China’s Resource-Backed Loans to Africa and Latin America: An analysis of corruption and debt distress

Abstract

China’s overseas lending has sparked intense criticism. The Communist Party abides by the principle of non-interference and structures its loans in opaque ways out of the public domain. As a result, there is growing concern China finances corrupt regimes and its lending leads to debt distress. While studies have examined these concerns in the context of general Chinese lending and find them to be mostly untrue, they neglect to specifically include China’s resource-backed loans (RBLs) in their analysis due to a historical lack of available data. With research estimating that RBLs constitute between 30% and 50% of China’s lending portfolio, the lack of analysis on the risks of RBLs suggests that not only are the consequences of RBLs unknown, but the accepted conclusions of Chinese lending should be treated as undetermined as well. The lack of analysis is especially problematic in light of COVID-19’s impact on developing nations’ debt burdens and the possibility that RBLs have fueled an upcoming debt crisis. This thesis creates the largest RBL dataset to be the first study to quantitatively analyze the risks of RBLs through various statistical methods. I examine three hypotheses: 1) more corrupt regimes receive more RBLs; 2) countries with more RBLs are more likely to be in debt distress; 3) more corrupt regimes are less likely to pay back their RBLs. Through pooled-OLS regressions, Kolmogorov-Smirnov tests, fixed-effects regressions, and correlation analyses, I find that Chinese RBLs are lent to corrupt regimes and contribute to debt distress. As for the third hypothesis, through a case study and a logistic regression, I find that corruption impacts debt sustainability. I argue that corruption and RBLs reinforce each other to cause debt distress and impact the likelihood of repayment. As a result, not only do these conclusions quantitatively verify concerns about RBLs, but they also throw the accepted conclusions of Chinese lending in question due to the fact that RBLs constitute a significant percentage of China’s lending portfolio.