other donors.

However, in the same cable written by former US Ambas­­sador Joseph Mussomeli, Cam­bo­­dia was said to feel perturbed at the uncompetitive rates provided by China on its lending.

“The new assistance is mostly loans, and reportedly the Cam­­bo­dians feel a bit squeezed on the terms,” the cable said. “Accord­­ing to diplomatic sources, the loans are not as good as those provided by the Japanese, and the RGC is re­­­portedly not happy with the interest rates (the Cam­bodians wanted 1-3% but the Chinese did not agree).”

(Additional reporting by Kate Bartlett)