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Trap of the Century?~I

Govind Bhattacharjee | October 14, 2018 12:24 am


The Belt and Road initiative (BRI) ~ “project of the century” as proclaimed by the President Xi Jinping and “the path of Xi Jinping”, as decreed by the State-controlled Chinese media, was first proposed in 2013. But its complete blueprint was released only in 2015 and it was integrated into the government’s 13th Five-Year Plan. By mid-2016, 57 countries had become active participants in the BRI, and 30 had formally signed the BRI cooperation contracts. With China claiming to have established 75 overseas economic cooperation zones in 35 BRI countries, and the China Development Bank “tracking” more than 900 projects worth $ 900 billion in 60 countries, China’s National Development and Reform Commission (NDRC) defined the BRI as a “systematic project” that “aims to promote the connectivity of Asian, European, and African continents and their adjacent seas” through “all-dimensional, multi-tiered and composite connectivity networks” to realise “diversified, independent, balanced and sustainable development in these countries.” The loosely defined objectives concealed the real intention which was to extend the Chinese empire to half the world through economic diplomacy and to gain political and economic control over Indian Ocean-rim countries.

The BRI comprises an overland Silk Road to link western China to Western Europe through the Eurasian supercontinent and a 21st Century Maritime Silk Road across the Indian Ocean connecting the Western Pacific to the Mediterranean, both being underpinned by an “unprecedented wave of Chinese investments in virtually all types of transportation infrastructure, including rail, roads, ports, airports, electricity generation, telecommunications and various other forms of connectivity.” This expansive connectivity network will have very serious strategic implications for the world, because, as Jeff Smith of The Heritage Foundation, a Washington-based think-tank, observes, it mainly serves the Chinese economic and foreign policy objectives, “from energy security to counterterrorism and from boosting Chinese exports to popularizing the Chinese currency”. Given that Asia will require infrastructure investments exceeding $1.5 trillion annually for the next 12 years “to maintain growth momentum,” no other country in the world has the requisite economic muscle to provide financing on such a scale. China’s promise of easy finances to build roads, ports and railways therefore attracted many investment-starved countries, especially in South Asia which undoubtedly is the least financially integrated region in the world, with intra-regional trade in South Asia accounting for less than 5 per cent  of total trade, compared to 35 per cent for East Asia and 60 per cent for Europe, while intra-regional investment accounts for less than 1 per cent. China’s BRI was thus initially cheered by many countries.

In contrast to the 1990s when China was a major FDI-destination,  the country has now emerged as a net FDI-exporter, its outbound FDIs growing annually at a rate of 30 per cent between 2005 and 2015. In 2016, for the first time, Chinese outbound FDI surged to $183 billion, far exceeding its inward FDI of $133 billion. As  ***The Atlantic*** pointed out, while China was the world’s largest recipient of loans from the World Bank and Asian Development Bank (ADB) till the 1990s, its loans to developing countries now exceed those of the World Bank itself. As its economy shows signs of slowing down and demand for its products slumps across Europe and America, China is desperately seeking a conduit to export its vast surplus and idle capacity it had created in its state-controlled monoliths and private sector. Besides, it also has huge unused forex reserves in its Central Bank. But the most important unstated objective is possibly to seek alternative sea routes for trade. Today the eastern seaboard and the narrow Malacca Strait accounts for 80 per cent of China’s oils and a vast quantity of its  goods trade. China desperately wants to build alternative routes through Pakistan, Central Asia, Myanmar and other corridors.

China cares very little for human rights anywhere in the world including within its own borders, and has gained trust and business in many countries by supporting their authoritarian dictators or helping suppress their human rights violations in international fora. BRI is also helping China to export its model of online information control, surveillance, and censorship of the internet, which is why authoritarian Governments from Russia to Zambia, Zimbabwe, Ethiopia, Uganda, Kenya, Maldives and Philippines are so enthusiastic about BRI. The fledgling democracies which are being gradually captured by corrupt or authoritarian leaders are particularly vulnerable to Chinese money-power their leaders so desperately need to stay in power and serve Chinese interests.

