The Hungarian government is keeping the details of the Chinese loans a secret. However, the example of African countries shows that China is a tricky, secretive lender, and this raises some questions about Hungarian transactions.

While the European Union sees China's foreign economic policy as an increasing challenge, the Hungarian government is apparently not bothered by the fact that it is making the country increasingly vulnerable to China. On the contrary, in the past few years, the Orbán-government has been reaffirming China's presence in Hungary in several different areas. The first spectacular moment of this business relationship with Hungary has been the joint Hungarian-Chinese project of the Budapest-Belgrade railway line. Then, in the spirit of diversification, they opened up to Chinese investors in the form of selling yuan-denominated government bonds, followed by the idea of founding the Fudan University, then welcoming new Chinese investments mainly in the battery industry. Chinese policemen on the streets of Budapest and a large Chinese loan were the cherry on top. The details of the latter are a closely guarded government secret. 

There can be no doubt that this dependency will grow in the future. During Chinese President Xi Jinping's visit to Hungary in May, he and Prime Minister Orbán signed 18 joint investment agreements in the spirit of strategic partnership. These are not all new projects, as it is customary at such high level meetings to re-confirm investments that have already been discussed but not yet started. Thus, a joint declaration of intent was made on, among other things, the following issues: 

  • extending Hungarian-Chinese cooperation to the whole spectrum of the nuclear industry; 
  • beginning preparations for the construction of the rail ring that would bypass Budapest, previously referred to as the V0 ring; 
  • starting preparations for the project for a high-speed railway linking Budapest city centre with Liszt Ferenc International Airport; 
  • jointly developing the charging station network for electric cars; 
  • starting the construction of Europe's "most modern, largest, safest and fastest border crossing point" between Hungary and Serbia; 
  • exploring the possibility of an oil pipeline between Hungary and Serbia, with the involvement of the Serbs. 

These are all very expensive projects, which would presumably be financed by Chinese loans, as it was the case with the Budapest-Belgrade railway line. The list of Chinese investments does not end here, as rumours emerged in spring about China possibly financing the construction of a direct high-speed railway line to Liszt Ferenc Airport. 

"We are talking about investments of hundreds of billions of euros. Some of them can be done on a market basis, especially the railways," said Gergely Gulyás, Minister of the Prime Minister's Office, at a Government Information Meeting. 

Chinese President Xi Jinping meets with Hungary's Prime Minister Viktor Orban at the Diaoyutai State Guesthouse in Beijing, capital of China, July 8, 2024
Chinese President Xi Jinping meets with Hungary's Prime Minister Viktor Orban at the Diaoyutai State Guesthouse in Beijing, capital of China, July 8, 2024 Li Xueren/Xinhua/AFP/East News

We owe China a considerable amount of money 

According to data from the Government Debt Management Agency (ÁKK) detailing Hungary’s foreign currency debt stock, in just three years, the Hungarian government has accumulated a substantial debt to China: 

  • At the end of the second quarter of this year, the Hungarian state owed the Asian Infrastructure Investment Bank HUF 71.79 billion (cc. 180 million 3EUR), the first call on which was made in the last quarter of 2022. 
  • Half a year earlier, in the second quarter of 2022, Hungary had already received a loan for the construction of the Budapest-Belgrade railway line, and the country has now drawn down HUF 341.6 billion (cc. 860 EUR) for this project. It is worth noting here that 85% of the HUF 750 billion (cc. 1,8 billion EUR) investment will be financed by loans and 15% by co-financing. 
  • Moreover, this spring, in complete secrecy, the government asked China for a EUR 1 billion loan, which at the end of the second quarter was recorded in the ÁKK's accounts as HUF 395.15 billion (cc. 1 billion EUR). 

This amounts to a total of HUF 808 billion, which is already a quarter of Hungary's total foreign currency loans. 

 In addition to the above-mentioned loans, the Hungarian state currently has 3 billion yuan worth of foreign currency bonds to repay to Chinese investors this year and the next, which is the equivalent of around HUF 150 billion (380 million EUR) at current exchange rates. It is important to note, however, that Hungary's foreign exchange reserves are very high: the amount is €47 billion, which is several times higher than those of Montenegro and African countries discussed later. This, under the current circumstances, provides sufficient security for the country. 

In other words, Hungary’s total exposure to China now stands at over HUF 1 000. 

