Chinese Web

The dragon’s debt-trap diplomacy and its intentions to exert control are beginning to cause acute unease across many nations

By Author  |  Published: 24th Nov 2019  12:12 am
Chinese Web

Will China take over Kenya’s Mombasa port just like it did Sri Lanka’s Hambantota port when the latter defaulted on repayment? China has funded the 472-kilometre Standard Gauge Railway from Mombasa to Nairobi, which became operational in 2017. Kenya has to repay the loan of $3.21 billion to China from 2020 but the project is incurring losses. In lieu, China could take over the port of Mombasa.

In December 2017, China took over the Hambantota port for a lease of 99 years after the Sri Lankan government defaulted. Early this year, The Straits Times reported that as of 2018 end, nearly a quarter of Sri Lanka’s total foreign debt was owed to China. China has lent around $8 billion while building ports and highways and planning other major investments in the island nation as part of its drive to build a 21st century ‘Silk Road’ across nations.

China has invested heavily under its ambitious Belt and Road Initiative in major infrastructure projects across multiple nations, including in a motorway in East Africa, a railway tunnel through the mountains of Kazakhstan and a rail network in Southeast Asia. It is now the single largest financier of African infrastructure, financing one in five projects and constructing one in three, states a Deloitte report.

Hovering Danger

The scale and range of these investments have begun to cause discomfort in many nations, for these investments are increasingly no more being seen from the angle of business. Many politicians and countries now see these investments as China spreading its tentacles over them, which in not too distant future may not leave them with many options.

Malaysian Prime Minister Mahathir Mohamad has cautioned the Philippines over falling into a Chinese ‘debt trap’. Philippines is increasingly relying on China to bankroll its growth initiatives. “If you borrow huge sums of money from China and then you cannot pay, when the person is a borrower, he is under the control of the lender. So, we have to be very careful about that,” Mahathir told ABS-CBN News recently.

Pacific leaders are also increasingly becoming cautious about taking more Chinese money. Six Pacific governments need to pay back debt to China — Cook Islands, Fiji, Papua New Guinea, Samoa, Tonga, and Vanuatu — but only Papua New Guinea and Vanuatu have taken Chinese loans since 2016.

A recent World Bank paper too pointed to the same trend. “Several countries have already scaled back on Belt and Road Initiative (BRI) investments or requested debt relief from China. In October 2018, Malaysia decided to suspend and renegotiate US$20 billion worth of projects fearing not to be able to repay such debt and Pakistan cut down the cost of a large railway project. China had to provide debt relief to several borrowing countries in recent years; in some rare cases, difficulties in repaying debt has resulted in China taking possession of key infrastructure in lieu of repayment in Sri Lanka, Kyrgyz Republic and Zambia, raising concerns over collateralised debt obligations, debt transparency and weak governance in countries that are large recipient of financing from China.”

In fact, the negative sentiments about Chinese investments is spreading fast. The China Daily has reported that “there is a possibility that the Chinese government might be forced to forgive the loan (for Standard Gauge Railway in Kenya) in order to avoid negative sentiment among Kenyan citizens and increasing scrutiny from the international markets.”

Path to Power

China has never been coy about its intentions to expand its power. Its plans were clear when in 2013, Chinese President Xi Jinping unveiled the BRI, China’s most ambitious project. The BRI, which plans to connect China, Europe, Africa and Asia through a grid of roads, railways, ports and industrial hubs, reviving ancient sea as well as land trade routes, has till date been signed on by 123 countries.

The BRI consists of two parts. The economic belt comprising six corridors, including roads, railways, bridges, power plants to enable trade to and from China with Europe, Asia, and Africa. The second part, known as the Maritime Silk Route, connects the South China Sea to the Indian Ocean through a chain of seaports.

China is granting huge loans to the countries that are part of the BRI. While many of these countries badly need new infrastructure and access to new markets, China is ever-willing to loosen its purse strings, publicising it as a win-win for all. It is also important to point out that globally, a vast majority of Chinese official development finance is in the form of loans and not grants, and only a minority of these loans are concessional.

Moreover, there is only one way the money is flowing – from China to these countries and there is only one way power is accruing – towards China. So, is China laying a debt trap for these countries? Are these countries slowly but surely getting trapped in the Chinese web? Many countries worry that the BRI conceals China’s efforts to expand its influence by granting loans and then acquiring the assets when they cannot repay.