Using economic tools to advance a country’s interests is nothing new in geopolitics. But the way China is practising this age-old tactic of statecraft has started sending shivers across the globe, and many countries are just waking up to the perils of the consequence of a debt-trap being carefully laid by China trying on the sly to become the world’s most extensive commercial empire through the BRI, which involves funding exceeding  $ 1 trillion, of which $ 300 billion is estimated to have been spent already. However, most of this funding is provided by way of loans rather than grants to developing countries, and not on the easiest of terms. Under the grand strategy of Chinese foreign policy, the loans often come by way of Chinese equipment, Chinese products and inputs, besides management of Chinese firms, using Chinese manpower, to build roads and ports of its BRI partners. These loans naturally impose heavy costs on them and some have started to back out, as they fear, rightly, that these might be a ruse to influence their domestic politics and internal affairs and might ultimately infringe upon their sovereignty.

Several completed BRI projects are already bleeding, like the world’s “emptiest” international airport near Hambantota and possibly the world’s “emptiest”  port at Hambantota despite being situated near one of the busiest maritime trade routes, both built at huge cots financed by China, as well the much-publicised, multibillion-dollar Gwadar port in Pakistan. As analyst Brahma Chellaney points out, China would rather prefer the projects to continue to operate this way and remain non-profitable, because the heavier the debt burden on smaller countries, the greater the influence China can exercise over them. After all, it has successfully used its enormous clout to push Cambodia, Laos, Myanmar, and Thailand to nullify a united ASEAN stand against its aggressive territorial claims in the South China Sea. There is also a military angle to it; as Chellaney says, Chinese attack submarines have docked twice at Sri Lankan ports, and two Chinese warships were recently pressed into service for the Gwadar port security.

Hambantota port was built by China at a cost exceeding $1 billion, but could attract practically no container traffic to generate the revenue with which to repay the debt, forcing Sri Lanka to transfer the port along with 15,000 acres of land to Chinese firms on a 99-year lease in lieu of debt relief. After Maithripala Sirisena was elected  the Sri Lankan President in January 2015, he found the country saddled with $8 billion in Chinese debt, and bulk of its revenue going towards repayment of this “unprecedented debt”,  due to deals negotiated by the previous Rajapaksa government. Sri Lanka is already in a serious debt trap, with a substantial part of its external debt owed to China to resolve which it has agreed to convert its debt into equity, leading ultimately to Chinese ownership of projects. In a repeat of Hambantota story, $3.8 billion investment in a city-sized casino resort in Cambodia has produced a “sprawl of mostly empty hotel buildings, deserted beach bars and the unfinished shell of a casino on a remote part of the Cambodian coast” which has caused “extensive environmental damage”, besides “displacement of thousands of people.” An expensive Chinese-built railway in Kenya “carries less than 20 per cent of the freight it needs to break even.”

Benefits of BRI are thus going to China and Chinese firms, while costs have to be borne by the partner nations. According to a 2018 study by John Hurley, Scott Morris and Gailyn Portelance of the Washington-based Center for Global Development, of the 68 countries participating in the BRI, 27 have “junk” financial ratings and 14 are unrated; in eight countries ~ Djibouti, Kyrgyzstan, Laos, Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan ~ the “future BRI-related financing will significantly add to the risk of debt distress.” Each of these countries already carries a heavy debt burden ~  Pakistan’s debt was almost 70 per cent of its GDP and Maldives  and Djibouti’s 83 per cent and 87 per cent respectively in 2016. Debt Traps are indeed integral parts of the Chinese Grand Strategy. China sees debt-for-equity swaps as a tool to advance its geopolitical agenda to control ownership stakes in sensitive ports and infrastructure facilities in countries through servicing of their growing debt to China.

China itself is suffering from a debt problem ~ its Debt:GDP ratio has grown from a 141 per cent in 2008 to 256 per cent  in 2017, which is clearly unsustainable, given its lower per capita income compared to the developed countries that can withstand such high debt burden. With its economy already in a slowdown mode, it may even trigger a recession leading to another global financial meltdown.

(To be concluded)

The writer is a commentator. Opinions expressed are personal


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