Has Beijing snared itself in its own debt trap? The lure of cheap cash has bought it diplomatic support and access to ports across Africa, Asia and the Pacific. But now those nations are struggling to meet repayments. And someone still has to pay.
“China is a loan shark with no legs left to break,” argues Foreign Policy’s Christina Lu. “The problem is that a lot of the countries that China is loaning money to are broke. Sri Lanka has offered up a major port and 100,000 endangered monkeys to keep Chinese kneecappers at bay. Beijing needs the vig (repayments), and the countries it bet on can’t come up with the goods.”
China’s struggling under the weight of its own internal debts.
Largely unregulated loans under its “shadow banking” network of trusts had propped up a property-building bubble far beyond the point where it should have burst. Now that it has, multibillion-dollar speculative developers are on the brink of collapse.
But their creditors want their money back. Contractors can’t survive without cash. And suppliers need to be paid for their goods.
It’s the same story on an international scale with Chairman Xi Jinping’s flagship ‘Belt and Road’ (BRI) investment initiative.
“As the world’s largest bilateral lender, China faces challenges in dealing with the debt distress of some of its borrowers,” says University of Tokyo Professor Toshiro Nishizawa. “Whether China can support those debtors and avoid trapping itself in unpaid debts will depend on its policy choices.”
Cheque-book diplomacy?
Professor Nishizawa says the ‘debt trap diplomacy’ narrative is an unfounded myth: “There are no winners in a debt trap strategy, as the debtor, trapped with unsustainable debt, leaves its creditor out of pocket”.
Instead, he argues that the problem is mostly the BRI’s lack of transparency and expensive terms.
But Beijing has sought diplomatic payback for its loans.
Micronesian President David Panuelo earlier this year alleged Beijing had used threats, bribes and covert operations to extend China’s influence far beyond the legal terms of the deal.
“To be clear: I have had direct threats against my personal safety from PRC officials acting in an official capacity,” he said in an open letter shortly before he left office in May. He also accuses China of compelling Micronesian citizens to act in multilateral meetings on their nation’s behalf “without our Government’s awareness or approval”.
Beijing will soon host the third Belt and Road Forum for International Cooperation. Representatives from more than 90 nations are expected to attend.
The scheme goes far beyond simple infrastructure loans. It covers access to digital technology, health, climate change and security projects.
Foreign ministry spokesman Wang Wenbin recently said the BRI had allocated more than $US 1 trillion in investment funds through more than 200 agreements with 152 countries and 32 international bodies.
Since receiving the money, many have switched their diplomatic support from Taipei to Beijing. Others have backed China’s repressive acts against the Uighur ethnic group in Xinjiang.
Fiscal incompetence?
“China should release itself at an early stage from the risk of being debt-trapped. Otherwise, it may make the same mistake that Western creditors made and eventually lose its financial claims,” warns Professor Nishizawa.
Post World War II international loan projects have had a chequered history. And that experience drove the formation of global rules-based initiatives such as the International Monetary Fund, World Bank, Paris Club of creditors and G20 Common Framework for Debt Treatments.
But China is now the largest creditor by far.
And it has lent the money on its own terms.
“Beijing now, for the first time, has the keys to the car,” writes Lu. “The problem is that the car is jacked up, on blocks, and the key doesn’t actually work. China’s gamble on chequebook diplomacy turned out little different from a Las Vegas weekend, except none of it stayed in Vegas.”
Beijing has rejected offers to join the Paris Club’s co-ordinated framework approach to debt restructuring. That means any negotiations must be solely on a bilateral basis.
“China has lowered its lending since 2017 to address the debt overhang, but some countries’ stock of outstanding debt owed to China remains high and will require China to take debt relief action,” says Nishizawa.
So far, Beijing has had to issue more than $US230 billion in emergency loans to prop up its debtors.
“But its bailout approach typically seeks to simply prevent immediate default through payment term extension for low-income countries and new money for middle-income countries,” the professor adds. “This remedial approach without debt relief does not resolve the solvency problem, paralleling Paris Club creditors’ procrastination prior to adopting debt forgiveness in the 1990s.”
Snared by its own trap?
“China’s current economic and financial woes, which includes significant domestic debt distress, may explain its reluctance to provide debt relief out of fear of creating moral hazard domestically as well as its insistence on multilateral creditors’ debt relief and new money injection”, observes Professor Nishizawa.
“Yet new multilateral lending can be a double-edged sword even on concessional terms, as
non-reschedulable multilateral debt can be forgiven only at the shareholder countries’ expense.”
Adding to Beijing’s woes, says Lu, is its highly fragmented – and politicised – lending system.
“It’s not just Beijing that needs to sign on; negotiations involve an uncoordinated, fragmented system of Chinese banks, financial institutions, and regulators, all of which are looking out for their own bottom lines,” she writes. “Chinese officials may also be concerned about being seen as accepting a package crafted by the international community.”
Meanwhile, the IMF just reviewed a $US2.9 billion bailout granted to Sri Lanka in March. Its largest creditor is China, which is seeking to restructure the Indian Ocean island’s $41 billion debt.
“China is always Sri Lanka’s reliable strategic partner and appreciates that Sri Lanka has always been friendly to China and has stood by China on issues related to its core interests”, Foreign Minister and Director of the Office of the Foreign Affairs Commission of the ruling Communist Party of China (CPC) Central Committee Mr Wang was quoted as saying.
Jamie Seidel is a freelance writer | @JamieSeidel