China Debt Trap to Developing Countries.

China Debt Trap to Developing Countries.

China has been on the verge of constructing tons of infrastructure over the past three decades. Owing to this rate, it means it is extremely good at it. China has also generated a macro-economic environment which is very stable and this has resulted to a very low inflation situation and less cost capital. China has the largest economy after USA. Through their infrastructure expertise, china is supporting projects of infrastructure in many developing countries which are strategically located through offering them large loans. china is excelling very well in this through the use of their economic strength to advance their interests throughout the world. According to Hurley et al., (2018), China has formulated a policy of $1 trillion called “one belt, one road” which is aimed at supporting projects of infrastructure in different countries by offering them loans. Extension of these loans to constructions of these projects is not a bad thing, but the motive behind it is what bad.

         China is not funding these project so that it can benefit the locals, but to help Chinese have access to the natural resources and create market for its export goods which are cheap and of low cost. After offering the loans, china also may send its own manpower to reduce jobs for the locals. What china is doing to the developing countries is a long financial case study for itself. It is using its debt trap policy in order to gain geographic control of these developing countries by purporting to be there for commercial reasons and in the end militarize the regions.

The Debt Trap Policy

       China is in the run of playing the same role that USA is currently playing in the world. Chinese government wants to make china a superpower. There is nothing wrong with this as this is what every country fights for. Greed is not wrong but the means which are pushing this desire maybe be wrong. The communist party of china is putting its plans in action through constantly expanding their policy; instead of war they have turned to financial supremacy and domination by use of money as their main weapon. Their debt policy involves lending countries, especially developing and underdeveloped strategically countries of importance by use of a collateral, where at the ultimate end the country is unable to pay the loans and this creates a necessary dependency on china in terms of economy and they end up selling its stakes back to china. China takes this opportunity to maintain hegemony and even use the geostrategic importance which it possesses.

       The debt trap policy that china is using currently is an expansionary plan which is very brilliant. They lend developing countries’ economies money to build infrastructure, which creates wealth for companies from china, offer employment to Chinese citizens and expand trade flows of Chinese goods which at the end will lead to gain in geo-political influence and power to the government of china.

        After this kind of drain, the country will not be able to pay interests of the money they took and may end up giving back these ports, airports or roads in order maintain the Chinese company and be able to collect the interest money.

      Var & Po (2017, March) takes a case study of a country like Sri Lanka which in 2010, were given a loan of $1.5 billion by chine to fund the building of a big port in Hambantota town. This looked like a great multi-national deal, conversely, the shipping activities and traffic on the port was almost zero. Due to lack of business on the port, the government of Sri Lanka, realized that it would be hard to repay the loan from china. So as to get a waiver on the whole debt, the Lankan government signed a bilateral agreement with the Chinese government on a 99-year lease. china merchants port holding co. received a 70% stake on the Hambantota port. The agreement also carried the geography in an economic zone like plan to permit more Chinese cash flow as investments for economic growth and development.

        This may seem like a good cure for a project that was failing but it is a disease that has been transferred throughout the world especially to the developing countries. This shows that countries that owes china money will be obliged to sign a deal to surrender some of their territories to the Chinese government. This is what we call a debt trap. China is putting developing countries in situations where it is only them who can save these countries. They are trapping developing countries in a financial situation that solution will come from them. this cunningness of china is called the debt trap policy of china. The countries are left in a situation where they cannot pay even the interest leave alone the debt amount.

Analysis of the Debt Trap Policy

         Last year, Sri Lanka handed over a port to Chinese government companies due to a debt of more than $ 1 billion. Djibouti which is the home of the main base of US military in Africa, looks like it will cede control of another important port to companies linked to Beijing and the government of the United States is very unhappy with this.

      Hussain et al., (2016 asserts that China is transferring skills to other developing countries. And it is helping these emerging countries finance the projects through relatively low-cost loans that are pointedly below what those countries could tap into in global markets, or domestically. Beijing encourages that dependency through contracts that are opaque, practices of predatory loans and deals that are corrupt mire a country in debt and cuts short its sovereignty which denies them the long term and a self-sustaining growth. The investments of Chinese in developing countries does not offer any solution to the infrastructure problems in these countries, it only creates huge debts and very few jobs if any, to some of the few countries that china pretend to be helping. The depth trap policy has been referred to as an offer of honey through cheap loans on infrastructure, with a very severe sting awaiting if their economies fail to generate enough cash to service the interest that comes with these loans.

       China has tried to characterize its “belt and road” initiative to look as a win-win in its aspirations to become a global leader in trade in the developing economies through funding of infrastructure projects especially on the transportation sector. It is the only country that has the courage to take risk of financing project that look unlikely to produce anything. China has filled that vacuum that was left by shrinking American presence in the global setting. When its debts plan go wrong, china has been faced with accusations of imperialism.

