Vietnam is known to have avoided China’s Belt and Road Initiative (BRI), but it received more than $ 16.3 billion in funding from Chinese projects from 2000 to 2017. A new report on Chinese economic assistance programs shine a light on Vietnam and suggest that the country is increasing its debt burden to China far beyond what is commonly thought; creating political risk and affecting Vietnam’s potential policies towards its northern neighbor, which is already subject to harassment and intimidation.
$ 385 billion in hidden debt
AidData’s recent report on China’s overseas loan and assistance portfolio revealed a total of $ 385 billion in unreported and under-reported debt. The dataset covers 13,000 Chinese-funded projects worth $ 843 billion in 165 countries from 2000 to 2017. Although the data includes many non-BRI projects, it’s fair to say that Chinese loans and grants increased dramatically after the BIS began in 2013. The report found that the average government “underreports its actual and potential repayment obligations to China.” an amount equivalent to 5.8% of its GDP.
So how did the debt burden get so heavy? What AidData found is that China grants very few grants and that even its loans are not between sovereign states. Instead, “nearly 70% of Chinese loans abroad are now directed to state-owned enterprises, state-owned banks, special-purpose vehicles, joint ventures, and private sector institutions in countries. beneficiaries ”, rather than sovereign borrowers: that is, central government institutions.
Why is this important? First, Chinese loans are not cheap. Indeed, the average Chinese loan carries an interest rate of over 4%, nearly four times the financing rate of Japan or the European Union.
Second, China has demanded high levels of collateral, whether for assets or money in escrow accounts that China controls. As such, we have already seen debt-for-equity swaps in Sri Lanka and Laos. While even China might not want to oppose a sovereign government if it cannot service its debt, Beijing has no qualms about its state-owned enterprises seizing the assets of their overseas partners. . For example, a Chinese state-owned enterprise took over part of the Lao power grid when a Lao state-owned enterprise was unable to service its debts for the construction of hydroelectric dams.
And the debt to China is enormous: 42 developing countries, including four in Southeast Asia (Laos, Brunei, Cambodia and Myanmar), have “a public debt to China greater than 10% of GDP”.
Where is Vietnam?
The situation is particularly serious for Vietnam, as it is the eighth recipient of other official Chinese flows (OFA) from 2000 to 2017. In total, Vietnam borrowed 16.35 billion dollars, just behind Indonesia in South East Asia. Vietnam was the 20th largest recipient of Chinese concessional ODA, barely $ 1.37 billion. Nonetheless, Vietnam has long been suspicious of the BRI and to date no new infrastructure project in Vietnam has been officially labeled as part of the BRI in the public domain.
Vietnam’s recent economic growth has been meteoric, with positive growth every quarter from 2000 to mid-2021, when COVID-19 shut down Ho Chi Minh City, the economic hub of the country. As Vietnam prepares to absorb production as companies and countries seek to disassociate themselves from China, infrastructure is its biggest hurdle.
According to the Global Infrastructure Hub, Vietnam’s demand for infrastructure investments is estimated at $ 605 billion between 2016 and 2040. As Vietnam grows richer, bilateral and multilateral development aid and concessional loans have reached a peak. peak. The demand is so enormous that Vietnam must mobilize foreign sources of finance, amid growing difficulties in public-private partnership and build-operate-transfer projects, and limited public budgets.
The BIS has the potential to help Vietnam alleviate its thirst for capital, and Hanoi has publicly endorsed it. In November 2015, the two sides agreed to expand bilateral trade, especially border trade, with northern Vietnam now part of China’s supply chain. The two sides also agreed to promote, but not bind, the development strategy of the BRI of China and Vietnam of 2004 Two Corridors and One Economic Belt. In November 2017, Vietnam and China signed a memorandum of understanding on the joint implementation of the Chinese BRI and the two corridors and an economic belt, in addition to establishing a working group on cooperation in matters of infrastructure and a working group on financial and monetary cooperation. Senior Vietnamese leaders participated in both BRI forums in 2017 and 2019.
But privately, leaders and political advisers have expressed serious doubts. The 2017 MOU was hardly implemented for several reasons.
First, as mentioned above, Chinese loans don’t come cheap. For example, Chinese ODA loans carry very high interest rates, averaging 3% per annum. This is significantly more than Japan (0.4-1.2%), South Korea (0-2%), or India (1.75%).
China’s preferential credit loans are similar to export credit, which is conditional on the recipient country’s adherence to a number of project-related requirements regarding the use of Chinese contractors, among other stipulations, associated at less attractive loan terms compared to other donors. In many cases, this makes the actual cost of the loan much higher than it would be under an open and competitive bidding process. In addition, Chinese loans are subject to a 0.5% commitment fee and 0.5% administration fee. The loan term and grace period are shorter than those of other lenders, 15 and five years respectively.
Second, Chinese loans come with many additional conditions, including the design and management of the project by Chinese state-owned enterprises, the purchase of Chinese technology, and the use of Chinese workers, many of whom never return to China, causing a local resentment.
Third, Chinese companies have a terrible track record of delays, lack of transparency, cost overruns, environmental damage, poor build quality, and high maintenance costs. The $ 866 million Cat Linh-Ha Dong Railway in Hanoi is the latest example of a Chinese infrastructure project gone wrong and the source of considerable public animosity.
Indeed, in the AidData report, Vietnam was the fifth slowest country for completion of Chinese-funded projects, with an average of 1,783 days (4.9 years) for each project. Among the top 10 countries with BRI infrastructure projects that have been publicly linked to “scandals, controversies or alleged violations”, Vietnam is ranked fourth, with five projects worth $ 2.75 billion .
So why does Hanoi keep looking for Chinese loans? This is partly a political calculation, hoping that being linked more closely to China will limit Beijing’s intimidation and aggression.
Hanoi has expressed no public concern about being caught in a “debt trap” with China. Its debt remains manageable and the economy grows enough to service the debt. Unlike Laos, Vietnam is full of sources of capital.
But Vietnam’s concerns are clearly justified. Hanoi has limited its sovereign debts to China. It has encouraged non-sovereign commitments, through commercial banks, state-owned enterprises and even private enterprises, in order to reduce its political risk. Together, sovereign debt and OOF loans to China account for 6% of GDP, according to AidData.
While Indonesia in absolute terms has received the most Chinese loans in Southeast Asia, the situation in Vietnam appears more worrying in relative terms. Although low, Vietnam’s sovereign debt and OFA as a proportion of GDP are only lower than in Laos, Cambodia, Brunei and Myanmar.
As long as Vietnam can serve Chinese loans, even at extremely high interest rates, the repo man will not come knocking on the door. But if he does and when he does, Hanoi’s rulers should expect a huge backlash from its nationalist citizens, who have a high level of distrust of China.
This is Hanoi’s real political risk.