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Is China’s Belt and Road plan a debt trap?


FRANK CHING

SPECIAL TO THE GLOBE AND MAIL

PUBLISHED 4 HOURS AGOUPDATED AUGUST 31, 2018

Frank Ching is a Hong-Kong based journalist.

Beijing’s ambitious development strategy, the Belt and Road Initiative, which involves land and sea connections from China to Europe, linking dozens of countries on three continents, is enthralling in its scope.

Presented in 2013 as a project that will stimulate economies and enhance trade, it will also significantly heighten China’s own geopolitical status. As Henry Kissinger has said, the Belt and Road Initiative “is a quest to shift the world’s centre of gravity.”

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China recently announced that it has invested more than US$60-billion in countries along the Belt and Road since 2013. In 2017, direct investment reached US$14.36-billion, or 12 per cent of China’s total outbound investment.

More than 100 countries and international organizations have signed agreements of co-operation with China on developing the Belt and Road.

While five years is a relatively short time, China is presenting some examples of an “early harvest,” as Vice-Foreign Minister Le Yucheng put it during a talk at Tsinghua University in July. He cited Uzbekistan where, he said, a third of its 30 million people live in the Andijan region. For them, going to Tashkent, the capital, meant either a four- or five-day drive across mountain passes or transiting through a third country by rail. But Chinese construction workers built a railway tunnel – the only one in central Asia – and now the trip takes only two hours.

Another example Mr. Le cited was Kenya.He said a journey from Mombasa, the country’s biggest port city, to Nairobi, the capital, used to take over 10 hours. But China helped to build a railway line in May, 2017, and now the trip has been cut to five hours.

No doubt, there are very positive experiences around the Belt and Road Initiative. But there has also been a recent spate of bad publicity. In Sri Lanka, for example, former president Mahinda Rajapaksa accepted billions of dollars in loans from China for infrastructure projects, including a new port that feasibility studies said wouldn’t work. Mr. Rajapaksa lost power in 2015, and the new government became responsible for the debts. In July, 2017, Sri Lanka agreed to lease the Hambantota Port to China Merchant Port Holdings for 99 years for US$1.4-billion. So the port that Sri Lanka borrowed money from China to build is now in Chinese hands. Even so, Sri Lanka remains deeply indebted to China.

Now, it is feared that half a dozen other countries may also be caught in a “debt trap.”

The Malaysian Prime Minister, Mahathir Mohamad, last week asked China to cancel three infrastructure projects that he said Malaysia simply could not afford. In unusually candid remarks, he warned against “a new version of colonialism.”

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Earlier in August, Tonga’s Prime Minister, Akilisi Pohiva, said that Pacific island nations should request China to waive their debts. Subsequently, he issued a statement thanking China and saying that the two countries would discuss “proper solutions through friendly consultation.”

Clearly, the Belt and Road Initiative has run into serious problems. Some countries are finding the burden of debt financing too arduous. Even the Chinese nationalistic paper Global Times published a commentary in which it said: “When providing concessional loans, China should make sure that the recipient countries have the ability and resolve to pay back. China should think over the potential hazards before establishing credit relations with other countries.”

There is a real danger of leaders of developing countries accepting substantial development loans for large projects that help themselves, their relatives and friends, rather than the people. Then when these leaders lose power, successor governments are stuck with the task of financing the loans.

There is also a danger that China may allow politics to trump economics. El Salvador may be a case in point. The country asked Taiwan for help to develop a port. The Taiwan government sent an engineering team to make an assessment and concluded that the project wasn’t feasible. After Taiwan declined to support the Port La Union initiative, El Salvador broke relations with Taiwan and established relations with Beijing.

Now China is expected to help finance the port project. Such loans, however, may thrust that Central American country into a “debt trap” without either party wanting it to happen.

China needs to reassess the viability of Belt and Road projects. It’s not enough to get a government to sign on the dotted line for loans. As both the Sri Lanka and Malaysia cases show, successor governments may find onerous accords that predecessor governments accepted, with consequent loss of goodwill for China. And feasibility studies should be respected.




https://www.theglobeandmail.com/opinion/article-is-chinas-belt-and-road-plan-a-debt-trap/

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