      The center for global development, which is a non-profit research organization, did an analysis of china’s debt on nations that are taking part in the current belt and road plan of investment. Countries like Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan and Tajikistan may find themselves in an above average debt situation.

        The researchers said that they did not estimate the severity of this debt on the growth of the economy, and most of their data came from reports from media. This evidence should raise a cause of alarm and a lot of concerns on the distress that is expected economically from these debts that will undermine the economic development and even efforts to develop it. China has in the past responded inconsistently to the debtors and this has not been the best practice by any international lender who is working with countries which are poor. It has sometimes waived the debts, and other times it has taken the infrastructure and fully controlled them in search for recompense.

       According to Lin (2017), debts from china has been viewed with a bad eye with massive evidence on its putative effects. The case of china taking over Sri Lanka’s port at Hambantota town, taking of Djibouti outpost and many others due to failure to service their loans conveniently ignores the eighty-four instances over the last 15 years when china waved loans without taking possession of any assets. Such as Ethiopia’s third restructuring. These evidences of bad faith about the Chinese debts ignores investments done by china in Venezuela. Venezuela is the largest single debtor from china where projects are still going on without takeover of any project or state asset. Western countries especially US resonates very well with the language of debt-trap policy. The anxiety is based on the fact that china is rising to be a global superpower through economic boosting.

      Fernando (2016) says that in developing countries, especially in Africa, Chinese financing cannot be avoided, the west, historically, have neglected the infrastructure plans referring to them as “uneconomical and unnecessary” and China stepped in especially from the 60s. since then, it has financed more than 3,000 strategic infrastructure projects around developing countries in Africa. It has also offered many tens of billions of dollars as commercial loans to state owned enterprises. The excess industrial capacity from china has been a benefit to the overwhelming market especially the manufacturing sector. When evaluating the partnerships of the developing countries with the rest of the world, ether in investment stock, growth investment, financing of infrastructure or aids, there is no country that matches china’s involvement in these activities.

         Through this analysis, it is evident that Chinese debt-trap policy has both positive effects and negative effects. Although positive effects seem appreciable, its negative effects are very severe that pressure both domestically and internationally are set to limit the Chinese ambitions. china watchers have expressed their discontent with this and have shown clear signs of discontent. The lending process of belt and road initiative (BRI) has stated to shrink and have been dramatically decreased since the year 2015. There is a link between criticism which has emerged due to an initiative to expand the Belt and Road initiative, which is a plan on infrastructure which was announced in 2013 to cover all developing countries in Asia, Europe, and Africa, which has been criticized by the Chinese critics back at home referring to it as a “aid” and a decreased ambition towards the program.

      As the trade war between china and united states take a high note, the people’s bank of china is trying to balancing act between allowing the yuan to become weak against the dollar and superseding to take care of this decline before it causes a devaluation that would negatively affect the economy of china. As this war is going on, china is trying through all means to manage the paywall – a massive domestic debt. Even if this crisis does not arise, taking care of this debt is still the main focus of the Chinese policy makers.

      China is also facing external pressure from international bodies to fall in line with the lending standards that were set internationally especially from the international monetary fund. The weaponized loans narrative is also spreading all over. Banking on the incident of the port in Hambantota in Sri Lanka, the critics parade this as an evidence that china is offering loans to countries which have a low income with a bad intention. Domestic politic also from countries in partnership are also affecting the lending of china. Malaysia has cancelled two major projected that were funded and run by Chinese after a new government was brought into power after an election.

Consequences of the Debt Trap Policy.

         China is in support of projects of infrastructure in developing countries that are strategically placed, by extending very huge loans to their respective governments. Arias & Wen (2015) asserts that due to this, many countries have been overburdened by these debts, exposing them their economies to Chinese influence. Consequences of these loans have been severe to some countries while others have enjoyed. Many developing countries have been put in very compromising situations by these debts. This has led to china taking over some of these some of the assets owned by the states. Some instances which elaborate this are as follows:

  1. Sri Lanka’s Hambantota port;  as explained earlier in this study, this port was surrendered to china’s merchants ports holdings for a lease period of 99 years. The company will operate this port under its authority and rules. This resulted from the failure of Sri Lanka failing into the debt trap of china and sometimes also before submarines from china were sported on that port.
  2. China and Maldives: china lent a loan to Maldives, this impacted an increase in the depth to GDP ratio and in the ultimate end  a sudden decision of FTA with china was reached.
  3. China a new IMF: china is in the verge of taking over the roles of IMF. In the recent past, it has entered the country of Zambia, which is landlocked, gave them a loan and it has turned out that Zambia cant repay the loan. Zambia has fallen a victim of the china’s debt trap and it was forced to sell some of its stakes in ZESCO.
  4. Djibouti’s outpost: china has been the key financier of the many infrastructural projects in Djibouti.  It has financed the building of a stadium, the ministry of foreign affairs offices and the peoples palace. The construction peoples palace was such an expensive project that resulted to Djibouti falling in the debt trap of china. Djibouti had to part away with a 90 acre plot which will be used by Chinese military to house more than three hundred troops from china. Chinese government will only pay a mere $20 million per year to the Djiboutian government. China has created a military outpost in Djibouti, which is viewed as a strategic move to access the west of Africa.

