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China’s debt-trap diplomacy? BRI participant countries owe over 385 billion USD to China in hidden debt, study reveals

The research estimated that 40 lower-to-middle income countries(LMIC) have debt exposure to China that is higher than 10 per cent of their national gross domestic product(GDP)

China has long been known for using its financial clout to further “debt-trap diplomacy”, a policy that encompasses saddling borrowing nations with excessive credit with the intention of extracting economic or political concessions from the debtor country when it finds it increasingly difficult to meet its debt repayment obligations.

Now, a report published by AidData says China’s Belt and Road Initiative has left a large number of countries burdened with “hidden debts” to the tune of $385 bn.

The report published by AidData, an international development research lab based at the College of William & Mary in Virginia, further says that scores of countries underreported their financial liabilities linked to China for many years now, resulting in mounting “hidden debts”, or confidential liabilities that the countries might be obligated to pay.

AidData has parsed through more than 13,000 aid and debt-financed projects worth more than $843bn across 165 countries for a period of 18 years ending 2017 to arrive at the conclusion that Beijing has been stealthily deploying its “debt-trap diplomacy” where China uses its financial supremacy to tie smaller countries in the allure of lucrative loans and then using the leverage to bend them to its will.

The analysis conducted by AidData researchers has hinted that Chinese lendings are considerably larger than previously estimated by credit rating agencies and intergovernmental organisations with surveillance capabilities. China, they conclude, has been able to pull the wool over intelligence agencies from finding out the substantial leverage it held on small countries by extending seemingly large credit lines to them.

Brad Parks, executive director of the AidData team, was astonished to discover that the hidden debt amount granted by China is close to $385bn, as reported by Financial Times.

The discovery of China’s practice of saddling countries with outsize loans in order to exert its influence on them has come at a time when the pace of lending on the Belt and Road Initiative has hit roadblocks, partly because of the United States’s initiative in leading the G7 effort to undercut Beijing’s hegemony in international development finance.

However, the report underscores the enduring consequences of a sharp transition since Xi Jinping unveiled the BRI plan after coming to power in 2013.

The marked shift in Beijing’s lending strategy after Xi Jinping was elected as the President of China

China had previously directed its lending to sovereign borrowers such as central banks. But under Xi Jinping’s leadership, that changed fundamentally. As of now, more than 70 per cent of China’s foreign debt comprises loans extended to state-owned companies, state-owned banks, special purpose vehicles, joint ventures and private sector institutions.

The research estimated that 40 lower-to-middle income countries(LMIC) have debt exposure to China that is higher than 10 per cent of their national gross domestic product(GDP). On average, the LMIC government is under-reporting repayment obligations to China by an equivalent of nearly 6 per cent of GDP.

“These debts usually do not appear in the government balance sheets in developing countries. The critical point is that most of them have safeguard against explicit or implicit forms of host government liability protection. That’s equivalent to erasing the difference between private and public debt,” Parks said in an interview with Financial Times.

China’s plan of pressurising borrowing countries that are struggling to repay their loans to cough up their physical assets

The research has come at a time when there is a looming fear among many countries about China moving to seize their assets in case they default in their loan repayment. Earlier last year, former Maldives President Mohamed Nasheed said China’s banks were not giving them ‘breathing space’ even in the pandemic.

The exorbitantly high outstanding amount that the Maldives owes to China led Mr Nasheed to worry if the country could face the same fate as Sri Lanka’s Hambantota port. Earlier in 2018, China made Sri Lanka cough up the Hambantota port, miles off the shores of its rival India, and a critical base to monitor the Indo-Pacific trade route.

Similar to the case of the Maldives, the former Sri Lankan President Mahinda Rajapaksa had taken enormous loans from China that the succeeding government in Sri Lanka struggled to square accounts with. As a result, after tough negotiations and months of pressure from Beijing, the Sri Lankan government handed over the port and 15,000 acres of land nearby to China for 99 years.

Not just physical but China is focused on collateralising liquid assets too: Brad Parks

Parks, however, revealed that though China has developed an image of a country using its loans to collateralise physical and illiquid assets, the research suggests that they are also involved in collateralising liquid assets.

“It is true that Chinese state-owned lenders have a strong preference for collateralisation: we find 44 per cent of the overall lending portfolio was collateralised, and when the stakes are really high, that’s when they turn to collateral,” he said.

Park says China is asking borrowers to maintain a minimum cash balance in an offshore account, or an escrow account, that is controlled by Beijing. So when the borrower fails to repay loans, the lender claws back the amount through such offshore accounts.

African countries who are part of China’s BRI cancel projects blaming China’s lack of transparency and shoddy work of Chinese companies

Countries that have a financial relationship with China are not just wary of losing their physical or liquid assets but also about the shoddy quality of work the Chinese companies are doing on their soil. This is the reason why a great many African countries are showing stiff resistance to Chinese companies, initiating action against Chinese investment and cancelling existing Chinese projects.

According to the Singapore Post, the low-grade work of the Chinese companies is to blame for the cancellation of a spate of projects.

John Hopkins University School of Advanced International Studies’ China-Africa Research Initiative report said that China signed 1,141 loan commitments with various African governments and state enterprises which were worth USD 153 billion. This was done during the period 2000 to 2019, according to the Singapore Post.

Most of these Chinese projects in Africa are getting suspended or abandoned by the African countries amidst the Covid-19 crisis and the inability of these African countries to pay back the huge loans taken from China. Hence in order to cut debt burdens, these countries decided to shut down the Chinese projects, most of which fall under Beijing’s Belt and Road Initiative 2013.

 

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Jinit Jain
Engineer. Writer. Learner.

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