When it comes to the subject of debts, let us not forget that the parties have set up a joint Hungarian-Chinese venture for the Budapest-Belgrade railway project: the Sino-Hungarian Railways Ltd. (Kínai-Magyar Vasúti Zrt.), whose debts jumped significantly last year. China is quite often involved in setting up such joint ventures. This is a common practice for China for projects in developing countries, as it allows new loans to be kept outside public finances, hidden away. This will be discussed later. 

85% of the Sino-Hungarian Railways Ltd. is owned by the Chinese companies involved in the project and 15% by MÁV (Hungarian Railway Company). 

At the end of last year, liabilities were reported at HUF 20.4 billion (cc. 51 million EUR), which is a huge increase from the previous HUF 2.3 billion (cc. 5,8 million EUR). 

Being a project company (that usually does not really generate any revenue, but only plays a financing role), the company closed with a loss of HUF 1.6 billion the year before last and HUF 1.7 billion last year, which forced the owners to raise capital. MÁV provided HUF 750,000 and the Chinese owners HUF 2.3 billion for this. 

China is the biggest creditor 

The biggest problem with the Chinese loans is not that they are loans, but that they are Chinese. The reason for this is that China’s lending practices are radically different from those of other organisations and countries. In many cases, the loans are secured by raw materials and local infrastructure, while these agreements are characterised by high interest rates and a total lack of transparency. 

If the debtor has defaulted, China is reluctant to waive its loans. Instead they prefer to deal with the situation by imposing a temporary moratorium on payments, extending the maturity and restructuring the loans. 

Although it is not uncommon for a developing country to default, it is still politically and diplomatically worthwhile for China to lend money to developing countries, as there is a statistically demonstrable alignment with Chinese foreign policy objectives in international fora for countries that have received more Chinese loans and aid. 

Insert a Photo: Xi Jinping visited Hungary in May this year, two months before Orbán's peace mission visit to Beijing.  

China is already considered to be the world's biggest lender, having lent a considerable amount of money to developing countries in Africa, South America and Asia. The precedent that Hungary has been able to receive a loan from the Asian Infrastructure Investment Bank is rather unique, since the institution - as its name suggests - only finances investments in Asian countries, while Hungary is the first and only European debtor to the bank. This was only made possible by the exceptional situation after the coronavirus pandemic, when the Hungarian state received the money for health development. 

Coming back to China as a creditor, according to AidData, at the end of the second quarter, the Chinese state had outstanding debt of USD 1 340 billion. Russia is the country's biggest debtor with USD160 billion, followed by Venezuela with USD 113 billion, Pakistan with USD 70 billion, Angola with USD 65 billion and Kazakhstan with USD 64 billion. 

China's reluctance to forgive debts is shown by the fact that it has forgiven only USD 18 billion of the USD 1 340 billion in debt. Looking at the sectors, almost a third of the outstanding debt, USD 404 billion, is used for industry, mining and construction, USD 280 billion for energy and USD 199 billion for transport. 

Embarrassing cases in Europe 

The details of the Hungarian loans are kept secret by the government, so we don't know anything about the terms, the maturity or the interest rates. Although the conditions of the Hungarian economy and state finances are far from being on a par with those of an African country or even Montenegro, we can still learn a lot about China as a creditor through their example. The revelations made in recent years on the subject of hidden loans and accounts only raise new questions about the Hungarian government's decision. 

Before we turn our attention to another continent, it is also worth examining the case of a much closer country, Montenegro, which shows that doing business with China is not the best idea. The country teamed up with China to build a motorway because it could not get credit from within Europe, as potential financiers feared that Montenegro would not be able to repay properly. 

The saga that started 10 years ago has now reached the point where only 41 kilometres (the first section) of the 165-kilometre-long total section have been completed later and more expensively than planned, and there is simply no money to continue, as the first section has already put the country into debt. For this section, China has provided a loan of €687 million. There are 20 bridges, two overpasses, two underpasses and 16 tunnels on this stretch of road, so the topography has justified this large number of elements, which has obviously increased the cost of the construction. Once the project started, unfavourable exchange rate fluctuations and corruption caused costs to spiral out of control. Reuters estimated in 2018 that it would cost the country an additional €1.2 billion to complete the construction of the motorway. 

