Five years in, China’s Belt and Road looks like a giant debt trap

 Gwadar Port in Pakistan, strategically located on the Arabian Sea. ( Photo: Wikipedia )

Gwadar Port in Pakistan, strategically located on the Arabian Sea. (Photo: Wikipedia)

Malaysia canceled China-funded projects worth billions of dollars last week

There’s a provocative quote attributed to the second President of the United States, John Adams, that’s been circulating on the internet lately. “There are two ways to conquer and enslave a nation,” the quote goes, “One is by the sword. The other is by debt.” While the John Adams Historical Society attributes the saying to Adams, no precise documentary source for the language has been identified, at least that we’ve seen. 

Regardless of its provenance, the idea that debt and war are the two primary ways to control a nation is a great insight into the current geopolitical situation, especially the rise of China. China has benefited from the world order created by American military dominance, with its 11 carrier groups and hundreds of military bases straddling the globe. China is motivated by national pride and economic self-interest to extend its sphere of influence, but many of its thinkers are ideologically opposed to replicating the American model, a militarism that they still call ‘Western imperialism’. 

While yes, China has built an aircraft carrier and continues to flex its muscles in the South China Sea, it’s also using soft power, like establishing thousands of Confucius Institutes across the developing world to teach Chinese language and culture. But surely the largest, most ambitious play to expand China’s power is its Belt and Road Initiative, also called the New Silk Road. The Belt and Road seeks to connect to Europe, Central Asia, Southeast Asia, the Middle East, and East Africa through a vast network of highways, high speed railroads, tunnels, bridges, and ports. 

The Belt and Road Initiative, if it’s fully realized, would cover more than 68 countries, including 65% of the world’s population and 40% of global GDP. The total invested capital could reach $1T, but crucially this isn’t simply spent by China and the multilateral development banks hatched in Beijing, but would be loaned to governments of the nations hosting the infrastructure. China has already played a fairly heavy-handed role in dictating credit terms favorable to itself, and there’s increasing reason to believe that the BRI, as it’s called, could function as a huge debt trap to bring developing countries further under China’s heel.

The premise is simple: China finances an expensive, ambitious infrastructure project in a poor country, and when that country can’t meet its debt payments, China essentially repossesses the facilities and uses them how it wishes. 

“We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries,” said Malaysian Prime Minister Mahathir Mohamad. Just last week, Mahathir cancelled his country’s China-funded projects, including a $3.1B project backed by the China Petroleum Pipeline Bureau.

Earlier this month, Reuters reported on pushback against the BRI from Pacific island nations, who are holding talks to present a coordinated request to China to waive their growing debt burdens. 

“It is no longer an issue for individual countries because there are small countries who borrowed from China and we have problems with that and the option is to collectively work together to find a way out,” said Tongan Prime Minister ‘Akilisi Pōhiva. Tonga owes about $115M to China, and according to a Reuters study, Pacific island nations collectively owe more than $1.3B to China. Pōhiva warned that asset seizures by China could be on the table if poor countries defaulted on their debts.

Indeed, China has used debt pressure to establish control over key assets in strategically located countries. Last December, Sri Lanka handed over a newly constructed maritime port to Chinese government-owned companies for 99 years, after falling behind in payments on over $1B of debt on the facility. Feasibility studies had demonstrated that the new port would not attract enough volume and revenue to pay for itself, but China pushed the deal through. Sri Lanka owed a total of $8B to China-controlled companies at the time of the transfer. According to the original terms of the loan and construction agreement, China would not be allowed to use the port of Hambantota for military purposes, but now that China has taken full control, all bets are off.

Djibouti, a small country on the horn of Africa, is now finding itself in a similar situation. Djibouti is projected to take on public debt worth 88% of its GDP, the majority owned by China. Last May, constructed was completed on the Doraleh Multipurpose Port, a $590M project co-funded by Chinese government-owned companies. Doraleh was operated by China until the government of Djibouti seized control of the container terminals, a move that was ruled illegal by a London court. A Chinese military base is located six miles away from the port. After financing the construction of a $4B electric railway through landlocked Ethiopia to the capital of Djibouti, China has decided to slow down its lending to Ethiopia on worries about the country’s debt profile and ability to repay.

Awareness of China’s problematic lending to poor countries has grown so acute that Quartz published a list of eight countries in danger of falling into China’s debt trap. Kyrgyzstan, a central Asian country that took on Chinese loans to build the Bishkek Thermal Power Plant, among other projects, saw its public debt soar from 37.3% of its GDP to 70.81% of GDP after its BRI debt. Pakistan’s 2016 public debt amounted to 10.91% of its GDP; after Belt and Road Initiative projects including the Gwadar Port were financed, the debt had mushroomed to 47.28% of GDP.

Yesterday, the Chinese government tried to rebut allegations that its Belt and Road Initiative was a scheme to trap developing nations in unsustainable debt and then use the leverage to seize control of strategic assets.

“The debt level in those countries was very high in the past. Some other countries are highly indebted since they have been heavily borrowing from other countries and international financial organizations. China is a late comer. It is not the biggest creditor,” said Ning Jizhe, vice-chairman of the National Development Reform Commission (NDRC), at a press conference meant to celebrate the fifth anniversary of the project.