Even as high debts are impoverishing its local governments, China is playing hardball with foreign borrowers, many of them participants in the Belt and Road Initiative, who incurred massive debts to build infrastructure projects to connect their economies to China.  Fortune Magazine, drawing on reporting from the AP, writes:

A dozen poor countries are facing economic instability and even collapse under the weight of hundreds of billions of dollars in foreign loans, much of them from the world's biggest and most unforgiving government lender, China.

An Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. And it's draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone.

Behind the scenes is China's reluctance to forgive debt and its extreme secrecy about how much money it has loaned and on what terms, which has kept other major lenders from stepping in to help. On top of that is the recent discovery that borrowers have been required to put cash in hidden escrow accounts that push China to the front of the line of creditors to be paid.

Countries in AP's analysis had as much as 50% of their foreign loans from China and most were devoting more than a third of government revenue to paying off foreign debt. Two of them, Zambia and Sri Lanka, have already gone into default, unable to make even interest payments on loans financing the construction of ports, mines and power plants.

A brand-new China-Laos railroad just began operation, built with borrowed funds.

When countries run out of foreign reserves owing to debts, the results can be catastrophic.  The article mentions Pakistan, where over a million workers in the textile industry are out of work and basically starving because of an inability to import raw materials like cotton.  In Kenya, civil servants are going without pay.

China is not playing by the same rules as the U.S., IMF, and other traditional lenders to third-world countries:

In the past under such circumstances, big government lenders such as the U.S., Japan and France would work out deals to forgive some debt, with each lender disclosing clearly what they were owed and on what terms so no one would feel cheated.

But China didn't play by those rules. It refused at first to even join in multinational talks, negotiating separately with Zambia and insisting on confidentiality that barred the country from telling non-Chinese lenders the terms of the loans and whether China had devised a way of muscling to the front of the repayment line.

Amid this confusion in 2020, a group of non-Chinese lenders refused desperate pleas from Zambia to suspend interest payments, even for a few months. That refusal added to the drain on Zambia's foreign cash reserves, the stash of mostly U.S. dollars that it used to pay interest on loans and to buy major commodities like oil. By November 2020, with little reserves left, Zambia stopped paying the interest and defaulted, locking it out of future borrowing and setting off a vicious cycle of spending cuts and deepening poverty.

Inflation in Zambia has since soared 50%, unemployment has hit a 17-year high and the nation's currency, the kwacha, has lost 30% of its value in just seven months. A United Nations estimate of Zambians not getting enough food has nearly tripled so far this year, to 3.5 million.

We are in no position to gloat or even tut-tut these debt-ridden countries being squeezed by China.  Our own borrowing from China to finance government expenditures is scandalous.  Interest and principal repayments are eating an increasing share of federal revenue, and the impact of the recent rise in interest rates on government debt is only beginning to be felt as bonds mature and must be refinanced at higher rates.

The world has grown fat on borrowed money, but the parry is nearing its end.  The suffering experienced in distant lands like Pakistan and Zambia may seem unthinkable here.  But our own version of hell will not be pleasant unless we change our ways, and the current unwillingness of the Biden administration to consider spending cuts in return for a debt limit extension does not inspire any hope.

Photo credit: YouTube screen grab.