The Dragon’s Deep Debt Labyrinth
China’s basic criteria behind the selection of BRI projects have been to consolidate its geostrategic position, facilitate easy access to the host state’s natural resources and its market for Chinese exports. To lure small, vulnerable developing countries into its debt-trap strategy, Beijing is offering a big loan they won’t otherwise manage
There are two ways to conquer and enslave a nation. One is by the sword. Other is through debt.
— John Adams
Sri Lanka’s economic collapse and unsustainable debt has brought the world’s spotlight back to China, the government’s largest bilateral lender, which owes at least 10% of its external debt (not including hidden loans). A real concern exists for countries like Pakistan and Nepal, among others, which could fall prey to a similar project.
China’s Belt and Road Initiative, to which 146 countries from the Indo-Pacific, Africa, Europe, Latin America and the Caribbean have signed up, has resulted in several unsustainable debt-for-infrastructure deals, which reinforce the political, economic and geostrategic ambitions of Beijing. It is the biggest lender in the world, bigger than the World Bank, the IMF and the Paris Club (grouping of industrialized countries that lend to developing countries), and has more than 100 ports in 63 countries.
The debt trap strategy
US research lab AidData found that 42 low-to-middle-income countries owe China more than 10% of their GDP in debt. The BIS loan contract contains confidentiality clauses: the amount and the attached conditions must remain confidential vis-à-vis other creditors, the IMF and citizens. Loans are systematically underreported (to the tune of $385 billion), the debt burden is kept off the nation’s balance sheet through the use of semi-private special purpose loans or corporate loans public utilities and banks – still benefiting from government liability protection – amounting to 70 percent of the funding. China lent disproportionately to countries that performed poorly on conventional creditworthiness measures, unlike other international lenders, but charged much higher interest rates with shorter repayment periods and is more aggressive than its peers to position itself at the top of the reimbursement line via collateralisation. The 74 poorest countries in the world owe 37% of their loans to Beijing. Many debtor States find themselves in a situation where their debt is unsustainable.
Beijing’s basic criteria behind the selection of BRI projects have been to consolidate its geostrategic position, facilitate easy access to the host state’s natural resources and its market for Chinese exports. Some other features of China’s debt trap strategy are: a large loan is advanced that small developing countries would not otherwise manage, the use of corruption to make the leaders of borrowing countries willing and flexible, the setting conditions for hiring Chinese companies and workers for project execution, higher loan rates than peers with shorter loan repayment period (less than 10 years). In case of default, it seeks to create equity in the project or demands new projects, thus tying the subject state in an endless knot.
The Dragon Defenders
Predictably, Beijing pushed back against the allegations, denying any bad motives and arguing that the loans were demanded by debtor countries and benefited them economically.
An interesting phenomenon happened recently, some publications rose up in defense of Beijing, confirming the Chinese narrative. Last year, The Atlantic in the US and Chatham House in the UK published reports calling the Chinese debt trap a myth. The publications have attempted to systematically refute any intent or responsibility on Beijing’s part, towards nations with unsustainable debts or unsustainable projects, or having any geostrategic ambition behind them. Indeed, they portrayed the dragon as harmless and uncoordinated, making poor economic choices. A major Indian newspaper recently published an article on Chinese loans, titled “Entrapment” or “ineptitude”? sure the same lines. A Chinese think tank, the CISS, has acknowledged and thanked some of these think tanks – like The Atlantic – and media outlets for “willingness to connect” with it through joint research or joint meetings and helping them establish “a brand and a reputation”.
The right questions that need to be asked here are: Why is Beijing interested in loans for projects that are unviable and have no other takers? Do the debts granted under the BRI have the potential to function as tools to advance China’s geostrategic interests? To assert that such was not the dragon’s intention – or that steps towards acquiring the assets due to the default have not yet been taken – is reckless. Why would Beijing want to scare and warn the world, especially India and the West, so far in advance?
External Affairs Minister S Jaishankar joked: “We have seen commercially unviable projects; airports where planes don’t come, ports where a ship doesn’t come” (Port and International Airport of Hambantota, Gwadar is another example). The sole motive for undertaking these “white elephant” projects is to secure a geostrategic advantage for Beijing: Chinese submarines dock in Sri Lankan ports and Chinese warships are pressed into the safety of Gwadar. The whole structure of BRI debts is such that they become unsustainable – action is the biggest indicator of intent. Whether or not he causes an economic crisis in the host country will depend on his economic handling, however, it is indisputable that he provides Beijing with a solid footing in the country that is being exploited to advance the dragon’s ambitions.
In the wings
In 2018, The New York Times reported that Sri Lankan officials said intelligence sharing was an integral part of the Hambantota deal and that the strategic possibility of the location of the port had also been discussed from the start. He also gave an account of the millions of dollars that have been stolen from the project fund from the Rajapakshas’ election campaign. It revealed an insistence on the part of the Chinese side to hand over the equity of the port and 15,000 acres of surrounding land, rather than allowing a relaxation of the terms of negotiation. Some Chinese companies have also been banned in Bangladesh and the Philippines for engaging in corrupt practices.
Montenegro presents another example of Chinese strategy behind the BRI where Beijing finances and builds an economically unviable highway – 78% of Montenegro’s external debt is owed to China and in case of default Beijing has the right to access Montenegrin land as collateral. Any arbitration would be conducted in accordance with Chinese law. Such strategies will be in play at all BRI sites.
Three years ago, Christine Lagarde, then managing director of the IMF, raised the same question, saying that the BIS should only go where it is needed and where the debt it generates can be sustained.
Alternatives to the BRI
One might have expected the BRI with 18 EU members and 20 Latin American and Caribbean countries to send shivers down the spine of the Western world. But the Chinese, unlike the Russians, have mastered the art of subtle play with which the West falls blindly in love. Washington’s Build Back Better World (B3W) and the EU Global Gateway, still in the launch phase, are too little too late; analysts have already declared them unable to compete with the BRI.
Now, there are worries and debates in BRI states about debts, however, if their common people can continue to pressure their governments for full transparency on loans, the situation can improve. International development banks and multilateral initiatives will also have to step up their game. Finally, the IMF and World Bank will have to provide debt to needy countries while easing harsh conditions and abandoning the imposition of the Bretton Woods consensus, s they had to have a real choice to get out of Beijing’s deep debt maze.
(The author is a foreign policy expert and lawyer)