Beijing’s Billion-Dollar Grip? New Study Shows How China Ties Loans to Commodity Revenues
New Delhi, June 28 – A groundbreaking study has uncovered how China is increasingly using commodity exports and foreign escrow accounts in its banks to secure loans issued to developing and low-income countries—raising red flags about debt transparency, sovereignty, and long-term financial stability.
The report, titled “How China Collateralizes”, was jointly published by the Kiel Institute for the World Economy, AidData, Georgetown University, and Oxford University. It analyzed over two decades of Chinese public and publicly guaranteed lending—worth nearly $911 billion from 2000 to 2021—and found that nearly $418 billion, or 46%, was secured through commodity revenues and restricted escrow accounts outside the borrowing countries' control.
Key Takeaways From the Study:
- Cash Collateral Requirement: Countries like Pakistan are required to hold reserves in four Chinese bank escrow accounts to guarantee repayments.
- Revenue Ring-Fencing: Myanmar must route its gas export income into restricted Chinese accounts.
- Opaque Agreements: Most loans are not backed by revenues from the projects themselves but from unrelated commodity exports like oil, gas, and copper.
- Escrow Secrecy: The structure and balances of these accounts are largely hidden from the public and even the borrowing countries’ own governments.
- Cross-Collateralization: In nearly half the cases, a single collateral source secures multiple loans, making debt restructuring extremely difficult.
A Pattern Across Asia, Africa, and Latin America
The study casts fresh light on how China’s Belt and Road Initiative (BRI), launched in 2013, has reshaped global development finance.
Some examples include:
- Pakistan’s energy sector relies heavily on Chinese loans that require collateral held offshore.
- In Bangladesh, the 1,320-MW Patuakhali thermal power project was partially funded by Chinese lenders using equity stakes in a special-purpose vehicle as security.
- Sri Lanka, in a now-infamous case, leased the strategic Hambantota port to China for 99 years in 2017 after failing to repay its BRI debts.
Why This Matters for India
India has consistently rejected the BRI framework, citing concerns over territorial sovereignty—especially regarding the China-Pakistan Economic Corridor (CPEC), which passes through Pakistan-occupied Kashmir.
The latest findings provide factual backing to New Delhi’s long-standing criticism that BRI projects lack transparency and trap countries in long-term, high-risk debt arrangements that can compromise national assets and decision-making power.
What the Study Reveals About the Lending Mechanism
According to the authors:
“Revenues routed overseas secure priority repayment for the creditor; they remain out of public sight and largely beyond the borrower’s reach until the secured debts are repaid.”
More than 60% of collateralized loans use income streams unrelated to the project being financed. That means a loan for a road or power plant could be backed by gas exports, for instance, limiting the borrower’s fiscal flexibility and sovereignty.
‘Invisible Chains’: The Bigger Debt Trap?
The study argues that such arrangements often result in offshore cash reserves that average more than 20% of annual external debt service payments. These locked funds could otherwise have been used by governments for healthcare, education, or disaster relief.
Moreover, cross-collateralization—where a single revenue stream secures multiple debts—means any attempt at debt restructuring becomes messy and contentious, especially when multiple creditors lay claim to the same assets.
Strategic Implications: Sovereignty for Sale?
These arrangements aren’t just financial tools—they also have deep geopolitical implications. Analysts warn that by locking in commodity revenues, China gains significant leverage over internal decision-making in smaller nations, while keeping its risk exposure to a minimum.
“It’s a subtle but powerful form of control,” said a senior researcher involved in the study. “You’re not just lending money; you’re gaining control of revenue-generating national assets.”
A Call for Transparency
The study recommends that borrowing nations demand greater clarity, conduct public audits of all escrow arrangements, and engage independent international watchdogs to monitor Chinese lending practices. It also urges global lenders like the World Bank and IMF to offer more competitive alternatives.
Conclusion: A Wake-Up Call for the Global South
The revelations from the “How China Collateralizes” study are a wake-up call for developing nations navigating the global infrastructure race. With China holding hundreds of billions in offshore cash reserves and collateral rights, borrowing countries risk ceding long-term economic sovereignty in exchange for short-term infrastructure gains.
As India maintains its distance from the BRI and emphasizes transparent, multilateral development financing, the study may serve as a crucial turning point in how global development projects are negotiated and financed.
Reader Takeaway:
India’s caution around BRI may be more than just a diplomatic stance. The study shows that many nations are caught in opaque and restrictive loan structures, where the cost is not just financial—but sovereign.