Bridge section of a highway connecting the city of Bar on Montenegros Adriatic coast to landlocked neighbour Serbia, (Bar-Boljare highway) near the village of Bioce, north of Montenegrin capital Podgorica, which is being constructed by China Road and Bridge Corporation (CRBC), the large state-owned Chinese company.
Bridge section of a highway connecting the city of Bar on Montenegros Adriatic coast to landlocked neighbour Serbia, (Bar-Boljare highway) near the village of Bioce, north of Montenegrin capital Podgorica, which is being constructed by China Road and Bridge Corporation (CRBC), the large state-owned Chinese company. SAVO PRELEVIC / AFP



There are hardly any cars on this short stretch of the motorway, as it is too expensive to pay the toll for such a distance, especially as it leads from one quite deserted area to another one. After the end of the motorway, the road becomes of poor quality again. 

According to a copy of the loan agreement that has been made public, if Montenegro fails to repay the loan on time, the Chinese Export-Import Bank has the right to seize Montenegrin land for military or diplomatic use. The situation is made all the more worrying by the fact that the initiation of enforcement would depend on a Chinese court decision. 

Learning from the case, Montenegrin Prime Minister Milojko Spajic said earlier this year that their exposure to China had been reduced from 27% of the GDP to 7.8%, so it was manageable and does not give reason for major concern. However, in the future they would like to see infrastructure development financed exclusively by regional or EU loans. 

Besides Montenegro, Greece also has experience with China, albeit in a different capacity. In 2008, nearly bankrupt Greece, under pressure from the IMF, handed over the right to use part of the port of Piraeus to the Chinese COSCO company. COSCO continued to develop the port, and in 2016, in a privatisation deal, it acquired 51% of the port's ownership. While the port's traffic has increased several fold as a result of the Chinese presence and development, the Greek-Chinese relationship has created serious political tensions domestically and on an EU level as well. China however sees Piraeus as a real success of the New Silk Road project. 

Port of Piraeus, Attica, Greece
Port of Piraeus, Attica, Greece Shutterstock

The port has grown to become a major transhipment hub for goods destined for the Mediterranean and Central and Eastern European countries in Europe, and thus it turned into one of the largest container ports in Europe. This is why the construction of the Budapest-Belgrade railway line is particularly important for China, as it would ensure the onward transport of goods to Western Europe. The investment in this railway line was more important to China than Hungary would gain from it, with a payback period of 130 years at best, but there were estimates that the project would show a return only in 979 years. 

A Chinese loan might be appealing at a first glance 

Developing countries are initially very happy that their infrastructure can be developed, by building bridges, roads and ports, which will in time contribute to economic growth, even if only financed through credits. 

Initially, these investments may actually boost GDP, but over time the Chinese loan repayments will place an enormous burden on the debtors, resulting in a nasty indebtedness. Government reactions to the situation have varied widely. 

In Pakistan, millions of textile workers had to be laid off because the country could no longer afford to run the factories. In Kenya, thousands of people employed in the civil sector had their salaries withheld in order to save money for the government to pay off loans. 

Sri Lanka declared insolvency in 2022, since then more than half a million jobs have been lost in the industrial sector, inflation has reached to 50% that year, and half the population impoverished completely. 

Sri Lanka's economy shrank by 2.3% last year after a plunge of more than 7% in 2022. 

Demonstrators protest inside the President's House, after President Gotabaya Rajapaksa fled, amid the country's economic crisis, in Colombo, Sri Lanka, July 9, 2022.
Demonstrators protest inside the President's House, after President Gotabaya Rajapaksa fled, amid the country's economic crisis, in Colombo, Sri Lanka, July 9, 2022. REUTERS/Dinuka Liyanawatte

Zambia has also found itself in a difficult situation after borrowing billions of dollars from the Chinese state bank over the past two decades to build dams, railways and roads. Although the loans have boosted the country's economy, the interest rates on foreign currency loans have risen so high that the government had no choice but to cut health and social spending and slash agricultural subsidies. But even these measures were not enough to get out of the financial difficulties the loans had put the country in. 

After a while, the financing of the repayments ate into the country's reserves and Zambia became insolvent, which put it in a vicious circle of cutting expenses and impoverishment. The more healthcare and social spending are restrained, the harder it will be on the population. Their income will shrink, so will their living standards and capacity for spending, so the state will have less revenue, leading to further cuts in expenses. 

