The Chinese Debt Trap – A Geo-Strategy


American statesman John Adams said, “There are two ways to conquer and subjugate a country: one is by the sword; the other is in debt. China, choosing the second path, adopted neo-colonial era practices and quickly became the world’s largest official creditor. By granting huge loans with conditions attached to financially vulnerable states, it has not only strengthened its influence over them, but has also trapped some in sovereignty-eroding debt traps. Instead of first assessing a borrowing country’s creditworthiness, China is happy to lend, because the heavier the borrower’s debt burden, the greater China’s leverage.

Debt trap diplomacy is a term in international finance that describes a creditor country or an institution that grants debt to a borrowing country partially or solely for the lender to increase its political influence. The term “debt trap diplomacy” was first coined by an Indian scholar, Brahma Chellaney. He called China’s predatory or exploitative lending practices, which overwhelm poor countries with unsustainable lending and force them to cede strategic leverage to China. The term was first used in 2017; within 12 months, it had spread rapidly through Western media, intelligence circles and governments. It was further defined in a 2018 report by the Harvard Kennedy School’s Belfer Center for International Affairs, which describes debt trap diplomacy in the context of Chinese geostrategic interests.

The creditor country is said to extend excessive credit to a debtor country with the intention of obtaining economic or political concessions once the debtor country becomes unable to meet its repayment obligations. Loan terms are often not made public and often come with terms that suit the lender. The term is most commonly associated with China, but has also been applied to the International Monetary Fund (IMF); both claims are disputed. The term “debt trap diplomacy” has been used in official documents by the United States government since the Trump administration. Multiple US government documents refer to it, such as “The Elements of the China Challenge” (2020).

Goals

China’s overseas development policy has been called debt trap diplomacy because once an indebted country fails to repay its loans; it becomes vulnerable to pressure from China to support its geostrategic interests. According to Brahma Chellaney, “this is clearly part of China’s geostrategic vision”. The Chinese government has been accused of demanding secret negotiations and uncompetitive prices on projects in which tenders must be closed and contracts must be awarded to Chinese state-owned or state-related companies charging prices significantly higher than those of the market.

For example, a 2006 loan to an African country, Tonga, sought to rebuild infrastructure. From 2013 to 2014, Tonga experienced a debt crisis when the Exim Bank of China, to whom the loans were owed, did not cancel them. Loans accounted for 44% of Tonga’s gross domestic product (GDP). Some analysts have said such practices highlight China’s hegemonic intentions and challenges to state sovereignty. SK Chatterji to Asia time pointed out that China’s BRI-led debt trap diplomacy is the economic side of China’s “slicing the salami” strategy.

Former US Secretary of State Mike Pompeo said China’s loans were facilitated by bribes, adding that “China presents itself with bribes to top leaders of countries, in exchange of infrastructure projects” in an October 2018 speech.

In fact, many Chinese loans have not been publicly disclosed, which has created a “hidden debt” problem. Every contract since 2014 has incorporated a sweeping confidentiality clause that obliges the borrowing country to keep the terms or even the existence of the loan secret. Such Chinese-imposed opacity, the study points out, violates the principle that public debt must be public and not hidden from taxpayers so that governments can be held accountable.

Analysts have advanced three strategic objectives behind China’s loans:

1) “Filling a ‘string of pearls’ to solve his ‘Malacca dilemma’ and project his power on the vital trade routes of South Asia;

2) undermine and fracture the US-led regional coalition that challenges Beijing’s claims to the South China Sea;

3) and allowing the People’s Liberation Army Navy to push through the “Second Island Chain” in the blue waters of the Pacific”.

False declarations

A study by AidData, an international development agency at William & Mary University in the United States, finds that half of China’s loans to developing countries are not counted in official debt statistics.

It is often kept off government balance sheets, directed to state-owned companies and banks, joint ventures or private institutions, rather than directly from government to government.

There are now more than 40 low- and middle-income countries, according to AidData, whose debt exposure to Chinese lenders is more than 10% of the size of their annual economic output (GDP) due to this “debt”. hidden”.

Djibouti, Laos, Zambia and Kyrgyzstan have debts to China equivalent to at least 20% of their annual GDP.

Much of the debt owed to China relates to major infrastructure projects like roads, railways and ports, as well as the mining and energy industry, under the president’s Belt and Road Initiative Xi Jinping.

Lost National Assets

Some borrowing states, when they cannot repay Chinese loans, are forced to cede strategic assets to China. Water-rich Laos’ transfer of its national power grid to Chinese majority control also has implications for its water resources, as hydropower accounts for more than four-fifths of national electricity production.

One of China’s early successes was to obtain 1,158 square kilometers of strategic territory from Tajikistan in 2011 in exchange for debt forgiveness. Since then, as the Chinese military base in Badakhshan points out, China has further consolidated its foothold in Tajikistan, due to a corrupt ruling elite.

A more famous example is the Sri Lankan transfer of the port of Hambantota, along with more than 6,000 hectares of land surrounding it, to Beijing under a 99-year lease. The transfer of the most strategically located port in the Indian Ocean region at the end of 2017 was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving his daughter to the cruel loan shark.

China’s debt trap diplomacy has not even spared its close ally, Pakistan. Saddled with a huge Chinese debt, Pakistan has granted China exclusive rights, coupled with a tax holiday, to run the port of Gwadar for the next four decades, with Beijing also pocketing 91% of the port’s revenue. China also plans to build a Djibouti-style outpost for its navy near Gwadar. Gwadar has become the center of a massive and determined protest against the Chinese presence in the country.

Residents and even those outside the city gathered in Gwadar to oppose the Chinese presence in Balochistan, the province where Gwadar is located.

In small island nations, China has converted large loans into acquiring entire islands with exclusive development rights. China has taken control of a few islets in the Maldives archipelago in the Indian Ocean and an island in the South Pacific nation of the Solomon Islands. The European Union, meanwhile, refused to bail out the tiny Balkan republic of Montenegro for mortgaging itself to China.

China often begins as an economic partner of a small, financially weak country, gradually becoming its economic master. The huge debts owed to China will not go away simply because Beijing erects a curtain of silence. And the burden of repayment will inevitably be borne by those who can least afford to make the sacrifices. Although China has canceled debts and negotiated loans in many African countries, the same cannot be said for other parts of the world. This difference can be attributed to the fact that currently, the African continent does not offer immediate geostrategic opportunities to Beijing compared to other parts of the world.


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