CHINA’S DEBT TRAP DIPLOMACY

Beijing is accused of luring developing or underdeveloped countries to borrow money for infrastructure projects and later controlling them if they fail to pay off their loans in time, while a US-based study says asset seizure is a rare instance.

Belt and Road Initiative (BRI) has become the backbone of China’s global integration strategy on the basis of integrated energy, logistics, and transport linkages like ports and road networks across the Eurasian axis reaching to the Middle East and Africa. Many describe China’s economic goals in the world as a “Trojan horse” with some criticism toward the multi-billion dollar BRI and accusing Beijing of laying ‘debt traps’ with the help of the project. 

China’s Debt Trap Diplomacy

In a push to gain rapid political and economic ascendency across the globe, China is dispensing billions in the form of concessional loans to developing countries, mostly for large-scale infrastructure projects. Often, developing nations are lured by China’s offer of cheap loans for transformative infra projects, which involve a substantial investment. These developing nations, which are primarily low- or middle-income countries, are unable to keep up with the repayments, and Beijing then gets a chance to demand concessions or advantages in exchange for debt relief.

According to a study by the International Monetary Fund (IMF), from 2013 to 2016, China’s contribution to the public debt of heavily indebted poor countries nearly doubled from 6.2 percent to 11.6 percent. China’s lending is expanding even more through Belt and Road Initiative (BRI).

What concessions are demanded by China?

In South Asia, with the Indian Ocean and Indo-Pacific as new theatres of contestation, Beijing will, and has capitalized opportunities to further establish its presence, influence, and leverage in the region. Sri Lanka is a prime example of China having taken advantage of internal fiscal mismanagement and debt. Sri Lanka in 2017, for instance, was forced to hand over control of the Hambantota port project to China for 99 years, after it found itself under massive debt owed to Beijing, who used it as a strategic base for China’s navy. China’s engagement with the Maldives could result in a similar situation where $1.4 billion amounting to 78% of the country’s external debt is owed to China

Similarly, in exchange for relief, China constructed its first military base in Djibouti. Whereas Angola is replaying multibillion-dollar debt to China with crude oil, creating major problems for its economy. Elsewhere in Tajikistan, Madagascar, Burundi, Chad, Mozambique, and Zambia are all either in debt distress or at high risk of it, a situation China’s predatory lending practices are exacerbating.

China has also loaned €800 million to build a highway in Montenegro. A provision under the agreement states if Montenegro were to default on repayment, China would get the right to access Montenegrin land as collateral – directly alluding to a strategy of seizing assets in case of inability to repay. This will provide China a direct entry into Europe. Presently, Montenegrin debt is around 65.9% of its GDP with China holding 25% of its public debt.

Kenya is the newest victim of China’s economic policy as it is going to occupy Kenya’s immensely profitable Mombasa port. China had lent 550 billion Kenyan shillings for construction of Kenya’s Standard Gauge Railway project. The African nation is not in a position to repay. Not only this, the inland container depot in Nairobi is also under threat of a Chinese takeover. It is suspected that, the whole Belt and Road Initiative (BRI) that was rolled out by China is actually proving to be a part of its debt-trap diplomacy

The China-Pakistan Economic Corridor (CPEC) is said to be the first project of BRI. Pakistan’s experience should be considered as a guide for the future. Four years ago, the then prime minister of Pakistan Nawaz Sharif had said that CPEC would prove to be a “game changer” for Pakistan and South Asia. But the way Pakistan has sunk into debt after four years from 5.8% in 2017-18 to 3.4% in 2018-19 and a projected 2.7% now. The debt burden is increasing to unbearable levels and so is the repayment pressure on Pakistan, With the worsening economic condition of Pakistan, nobody in that nation is now calling CPEC a ‘game changer’.

Experts recommends, the world to discover alternatives which might allow them to stand on their own two legs as the reality of Western and Chinese economic strategies have revealed that their actions have not been in favour of the host countries.

What are these concessional loans granted by China?

These are loans extended to low- and middle-income countries on terms that are significantly more generous than market loans. The ‘concessionality’ factor is achieved either by offering interest rates that are below the market rates or leniency in the grace period, and often with a combination of both. These loans generally have long grace periods.

Has India taken any loans from China?

India has not entered into any loan agreement directly with China. However, it has been the top borrower of Asian Infrastructure Investment Bank (AIIB), a multilateral bank wherein China is the largest shareholder (26.6% voting rights) and India the second (7.6% voting rights) among other countries. China’s vote share allows it veto power over decisions requiring super-majority.

China has been using the financial tool of debt to gain influence across the world and grab considerable power in India’s neighboring countries, thereby increasing the amount of political and security threats.

The neighboring countries of India have also taken loans from China are –

Bangladesh: $460 million

Srilanka : $5 billion

Pakistan: $30 billion

Apart from these countries, China has also lent millions to Middle Eastern, South America and European Countries

After all, BRI is central to its debt-trap diplomacy. China often begins as an economic partner of a small, financial weak country and then gradually enlarges its footprint in that state to become its economic master.

China’s strategy has a hollow ring to it. Looking ahead, as repayment of loans mature, we could see Beijing becoming increasingly opportunistic and seizing assets in what it perceives as strategic parts of the world.

China is showcasing its signature global initiative. But anyone who wants a brighter, more self-reliant future for developing countries should join together to break the chains of debt, China is wrapping around the developing world.

Aishwarya Says:

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