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Belt and Road Initiative: Advancing China’s debt-trap diplomacy?

September 04th, 2019
topics:Humans, Economy
by:Bob Koigi
located in:China
tags:Africa, belt and road, China, debt-trap diplomacy, infrastructure

Six years since Chinese President Xi Jinping launched the New Silk Road infrastructure project dubbed BRI, a labyrinth of overland corridors and shipping lanes that make up a maritime road meant to connect Asia with Africa and Europe, more than 71 countries constituting a quarter of the global GDP have warmed up to the idea as they seek to expand their infrastructural might.

This includes Italy, the only member of the G7. Under the five ports initiative, China is modernizing the Venice, Ravenna, and Trieste Italian ports, Slovenia’s Capodistria, and Fiume in Croatia - which will then be interconnected by the North Adriatic Port Association (NAPA).

The BRI is approximated to cost more than £760billion. China has already invested $210 billion in the project, with a big chunk of that spent in Asia.

The majority of developing countries are welcoming the idea as a plausible option to expand roads, railways, ports, and other key infrastructural projects due to the low-interest credit facilities offered by the Chinese and minimum or, in some cases, no strings attached, which contrasts grants and aid from the West. Some schools of thought have hailed the new Chinese initiative as the 21st century Marshall Plan that offers an opportunity to cut trade costs, boost connectivity, and reduce poverty in most of these developing countries.

In Africa, where the project has made successful inroads, the continent has managed to add four new railways, including a 1,866 kilometer Benguela Railway in Angola, 759 kilometer Addis Ababa- Djibouti  line, the 186 kilometers Abuja-Kaduna railway, and Kenya’s Nairobi- Mombasa Standard Gauge Railway.

The forays have paid off, with China having replaced the U.S. as Africa’s largest trading partner for the past ten years. Up to $143 billion in loans has been extended to Africa by China between 2000 and 2017 according to researchers at the China-Africa Research Initiative based at the Johns Hopkins University in the United States.

But as China’s trade scope spreads across the world, and Xiping’s signature foreign policy plan, the BRI, advances across continents, so do concerns about the predatory style the country has embraced in dealing with its trade partners - an approach that has been interpreted as a way to cement its place in global geopolitics and exert itself as a global economic powerhouse. Of particular concern is the way China is funding expensive yet poor performing projects even as the recipient countries, mostly developing, struggle to service loans, which are then cancelled in exchange for strategic gains in a well-orchestrated debt-trap diplomacy.

In most of these countries, the cumulative debt to China has been rising since 2013, exceeding 20 percent of their GDP.

According to the Center for Global Development, by the beginning of this year, eight countries that had signed up for the Belt and Road initiative were at risk of defaulting on loan repayment. These countries, which are the poorest in their areas - including Djibouti, Pakistan, Mongolia, and Laos among others - owe more than half of their foreign debt to China.

In cases of inability to service these loans, debt diplomacy is applied with China either forgiving the loan in exchange for silence on key issues like human rights violations and political influence or China acquiring strategic equities in those countries, as was the case in Sri Lanka.

When China was building Sri Lanka's airport in 2007, it offered the country a $361 million credit facility to boost operations and a further $1.9 billion to assist in upgrades and construction of the airport. This was done despite heavy concerns over the commercial viability of the port. Come 2017, Sri Lanka owed Chinese firms over $8 billion from the construction of the airport, which hadn’t generated any significant profits for a decade. Sri Lanka was trapped and had to grant the Chinese an 85 percent share of the port in Hambantota in a 99-year lease agreement.

In Djibouti, where public debt currently stands at 80 percent of the country’s GDP - with a big share of that owned to China, the latter has set up its first overseas military base in the country, as it advances its interests in the continent.

Other African countries, including Zambia, Burundi, and Mozambique, are either teetering on debt distress or are already in one.

Experts now argue that the new strategy by China is catching more countries, especially the developing ones, off guard and there haven’t been any tangible benefits for these countries. “The approach is predatory and the rush to take loans to finance capital projects is coming to bite African countries. These projects aren’t generating any meaningful profits yet loans have to be serviced. That is where the debt-trap diplomacy is playing out to the benefit of China. Then there is the policy of having the Chinese companies do all the construction and bring in their experts. It is hurting local industries,” said Dr. Justus Ber from the University of Nairobi Institute of Diplomacy and International Studies.

Another school of thought, however, has poked holes at the debt trap diplomacy narrative, arguing that China has been lenient with defaulters and at times forgives these loans, while advancing even bigger ones to defaulters.

The argument further goes that China stands to lose from the defaulting countries owing to the huge investment it has already made. Rhodium Group, a New York-based consultancy firm has found in its report tracking 40 cases of China’s debt renegotiations with 24 countries that China had pursued deferments and debt waivers in an arrangement that has seen it renegotiate $50 billion of loans in the last ten years.

Last year, the firm says, China cancelled a $7 million loan to Botswana and even went ahead to extend another $ 1 billion to the country in order to finance its infrastructure, signaling its commitment to cementing trade ties with partners.

“Write-offs are often conceded by Beijing without a formal renegotiation process. Instead, Beijing usually unilaterally agrees to cancel part of a borrowing country’s debt, even when there are few signs of financial stress on the part of the borrower. Such cases of debt forgiveness are therefore probably used to signal support to the recipient countries, and improve bilateral relations,” read a section of the report.

Article written by:
Bildschirmfoto-2014-10-08-um-19.29.13
Bob Koigi
Author, Contributing Editor
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China under the five ports initiative is modernizing the Venice, Ravenna and Trieste Italian ports, the Slovenia’s Capodistria and Fiume in Croatia which will then be interconnected by the North Adriatic Port Association (NAPA).
Concerns are rising about the predatory style the country has embraced in dealing with its trade partners and its approach that has been interpreted as a way to cement its place in global geopolitics and exert itself as a global economic powerhouse.
In most of these countries, the cumulative debt to China has been rising since 2013, exceeding 20 per cent of their GDP.
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