The case of Zambia reveals the Chinese rules of the game 

In other cases, major creditors such as the United States, Japan or France entered into separate agreements to settle the case of forgiving part of the debt with each creditor disclosing how much it had lent to the debtor and on what terms. This way, no one felt deceived. But this is not the practice followed in China. At first, China was not even a partner in international negotiations, as it negotiated separately with Zambia and insisted on secrecy. In other words, it has strictly forbidden the contractor country from disclosing the details and terms of the Chinese loan to other creditors, AP reports.

A few months after Zambia became insolvent, it emerged that the country had owed USD 6.6 billion to the Chinese state bank, double the amount previously known. 

A solution to the critical situation was finally found this year, when the Zambia signed a loan rescheduling agreement with China worth HUF 6.3 billion, under which the Asian lender agreed to reschedule USD 4.1 billion of debt. 

Hidden deposit accounts and secret loans 

Over time, developing countries have become heavily indebted due to a series of loans from China, and feared that if they borrowed more, the country would be deemed too risky by credit rating agencies, making borrowing even more expensive. In order to handle this problem, China came up with the idea of setting up joint ventures for various projects, with the loans going to these companies instead of the state. This also allowed them to avoid having to enter these new loans in the public accounts. 

In Zambia, for example, the fact that two Chinese banks had granted a USD 1.5 billion loan to a project company to build a huge hydroelectric power plant was not recorded in the country's books for years. In Indonesia, a USD 4 billion Chinese loan to build a railway line did not appear in the public accounts. Although these loans do not appear in their budgets, the risk is still borne by the states. If the projects fail, what had previously appeared to be private debt, immediately becomes public debt. 

The extent to which this is common practice is illustrated by the fact that a few years ago, researchers on the subject identified at least USD 385 billion in hidden credit in 88 countries. This is equivalent to 28 % of China's total outstanding debt. 

At the same time, another hidden element of Chinese loans was revealed. 

In several cases, clauses were found in the contracts that require the borrowing country to deposit US dollars or other foreign currency in a secret escrow account, which Beijing can simply seize if the debtor defaults. 

This move has put China at the top of the list of creditors without the knowledge of the other creditors. In a bankruptcy case, creditors make their claims known, and a ranking is established according to which the claims are satisfied. 

China claims to be a lenient creditor 

The situation of developing countries is not helped by the recent events of the global economy: they are affected by the rising prices of oil and grain due to the Russo-Ukrainian war, and by the rising cost of credit due to Fed's (Federal Reserve Bank in the USA) successive interest rate rises. The situation has led some to take desperate action. Honduras has formally entered into diplomatic relations with China, due to financial pressure, while at the same time suspending them with Taiwan, and Pakistan has agreed to buy oil from Russia at preferential prices to avoid blackouts. 

China, by the way, argues that it is a lenient creditor, even though it is not a creditor that forgives loans. The country's leadership believes that if the IMF and the World Bank ask China to waive some of its loans to countries in trouble, they should do the same for them, in a spirit of collective action and fair burden-sharing. 

Alongside the IMF and the World Bank, the United States is also concerned about China's lending practices and growing presence in Africa. The fact that these countries are at loggerheads over the continent is not surprising, given Africa's wealth of raw materials and natural resources, with nickel, for example, being crucial for electric car batteries. The United States also accuses China of exploiting African countries. Last spring, Vice President Kamala Harris asked African countries not to put raw materials and natural resources behind loans as collateral, as China could easily block them for decades. 

In response, China said: they do not force anyone to borrow or repay and there is no political interest behind the loan agreements. 

In terms of its lending practices, the country also argues that it provides relief to debtor countries in the form of loan maturity extensions and emergency loans, but it also temporarily suspended interest payments during the coronavirus epidemic. It has also waived 23 interest-free loans for African debtors, although according to AidData, these loans are typically from two decades ago and accounted for less than 5 % of total loans. 

TEFI

This article was written in the framework of The Eastern Frontier Initiative (TEFI) project. TEFI is a collaboration of independent publishers from Central and Eastern Europe, to foster common thinking and cooperation on European security issues in the region. The project aims to promote knowledge sharing in the European press and contribute to a more resilient European democracy.

Members of the consortium are 444 (Hungary), Gazeta Wyborcza (Poland), SME (Slovakia), PressOne (Romania), and Bellingcat (The Netherlands).

The TEFI project is co-financed by the European Union. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Education and Culture Executive Agency (EACEA). Neither the European Union nor EACEA can be held responsible for them.