Bankrolling Power

China has been on such a consistent and focused lending spree that it has left lending institutions like the World Bank and IMF behind, who are no more the biggest creditors. A study by Sebastian Horn and Christoph Trebesch of the Kiel Institute for the World Economy and Carmen Reinhart of Harvard University, finds that China “now accounts for a quarter of total bank lending to emerging markets, transforming China into the largest official creditor, easily surpassing the IMF or the World Bank.”

China’s direct loans and trade credits have climbed from almost zero in 1998 to over $1.6 trillion, or close to 2% of world GDP in 2018. These loans mostly go to low and middle-income countries. What has made China such a dominant global creditor in the recent 20 years is the drastic increase of China’s GDP, combined with China’s “Going Global Strategy” to foster Chinese investment abroad, which was initiated in 1999, say the authors.

But about 50% of it is “hidden”. Neither the IMF nor the World Bank, nor credit rating agencies report on these “hidden” debt stocks, which have grown to more than $200 billion as of 2016. The authors point out that the problem of “hidden” Chinese debts is particularly severe in crisis countries such as Venezuela, Zimbabwe and Iran. Indeed, China does not report any bank claims towards these countries to the BIS, despite substantial known lending flows over the past 15 years. China has also not joined the Paris Club, an association of world’s major creditors who agree on controlling their lending rates, providing information and coordinating a sustainable debt relief programme.

A study by the Center for Global Development in 2018 found eight countries at particular risk of debt problems owing to debt-financed BRI projects. In 2019, the World Bank predicted that 12 countries are likely to face debt vulnerability due to the BRI. The regions most indebted to China are Far East Asia and Central Asia, including highly exposed, small economies that are in geographic proximity to China such as Laos, Cambodia and the Kyrgyz Republic. Next come Sub-Saharan Africa and Latin America, as well as some parts of the Middle East and North Africa region.

Growing Criticism

China has consistently rejected all accusations that it is laying a debt trap or the BRI is a tool to expand China’s sphere of influence. Chinese President Xi Jinping speaking at the Second Belt and Road Forum meet held in Beijing in April 2019 focused on the need to ensure debt sustainability in BRI projects. Chinese Foreign Minister Wang Yi Wang in March stressed that “BRI is not a debt trap that some countries may fall into, but an economic pie that benefits the local population. It is no geopolitical tool, but a great opportunity for shared development.”

But not many are convinced. Recently, the US warned Pakistan that it will face long-term economic damage with little returns if China keeps pursuing the China-Pakistan Economic Corridor (CPEC) — heralded as a game-changer by both nations. “It’s clear, or it needs to be clear, that CPEC is not about aid. It would profit only Beijing,” said Alice Wells, the top US diplomat for South Asia, pointing out that the multibillion-dollar initiative was driven by non-concessionary loans, with Chinese companies sending their own labour and material. The corridor “is going to take a growing toll on the Pakistan economy, especially when the bulk of payments start to come due in the next four to six years,” she said. “Even if loan payments are deferred, they are going to continue to hang over Pakistan’s economic development potential, hamstringing Prime Minister Khan’s reform agenda.”

Roland Rajah, Alexandre Dayant and Jonathan Pryke, in their paper written for the Lowy Institute on October 21, 2019, point out that “the sheer scale of China’s lending and its lack of strong institutional mechanisms to protect the debt sustainability of borrowing countries poses clear risks. Chinese lending is more intense as a share of GDP in smaller economies. If China wants to remain a major development financier in the Pacific without fulfilling the debt trap accusations of its critics, it will need to substantially restructure its approach, including by adopting formal lending rules similar to those of the multilateral development banks.”

Finally, responding to increasing concerns and criticism, China has begun taking some rearguard action. It has announced support for an IMF training centre to help improve the debt management capacity of BRI-countries and also committed itself to the G20 Operational Guidelines for Sustainable Financing as well as the G20 Principles for Quality Infrastructure Investment, both of which contain debt-related provisions. But are these measures just to ward off criticism or do they signal a beginning for the better?

Circling India

• With the Rajapaksas now back, Beijing will likely be too, experts say. Under Mahinda, Sri Lanka secured almost $7 billion in loans from China, dislodging Japan as Sri Lanka’s main funder of infrastructure. But many of the projects have proven to be white elephants, including a $210-million airport that has no commercial flights.

• China also financed a 35,000-seat cricket stadium, which seldom hosts matches, a performing arts centre in Colombo with few shows and a misfiring power plant.

• Apart from BRI, China’s main promises in Pakistan include the development of Gwadar on the Arabian Sea into a world-class port. Beijing hopes to link Gwadar to the western Chinese region of Xinjiang, giving it more access to the oil-rich Middle East and reducing reliance on the dispute-ridden South China Sea

– With inputs from Agencies


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