Down dragon’s deep-debt maze

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Down dragon’s deep-debt maze

Sunday, 29 May 2022 | Sonal Shukla

China’s basic criteria behind the selection of BRI projects have been to consolidate its geostrategic position, to facilitate easy access to natural resources of the host state and its market for Chinese exports. To lure vulnerable small developing nations into its debt-trap strategy, Beijing offers a hefty loan which they won’t manage otherwise

There are two ways to conquer and enslave a nation. One is by the sword. Other is by debt.

— John Adams

Sri Lanka’s economic collapse and its unsustainable debt has brought the world’s spotlight back to China — the government’s biggest bilateral lender, owing at least 10 per cent of its external debt (non-inclusive of hidden loans). A real concern exists for nations like Pakistan and Nepal, among others, who might fall prey to a similar design.

China’s Belt and Road Initiative, for which 146 nations from Indo-Pacific, Africa, Europe, Latin America and Caribbeans have signed up, has resulted in several unsustainable debt-for-infrastructure deals, which further Beijing’s political, economic and geostrategic ambitions. It is the single largest lender globally, bigger than the World Bank, IMF and the Paris Club (industrialised nations grouping that lend to the developing nations), and has over 100 ports in 63 countries.

The debt-trap strategy

US-based research lab AidData has found that 42 low-to-middle income countries owe a debt bigger than 10 per cent of their GDP to China. BRI loan contract contains secrecy clauses: Amount and conditions attached are to be kept confidential from other creditors, IMF and citizens. Loans are systematically under-reported (to the tune of $385 billion), debt-burdens kept off the nation’s balance-sheet through use of special-purpose, semi-private loans or loans to state-owned companies and banks — still enjoying government’s liability protection — amounting to 70 per cent of funding. China lent disproportionately to countries that performed poorly on conventional measures of credit worthiness, in contrast to other international lenders, but demanded far higher interest rates with shorter repayment periods and is more aggressive than its peers at positioning itself at the front of the repayment line via collateralisation. World’s 74 lowest income nations owe 37 per cent of their loans to Beijing. Many of the debtor states are in a situation where their debt is unsustainable.

Beijing’s basic criteria behind the selection of BRI projects have been to consolidate its geo-strategic position, to facilitate easy access to natural resources of the host state and its market for Chinese exports. Some other features of Chinese debt-trap strategy are: A hefty loan is advanced which small developing nations would not manage otherwise, use of corruption to make the leaders of borrowing nations willing and pliable, setting terms for hire of Chinese companies and workers for project execution, higher loan rates than peers with shorter (less than 10 years) loan repayment period. On loan-default, it seeks creation of equity in the project or demands new projects, thus tying the subject state into an interminable knot.

 

Dragon’s advocates

Expectedly, Beijing has pushed back against the allegations, denying existence of any bad motive and justifying that the loans were demanded by the debtor countries and were economically beneficial for them.

An interesting phenomenon has occurred recently, some publications have stood up in defence of Beijing, upholding the Chinese narrative. Last year US’ The Atlantic and UK’s Chatham House published reports calling Chinese debt-trap a myth. The publications attempted a systematic refutation of any intention or liability on Beijing’s part, towards saddling nations with unsustainable debts or unviable projects, or of having any geostrategic ambition behind them. Indeed, they portrayed the dragon to be innocuous and uncoordinated, making poor economic choices. A leading newspaper in India recently published a piece on Chinese lending, titled, “Entrapment’ or ‘ineptitude’?” along the same lines. A Chinese think tank, CISS, has acknowledged and thanked some of these think tanks — like The Atlantic — and media houses for “willing to communicate” with it by joint research or joint meetings and helping them establish “a brand and reputation”.

The right questions that need to be asked here are: Why is Beijing interested in loans for projects which are unviable and have no other takers? Do the debts given under BRI have the potential to function as tools to advance China’s geostrategic interests? To argue that such was not the intention of the dragon — or steps towards acquisition of the assets due to loan default have not yet been undertaken — is foolhardy. Why would Beijing want to spook and warn the world, especially India and the West, so well in advance?

External Affairs Minister S Jaishankar quipped, “We have seen projects which are commercially unsustainable; airports where aircraft don’t come, harbours where a ship doesn’t come” (Hambantota port and international airport, Gwadar is another example). The sole motive to undertake these ‘white elephant’ projects is to secure geostrategic advantage for Beijing: Chinese submarines docks at Sri Lankan ports and Chinese warships are pressed into the security of Gwadar. The whole structure of BRI debts is such that they become unsustainable - action is the biggest indicator of intention. Whether or not it causes an economic crisis in the host nation will depend on its economic management, however, unarguably, it provides Beijing a strong foothold in the nation which is exploited for furthering dragon’s ambitions.

Behind the scenes

In 2018, the New York Times reported the Sri Lankan officials stating that intelligence sharing was an integral part of Hambantota deal and strategic possibility of the port location was also discussed from the beginning. It also reported about the millions of dollars that flew from the project fund to the Rajapakshas’ election campaign. It revealed an insistence on the Chinese side to hand over equity in the port and 15,000 acres of surrounding land, rather than allowing any easing of negotiating terms. Some Chinese companies have also faced ban in Bangladesh and the Philippines for engaging in corrupt practices.

Montenegro presents another example of Chinese strategy behind BRI where Beijing is funding and building an economically unviable highway — 78 per cent of Montenegro’s external debt is owed to China and in case of a default Beijing has a right to access Montenegrin land as collateral. Any arbitration would be conducted according to Chinese laws. Such strategies will be at play at all BRI sites.

Three years ago, IMF’s then Managing Director Christine Lagarde raised the same issue, stating that BRI should go only where it’s needed and where the debt it generates can be sustained.

Alternatives to BRI

One would have expected that BRI with 18 EU members and 20 Latin America and Caribbean nations would have sent shivers down the spine of Western world. But the Chinese, unlike the Russians, ace the art of subtle game play that the West blindly falls for. Washington’s Build Back Better World (B3W) and the EU Global Gateway, still in the launching phases, are too little too late; the analysts have already declared them incapable of competing with BRI.

Now there’s concern and debate in the BRI states about debts, however, if their common populace can continue to put consistent pressure on their governments about complete transparency over the loans, the situation can improve. International development banks and multilateral initiatives will also need to step up their game. Finally, IMF and World Bank will have to provide debt to needy nations while toning down the harsh conditions and dropping the imposition of Bretton Woods consensus, if they were to have a real choice to get out of Beijing’s deep-debt maze.

(The author is a foreign policy expert and a lawyer)

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