China is the Asian hero. A country nestled between the haphazard geography of the least developed and developing nations, playing at par with the giants of the developed western world. While its influence is a matter of great pride and hope for the Eastern world, it is also a subject of grave global concern. The ethics of its economic means for the acquisition of political and geo-political power are especially scrutinized upon. It a curious case of the indefinite Chinese loans.
The origin of the problem is clearly reflected in the numbers itself. The Chinese state and its counterparts have approximately lent $1.5 trillion in different schemes to over 150 countries around the world. In fact, China has emerged as one of the most prominent global lenders in the last two decades with an outstanding claim exceeding 5% of the global GDP. Despite these significantly large figures, the official data on lending is minimal and obscure. The country also refuses to become a member of the Paris Club—an informal group of creditor nations which track international lending activities.
Moreover, China’s systematic ‘underreporting’ of loans has also led to immense confusion over the total volume of their lending project. This is especially problematic since official records on many Chinese debts are amiss from all major data sources such as The World Bank, The International Monetary Fund and other credit-rating agencies. This entails that debt sustainability analysis and other policy research conducted by such bodies is possibly inaccurate and consequently misleading. This further has implications for private sector firms which invest heavily in financially evaluating the government bonds of various countries. Ultimately, the monetary risk of such discrepancies is shouldered by investors who make investment decisions on the crutches of misinformation.
A world bank statement stressed on the precarious position of the citizens of the indebted countries. They pointed out that once the details of such transactions are exposed, funding costs could skyrocket substantially or could be cut off altogether, thereby impacting the common man gravely. Moreover, due to the secretive nature of the debt deals, there is little that can be done to hold governments accountable before such disasters unfold. Most important, however, is the impact of hidden debts on global economic activity. Forecasting efforts are impeded by the discrepancies resulting in errors in aggregate demand estimates. A senior Asia analyst at Verisk Maplecroft also expressed, “Although Beijing’s lending can help developing countries, an opaque build-up of debt may eventually drag down economic growth.” Clearly, hidden debts have global implications which are far-reaching than just vague and exploitive deals between two nations.
However, in the midst of all this opacity, a disconcertingly clear pattern—which can help explain China’s dubious generosity—has emerged. Over 50% of the loans extended to developing nations are unreported and are channeled towards large-scale projects in infrastructure, energy and mining under China’s ambitious multi-billion dollar ‘Belt and Road Initiative’. This project aims at developing a network of roads, ports and other structures extending from East Asia to Europe to aid connectivity between the regions. It is viewed as the modern-day ‘silk-road’. These loans are extended with the reassurances that repayments will be feasible once projects become operational, however, there is no formal guarantee of the same. This is the basis of what many policy analysts around the globe have termed as China’s ‘debt- trap diplomacy’. Here’s how it rolls out:
China loans a handsome sum of money to a struggling nation, say Nation X, to invest in a highway connecting two of its major cities. However, the terms of this loan are vague and unclear. Due to some reasons, Nation X is unable to repay China in time, and to recover its money China now takes control of Nation X’s highway. However, the controversial speculation is that China probably extended the loan to Nation X knowing its inability to repay in the first place; that it was eyeing the geopolitical asset right from the beginning.
Something similar took place in Sri Lanka in 2017 when the government was compelled to lease its geopolitically-strategic Hambantota port to China for a period of 99 years. This case became the poster-child of China’s alleged ‘debt-trap diplomacy’ and stirred extensive debate across the globe. It confirmed it’s critics’ claim of the initiative being a predatory one aimed at securing geopolitical and political interests in strategic regions to boost China’s influence.
Many believe that the African continent is China’s next big victim. Given its rich resources, political instability, lacking economies and under-developed cities— it is essentially the perfect prey. The small yet strategically-located East-African nation of Djibouti is at the center of this ploy. It contains China’s first overseas military base, two new airports and the Ethiopia-Djibouti railway, and is believed to be the first pearl in China’s ‘String of Pearls’. The ‘String of Pearls’ theory suggests that China is trying to connect itself to the Middle-East via the Indian Ocean and is targeting assets accordingly. The strategic similarities to Sri Lanka are fairly obvious here.
However, China’s interest in the region go beyond infrastructural assets and are also focused on garnering political capital. In the light of the coronavirus pandemic, China moved swiftly to deliver aid to African countries with the help of the Alibaba group. It also promoted a temporary freeze on debt payments contracted by a group of twenty economies— an unusual move for a country that prefers bilateral relations. However, this generosity is not selfless and helps the country gather support where it really matters: The United Nations. Africa accounts for more than one-fourth of the member at the UN, and their support would allow China greater muscle power to deal with other big powers. Undoubtedly, China’s financial means are permitting it to extend its power in multiple ways and the opaque and endless loans were just the beginning of it all.
While the popular opinion has been that China’s debt policy is exploitive and targeted in nature, there is a flip side to the argument. It is believed that the Chinese have been willing to restructure terms of loans, and have also never actually ‘seized’ assets from countries. In the case of Sri Lanka, the real story seems different to some where China isn’t nearly as conniving as it is made to look.
To begin with, this project was commissioned in 2007, six years before Xi Jinping rolled out the Belt and Road Initiative. A Chinese construction firm, China Harbor Group, had won the contract for the port and China Eximbank had agreed to fund it. US $307 million were offered on an interest rate chosen by Sri Lanka, and the first phase of the port was scheduled to be completed within three years. Without waiting for the first phase to generate revenue, Mahinda Rajapaksa— the then Prime Minister of Sri Lanka— pushed to start phase two and another $757 million was borrowed at a lower interest rate. By 2014, the port was rapidly losing money and Sri Lanka signed an agreement with The China Harbour and The China Merchants Group to jointly operate the port for a period of thirty-five years.
The government changed in 2015, and when the new Prime Minister, Sirisena won, the country was sinking in debt. It owed more to Japan, the World Bank and Asia Development Bank than it did to China. As a result, Sri Lanka arranged for a bailout from the International Monetary Fund, and decided to generate the much-needed revenue by leasing the port out to an experienced firm. The only two bids came from China Merchants and China Harbor, and the former won a 99-year lease on the port. Once the fine details of the story are brought to light, Sri Lanka doesn’t seem like the naïve victim it is often perceived to be in the story.
Whether China’s intentions with its financial offerings are strategically motivated or not will continue to be up for debate. However, it cannot be ignored that developing nations, especially the ones in Africa, are becoming more and more dependent on Chinese loans. Given that China’s policy towards transparency on its international lending is already so dense, the international community needs to ensure that beneficiary countries tread carefully with their terms to avoid being obligated to the Red Dragon politically or otherwise. All moves need to be observed closely, and pressure needs to be built from the relevant bodies to hold China accountable for its exercises which have spillover effects globally.
Atisha Mahajan is a second year Economics and Political Science Major at Ashoka University. Her twitter can be found at @MahajanAtisha.