Starting the conversation…
Eyck Freymann, PhD Candidate, University of Oxford
The Trump administration is trying to persuade the world that it doesn’t pay to do business with China. The U.S. government’s 2018 National Security Strategy accuses China in three separate places of practicing “predatory economics.” “Know that the United States offers a better option,” Mike Pence told a group of Asian leaders in November 2018. “We don’t drown our partners in a sea of debt. We don’t coerce or compromise your independence. The United States deals openly, fairly. We do not offer a constricting belt or a one-way road.” To illustrate the destructive effects of Chinese debt diplomacy, Pence tells his audience to “just ask Sri Lanka”–particularly the famous port of Hambantota, which China now controls on a 99-year lease.
But if Chinese lending practices were really so predatory, then we should expect to see Sri Lanka–and China’s other commercial partners–pulling away from One Belt One Road (OBOR) now that Beijing’s malicious playbook has been exposed.
This hasn’t happened. To the contrary, OBOR is expanding. Since the Trump administration started peddling the “debt trap” narrative, its allies Italy and Portugal joined OBOR. So did more than a dozen Latin American and Caribbean countries. British Prime Minister Boris Johnson and several leading politicians and business leaders in London have praised OBOR and publicly mused about cooperating with it.
How can we explain OBOR’s attractiveness to such a wide range of countries? One reason is that China has become highly skilled at managing transfers of power, in the process transforming local politicians from anti-China hawks into close partners. When China threw its weight behind Mahinda Rajapaksa, the Sri Lankan leader who masterminded the Hambantota port, opposition parties cried foul and railed against Chinese influence. But when those opposition parties won the 2015 election (in part thanks to American and Indian interference), they wholeheartedly embraced OBOR. The same pattern can be seen in dozens of other countries, from Malaysia to Ecuador. At first, new governments try to renegotiate the terms of their predecessors’ OBOR-branded projects. In the end, however, very few countries have actually renounced their membership. If OBOR is a brand, then one might say that nearly every buyer has decided, after the trial period, that it is better to subscribe than to demand a refund.
Why? Recipient countries see partnership with China as a form of geopolitical leverage. Russia saw joining OBOR as a way to show that it had options after the Ukraine crisis soured relations with the West. The Central Asian republics wanted a counterweight against Russia. Greece wanted an ally in its negotiations with its European creditors, some of which wanted to expel it from the Eurozone. Iran saw a potential lifeline from crippling nuclear sanctions.
The American campaign to tarnish the OBOR brand is falling flat. When Italy joined OBOR last March, the National Security Council wrote on Twitter that “endorsing [it] lends legitimacy to China’s predatory approach to investment and will bring no benefits to the Italian people.” If even the Sri Lankans are looking forward to doubling down on their participation in OBOR, no wonder other countries don’t take Pence’s arguments seriously.
Jonathan Holslag, Professor of International Politics, Free University of Brussels
The American historian Mark Mancall has a line in his now standard work about China’s imperial foreign policy: to keep the barbarians into a perpetual spiral of debt. That is exactly what China does again today. If the downside of Chinese loans has become clear, many countries still fall for them. Just last month, the Hungarian government signed a US$ 1.5 billion loan with the Chinese Exim bank for a railway project.
When loans from Chinese banks are too sensitive, Beijing has various other interfaces at its disposal. Think of India, which last month received a loan of US$ 500 million from the Asia Infrastructure Investment Bank and another US$ 1 billion from the BRIC New Development Bank. China is the main financier of both banks. What keeps those countries so attracted to Chinese loans?
To be clear: there is no real alternative. Trump’s Indo-Pacific Economic Investment Initiative, announced in 2018, already seems to be aborted. The International Development Finance Corporation, founded in 2019 to counterbalance the BRI, has has an investment cap of
only $60 billion, which is pocket money compared to the credit lines of the Chinese state banks. Europe too has a connectivity strategy, but it lacks funding.
This is not surprising. For China, the BRI is just another way to continue its policy of sterilization. This means that the central bank takes the dollars and euros earned through exports, gives the exporting companies Renminbi instead, and channels the foreign currency into various strategic investments. For Western countries, the trade deficit they have with China, is just a way to acquire cheap consumer goods; for China, the trade imbalance is a strategic opportunity to support its industries.
This brings us to the most important explanation of the success of the BRI: China’s capability of converting its massive trade surplus with the West into an opportunity to grow its influence overseas. It’s the typical go-vs-chess difference. Western economists apply their typical market-based visions on trade imbalances, but for China it’s part of a quest for power and influence. This just requires China to exploit the short-termism elsewhere.
Indeed, China’s overseas debt exposure comes with a risk of defaults. But overall, China’s total external investment position still comes with an annual return of three percent. Not much; but not a loss either. And compared to that it preserves access to critical export markets, mitigates political resistance, and undermines its adversaries. For now, that’s a price well worth paying.
Gerald Chan, Professor of Politics and International Relations, University of Auckland, New Zealand
If you say something loud enough and keep repeating it, then people listening may tend to believe you. Does this common perception apply to the ‘debt trap’ that so many top American diplomats have frequently been using to describe China’s Belt and Road Initiative?
Mr Freymann has highlighted a very intriguing puzzle that deserves wide attention: Why, despite the Trump administration’s accusation, do increasing numbers of countries, mostly in the Global South, but also some European countries too, have come onboard the Belt and Road? Are they oblivious to the Chinese scheme alleged by the U.S.?
Obviously, most, if not all, of them are not. It is safe to assume that most borrowing countries must have made a careful calculation of the costs and benefits involved, and the risks and opportunities. They must have negotiated and bargained hard for a good deal. It is also safe to assume that China does not have easy money to throw around carefreely unless it feels confident of a reasonable return, making sure that the investments made by Chinese companies are financially sound.
The Hambantota port in Sri Lanka is often cited as the poster boy at the receiving end of China’s debt-trap diplomacy. It is useful to know, however, that when the Sri Lankan government first contemplated to build the port in 2005, it asked the Indian government to help, but the India government refused. Some Western governments and bankers were subsequently approached, but they too were hesitant. When Colombo turned to Beijing, it received a prompt and positive response. At present, the Sri Lankan government has cumulatively borrowed much more money to support its national development from Western countries, Western commercial banks, and multilateral financial institutions than from Chinese banks.
In the world of business, there are ‘bad’ loans and ‘good’ loans. Apparently, most countries receiving financial support from China for Belt and Road projects would see their loans as good investment for long-term development. Different countries of course have different reasons for working or not working with China to build infrastructure.
Chinese lenders are certainly not all angels, and not all borrowers of Chinese money are stupid. The accusation of ‘debt trap’ by American officials seems very strong on rhetoric but very short on details and very thin in evidence. Why cry wolf then? I am left as perplexed as many keen observers of China’s Belt and Road Initiative. Mr Freymann has rightly alerted us to a good direction for research.
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