THE CHINESE DEBT-TRAP POLICY : By- Khushi Agarwal

INTRODUCTION

If there is one thing at which China’s leaders truly excel, it is the use of economic tools to advance their country’s geostrategic interests. China, so the narrative goes, is aggressively lending to smaller nations who cannot pay back the loans. Some commentators term these lending as “debt-trap diplomacy”, implying that they form a part of an intentional strategy by the Chinese state to pressure the third world countries, leading to a multi-fold rise in the Chinese economic influence over the globe. Although the case of Sri Lanka is often cited as the poster child for the ills of Chinese debt-trap diplomacy, however a study of counter-arguments from both sides reveals a need for focusing on a way forward in light of no specific instance or evidence.

THE DEBT-TRAP POLICY- HOW IT WORKS AND WHAT IS MEANS?

Debt-trap policy is a type of diplomacy based on debt carried out in the bilateral relations between countries. It involves one creditor country intentionally extending excessive credit to another debtor country with the alleged intention of extracting economic or political concessions from the latter when it becomes unable to honor its debt obligations. The conditions of the loans are often not made public and the loaned money is typically used to pay contractors from the creditor country. This is an extension of the well-known strategic foreign policy which openly uses economic aid and investment between countries to curry diplomatic favors.

China’s Belt and Road Initiative (BRI) can be said as the leading example of Debt Trap Diplomacy. BRI hopes to invest an estimate of US$ 8 trillion in infrastructure financing to 68 countries in Asia, Europe and Africa most of which are under developed. Beijing portrays it as a cross-border, win–win economic stimulus package that will spur economic growth in China and also the countries with which it engages along the old Silk Roads. On the other hand, countries are becoming ensnared in a debt trap that leaves them vulnerable to China’s influence.


he loans by the Chinese government need to be guaranteed with some type of collateral. For many poorer countries, the only collateral large enough at hand is land — a port, for instance. Hence, there have been ripples of concern about overburdening the borrowers and ending up in settlements that undermine local sovereignty. The smaller the country, the more lopsided the negotiations with China are perceived to be, so the anxiety is especially high in places like the Pacific island nations or the African third world countries.

Of course, extending loans for infrastructure projects is not inherently bad; however, it seems that borrower countries have two choices when faced with unsustainable debt crisis: cancel the projects or hand them over to China. While China has shown a number of instances of ‘benevolence’ by cancelling a countries debt or rescheduling a payment, such as in the case of Cambodia, it has in turn ensured that the country award it contracts for additional projects in exchange. Thereby keeping the country entangled in a debt spiral. Hence, this policy receives mixed reactions from the international community.

THE SUPPORTERS AND THE CRITICS

The debt-trap policy of the Chinese government is often criticized on several counts in each of the Western, Indian, and African media. The analysts in these countries including senior figures in the US Trump administration, Vice President Mike Pence and Secretary of State Mike Pompeo, have suggested China's alleged debt-trap diplomacy may hide hegemonic intentions and challenges to states' sovereignty. Jonathan Hillman, director of the Reconnecting Asia project for the Center for Strategic and International Studies states “If it can carry goods, it can carry troops”.

Other concerns include the secretive conditions of the loans as well as their high interest rates. The policy has also been accused of imposing unfair trade and financial deals as cash-strapped countries are unable to resist Beijing's money.

India has also remained wary of Chinese intentions with regards to its BRI projects. As it develops infrastructure in India’s neighborhood, it steadily brings nations and certain strategic locations in them, under its influence. New Delhi’s primary concern is Beijing’s use of its economic presence to advance its strategic interests vis-à-vis India, which directly threatens India’s influence in the region.


On the other hand, the China-inclined analysts claim the opposite based on several cases taking place. To them, ‘Debt-trap diplomacy’ is little more than a fantasy. In the words of Analyst Ambassador Chas W. Freeman, Jr. (USFS, Ret.), "Debt-trap policy" is a "snappy phrase invented by an Indian polemicist" and that "Yet the only instance of a so-called a “debt trap” ever cited is the port of Hambantota, which is less an example of a “debt trap” than of a stranded asset.

A SAIS-CARI report from August 2018 and researchers at Johns Hopkins University although have warned that African countries might be unable to repay Chinese loans, however, Chinese loans are noted as not a major contributor to debt distress in Africa. Thus, according to them, while Chinese lending has certainly contributed to debt overload in some economies, it is not the driving force behind their problems. 


CASE STUDY- SRI LANKA


Sri Lanka is a textbook example how large Chinese investments can go terribly wrong for a host economy. Post-civil war Sri Lanka went on a borrowing binge to reconstruct dilapidated infrastructure and to successive Sri Lankan governments, China was a benevolent friend, offering cheap, easy and addictive money – an attractive alternative to the strict conditionality of Western financing arrangements.

In 2010, President Rajapaksa sought Chinese investment to build the Hambantota port in the country, for which China invested $1.5 billion. The following year, Colombo received a $200 million-dollar loan for a second international airport, that has since come to be known as the ‘world’s emptiest airport’, along with an additional $810 million for the second phase of the project. By 2015, Sri Lanka owed China $8 billion. In July 2017, with the country facing one of its worst financial crises, China agreed to a debt-for-equity swap, getting a 70 per cent stake in the Hambantota port, under a lease agreement for 99 years.

This sparked speculation across Sri Lanka that China had orchestrated the whole fiasco. To critics, it was confirmation of China’s imperial agenda and demonstrated the pitfalls of Chinese financing that such arrangements pose a threat to the sovereignty of vulnerable countries. However, further scrutiny of data and the events that followed reveal that Chinese lending only accounted for around 10 percent of the country’s external debt in 2017, and a host of domestic economic problems, including protectionism and weak exports, did more than China to bring.


THE WAY FORWARD


Many scholars and experts tend to look at BRI as China’s Marshall Plan. While China’s aggressive investments have definitely filled in the gap created by the reduction of investments from USA and west in the 21st century, the real problem appears to be the opaque, unclear, and shady intentions of the Chinese Government, and that can be addressed only through bending the hand of China through multilateral forums. China does not subscribe to any guiding multilateral frameworks, set down by the IMF or the WB, and has generally refrained from participating in multilateral approaches to debt relief, though it does participate in debt relief discussions and engages informally with IMF staff on individual country cases. Additionally, while China is an observer at meetings of the Paris Club, it is not a member, so it is under no obligation to act in solidarity with Paris Club members or even to inform the Paris Club about the management of its credit activities.

Thus without a guiding multilateral or other framework to define China’s approach to debt sustainability problems, we only have anecdotal evidence of ad hoc actions taken by China as the basis for characterizing the country’s policy approach.

Hence, the World Bank and other Multilateral Development Banks (MDBs) should work towards a more detailed agreement with the Chinese government when it comes to the lending standards that will apply to any BRI project, no matter the lender. Another recommendation is to establish a new creditor’s group which would maintain the core principles of the Paris Club but with China playing a more meaningful role. Given the evidence that China’s lending imposes unsustainable burdens on vulnerable countries globally, it is past time for world leaders to insist that all projects adhere to internationally accepted best practices for transparency and financial sustainability and that lenders adopt modern labor, governance, and environmental standards for their development projects. Failure to do so, will be catastrophic.



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