On the face of it, interest rates on Chinese loans are typically around 1-2% with a five year grace period and a term of up to 20 years. The World Bank offers loans to developing countries at a fixed interest rate of 1.54%, with a grace period of 10 years and a maturity of 40 years.
But this has to be seen in the aggregate. China's foreign loans are generally for infrastructure, and these infrastructure projects are usually arranged for Chinese companies to carry out.
Here an interesting thing arises, because Chinese companies build efficiently and quickly, so the result is lower construction costs.
For example, for the same railway, if China goes to build it, the price might be US$50 million per kilometre, whereas if Japan goes to build it, the price might be US$100 million. If Europe were to build it, it might cost US$200 million.
So let's think about it, if it's a railway like this and it's built for 200 kilometres. To get a loan from China, it would only cost US$10 billion. Get a loan from Japan, it would cost US$20 billion. And to get a loan from Europe, it would cost US$ 40 billion.
Well, here's the question. Do you think it is better to ask China for a loan of US$10 billion? Or is it better to borrow US$20 billion from Japan? Or would it be better to borrow US$40 billion from Europe?
It is possible that a project that can be built by a Chinese company in 3 years will take 5 years in Japan and 10 years in Europe. This construction time is well documented.This does not include the time taken to build the project.
Think about it, borrow $100 from China and then in 3 years you can start to have income and repay the loan.
Borrow $20 billion from Japan and then in 5 years you can start to have income and repay the loan.
Borrow $40 billion from Europe and then in 10 years you can start to have an income and repay the loan.
Even if the interest rates in China were twice as high, it would still be more cost effective.
In addition, there is a more important reason, that is, applying for loans from the world bank or the International Monetary Fund often carries great hidden conditions.
A true story from Indonesia.
In 1997, Indonesia fell into a serious currency crisis and had to apply for a loan from the International Monetary Fund to tide over the difficulties. At that time, Indonesian aircraft manufacturer Indonesian aircraft industry company was developing the first domestic passenger aircraft. At that time, N250 was launched as the first prototype and took off successfully. At the same time, it obtained a number of qualification certificates from the aviation administration.
Just then, the International Monetary Fund told President Suharto to cancel the N250 project immediately, otherwise the loan would not be approved. At that time, Indonesia was helpless. The Indonesian government had to forcibly terminate the project and asked Indonesian Aircraft Industry Corporation to dissolve the R & D team of the project. Later, many R & D personnel of the team went away to other countries.
Later, the International Monetary Fund intensified and even asked the Bank of Indonesia to stop providing funds to the Indonesian aircraft industry company. However, the Indonesian government did not fully comply with the requirements of the International Monetary Fund. Since then, the company's funds have been greatly reduced, and it had to turn to diversified operation in order to survive under the minimum budget support of the government.
Later, many people behind the scenes said that the reason why the national monetary fund pressed the Indonesian government to terminate the N250 project was that it had reached an agreement with European and American aircraft manufacturers. These aircraft manufacturers did not want Indonesia to produce and manufacture their own aircraft, because if Indonesian aircraft were localized, it would not only lose the Indonesian market, but also cause collateral effects, If other countries with R & D capabilities invest in the manufacturing of domestic aircraft, it will be a fatal blow to European and American aircraft manufacturers such as Boeing and Airbus.
As the saying goes, people are short mouthed and soft handed. Lending countries often add additional conditions or even exert pressure on lending countries to achieve their ulterior goals. Economic cooperation with China is often mutually beneficial and win-win. China has never used economic means to force some developing countries to do things they are unwilling to do, whether political, diplomatic or internal policies, China is a country that truly achieves "reaching the goal and benefiting the world".