Finance TYPES OF LOANS AVAILABLE FROM CHINESE BANKS

Adeyemi Olajide » Types of Loans Available from Chinese Banks

China is one of the world's largest economies and has become a major lender to many countries, especially in Africa and Asia. In recent years, China has funded several infrastructure projects, ranging from roads and railways to ports and power plants. Chinese banks have provided various types of loans to borrower countries, including direct loans, government-secured loans, project-based loans, and central bank loans.

Direct loans are pure business transactions based on risk evaluation and returns on investment. The banks lend money directly to the borrower country and if the loans go bad, then the banks suffer the loss. The average rate of interest for USD loans is 4.30%, while for local currency, it ranges from 7.8% to 11.7%. An example of direct loans is the China-Pakistan Economic Corridor (CPEC) loans.

Government-secured loans are those in which the government of China guarantees the full loan and interest to the banks advancing the loans. The banks get regularly paid by their government (China) in yuan, and the Chinese government (central bank) gets paid by the borrower country only in USD or euro, or yuan. The bank has zero risk in such loans, so the interest rates are low. The average rate of interest for USD loans is 1.30%, while for yuan, it varies from 1.89% to 2.16%. Examples of government-secured loans include loans to Africa, Belt, and Road Initiative (BRI) loans, and loans to Kazakhstan, Serbia, Iran, and Turkmenistan.

Project-based loans are those in which the banks lend money for a specific project based on a schedule. The project could be fully government-controlled or partially private, wholly private with a government guarantee, or wholly private without guarantee (government = borrower government). The loan is always in yuan, but the repayment may be in USD or yuan. The bank has collateral in the form of land, operational revenue, or infrastructure possession in the event of default, and by law, the same collateral automatically goes to the Chinese government instead of the full default amount. The interest rate for USD varies from 2.25% for fully government-controlled projects to even 8% for wholly private projects. Examples of project-based loans include loans to Egypt, Kenya, Sri Lanka, Bangladesh, and CPEC.

Central bank loans are loans directly advanced to the borrower country by the Chinese government where banks don't have any role in lending. The amount is mostly in USD, and the borrower country issues debt instruments instead of the loan, but the loan currency is yuan. The interest is mostly 2.95% (yuan rate), which is the 5-year or 10-year bond yield.

Chinese banks have become major players in global lending in recent years, but their lending practices have come under scrutiny. Some critics have argued that China's loans often come with strings attached, such as the use of Chinese contractors and the requirement to use Chinese materials. Others have raised concerns about debt sustainability, as many borrower countries have taken on large amounts of debt to finance infrastructure projects. In some cases, this debt has become difficult to repay, and borrowers have had to renegotiate the terms of their loans.

Despite these concerns, China's lending practices have provided a lifeline for many developing countries, especially those that have had difficulty accessing loans from traditional lenders such as the World Bank and the International Monetary Fund. Chinese loans have funded much-needed infrastructure projects, such as roads, railways, and ports, that have helped to spur economic growth in many countries.

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