         China has the aim of building infrastructure for foreign countries. its investment do not necessarily come as equity but as a loan. Over lending is also over borrowing. Projects that Chinese give to these countries do not create enough returns to service the loans and pay the interests. Due to this,  China then converts some parts of its loans into an equity of controlling these projects and also draws a lot more favors than in the situation where if it had invested directly as equity. After this, it then it play-acts as if it is rescuing them although it is taking advantage of the situation. China is one of the many multilateral lending institutions which has a very unviable process of lending.

Recommendations.

       China should work closely with other countries in order to recruit them into their programme of investment so as to spread its debts more equally. It should also adopt a more transparent and strict standards about the sustainability of its aids to the developing economies. China should not ignore the criticisms and pressures discussed above. It should develop a good criteria and be very cautious in ensuring that their project are sustainable. It should adopt sustainability as a criterion and this will help increase the lending quality of the Chinese government and curtail the project scope which are eligible for lending. They should carry a commercial viability of any project before they can fund any project.

      Adopting a strict project eligibility criteria will result to competent preparation of project and implementation. This could also reduce the selection of projects to be funded on the basis of electioneering and politics as opposed on it social and economic outcomes policies. This can also facilitate more projects that are based on the integration of regions, growth in trade and advances in commerce.

     The wide scale of debt sustainability may plague the belt and road initiative. It is also not likely that this initiative may avoid the problems that e with debts in the countries that participate. China and BRI partners should adopt a better way in order to align themselves in line with multilateral disciplines and standards. The best way to pursue this is to appeal to china as a good global citizen, so that its practices of investment with be in line with the pro-development rhetoric of BRI. Partly, this will ask for pressure from the leading partners of this initiative and predominantly the multilateral development banks. (MDBs). On top of this, there are appeals for china to take a more productive approach in its own interest as a creditor, while being able to recognize the power of collective action over go-it-alone strategies.

      Use of existing facilities such as World Bank- IMF Debt Management Facility and the UNCTAD’s Debt Management  and Financial Analysis System. These facilities rely on the support from the donor and have not categorized china as one of their donors. These initiatives offer technical support to developing country governments on how to improve their practices of managing debts. Through offering their support via these multilateral mechanisms, china can be able to enhance an arm’s length view towards its loans.

       Finally, adopting a debt-for-nature swaps by china would be an effective move. The environmental organization has been steering this movement since 1980s and has been applied by the United States. Under this policy, the country that is borrowing can be forgiven its debt if it pledges full commitment towards funding some important environmental objectives, such as preservation of tropical forests. China can apply this mechanism to its large number of debtor countries for a greater good for all. Although this can be applied, care should be taken to make sure that the environmental p objective given to the debtor country does not incomprehensively lead to reduction of terms of the debt, or lead to unfavorable conditions for the debtor country.  Chinese should offer a clause that offers for the purchase of their goods and services. This from a bigger picture would be to address the indebtedness situation a very different manner that even leads to a bigger benefit and would alleviate concerns about the behavior of china in the cases of Djibouti and Sri Lanka.

References

Hurley, J., Morris, S., & Portelance, G. (2018). Examining the Debt Implications of the Belt and

Road Initiative from a Policy Perspective. Center for global Development, March.

Var, V., & Po, S. (2017, March). Cambodia, Sri Lanka and the China debt trap. In East Asia Forum (Vol. 18).

Hussain, J., Yuan, Z., & Ali, G. (2016). China Pakistan economic corridor. Defense Journal, 19(6), 13.

Lin, J. Y. (2017). The rise of China and its implications for economics and other developing countries. Area Development and Policy, 2(2), 109-119.

Fernando, H. S. G. (2016). Relevance of Development Assistance to the Economy and Its Impact after Sri Lanka’s Elevation to Upper Middle Income Status. Sri Lanka Forum of

University Economists (SLFUE), Department of Economics, Faculty of Social Sciences, University of Kelaniya.

Arias, M. A., & Wen, Y. (2015). Trapped: Few developing countries can climb the economic ladder or stay there. The Regional Economist, Oct 2015.