Are China’s cheap loans to poor nations a development boost or a debt trap?

Posted on Nov 16 2018 - 8:32pm by Editor

ABC NEWS

16 November 2018

by SEAN MANTESSO

Two large ships are docked at the Hambantota Port in Sri Lanka in this 2013 file photo.

China is in the midst of a rapid push to gain economic and political ascendancy across the globe — and it is splashing out billions of dollars in concessional loans to developing countries in the process.

Key points:

  • China offers concessional loans for large-scale infrastructure projects
  • But if countries fail to pay them back, Beijing can start making demands
  • Several of Australia’s neighbours in the Pacific have large Chinese loan debts

This money is used to construct much-needed major infrastructure projects, but what happens when these poorer countries cannot pay China back?

Experts warn Beijing is using bad loans as a form of entrapment, allowing the nation to gain influence and power across the world.

Here’s how they say it works.

Poorer nations are lured by China’s offers of cheap loans for transformative infrastructure projects.

Then, when these countries are unable to keep up with their repayments, Beijing can demand concessions or other advantages in exchange for debt relief.

This process is known as debt-trap diplomacy.

Sri Lanka’s Hambantota Port development project serves as a cautionary tale to anyone who thinks China’s loans come without conditions.

 

Protests erupted last year when Sri Lanka was forced to hand control of the port over to China — on a 99-year lease — in order to wipe off about $US1 billion ($1.4 billion) worth of its debt to Beijing.

China now has control of a key port on the doorstep of regional rival India, and a strategic foothold along a key commercial and military waterway.

Australia’s debt-saddled neighbours

To men wearing hard hats stand on construction site.

Photo: China has offered billions in loans to Papua New Guinea — although much of it is yet to materialise. (ABC News: Eric Tlozek)

A little closer to home, Australia has been a bit sluggish to respond to China’s spreading influence in the Pacific.

Chinese loans and aid have gone from almost zero to $1.8 billion in the space of a decade, and some of our neighbours are already heavily-laden with debt to Beijing.

However, China has also pledged to spend $US5.8 billion ($8 billion) in total across the Pacific region.

For instance, Beijing has promised Papua New Guinea an incredible $US3.5 billion ($4.8 billion) for a new road network, which would stem from its capital Port Moresby.

Fiji owes China half a billion dollars, and Tonga now owes more than $160 million, or one-third of its GDP.

onga has been forced to admit it may fail to repay its debts, stoking fears other small Pacific nations could fall into debt distress and become vulnerable to diplomatic pressure from Beijing.

In fact Tonga’s Prime Minister this year even went as far as calling on the Pacific Islands to band together against China — before backtracking on that call days later, for reasons that remain unclear.

Earlier this year, reports that China was moving to create a military base in Vanuatu sparked a panic in Australia, and served as a catalyst for a renewed pivot to reclaim regional influence.

Prime Minister Scott Morrison has now announced the creation of a new infrastructure bank for projects across the region, seen largely as a pushback against Chinese influence.

China’s President Xi Jinping is currently in Port Moresby for this year’s APEC summit, where he will hold a special meeting with Pacific Island leaders.

Mr Xi is expected to put even more concessional loans on the table at that side meeting — so watch this space.

China’s Belt and Road plan

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At the heart of the issue of Chinese investment is Mr Xi’s flagship economic policy, the One Belt One Road initiative.

It is a trillion-dollar project aimed at connecting countries across continents for trade, with China at its centre.

However, due to currency issues and problems with the blueprint, costs blew out and the project remains only partially completed.

Now debt levels in the fledgling European state are at 80 per cent of GDP, and Montenegro faces the prospect of either abandoning the project or negotiating for more money from China — pushing it deeper into Beijing’s sphere of influence.

In Africa, China is financing major projects across the continent, and Beijing’s level of investment is gathering pace.

In September, Mr Xi promised Africa $82 billion for development over three years — in 2015, it gave countries on the continent the same amount.

China’s investment in Zambia for example is impossible to miss — schools, surgeries and construction projects bear Chinese symbols, and a vast new network of roads is being built with Chinese finance.

But the debt is mounting there, with Chinese loans accounting for up to a third of the country’s total $13 billion national debt.

Debt deals have countries spooked

A construction worker looks on as the China-funded Sinamale bridge is seen in Male, Maldives. Photo: Experts say the Maldives, where China has invested in major transport infrastructure, is also at risk of debt distress. (Reuters: Ashwa Faheem)

For now many countries are enjoying the new highways, airports and promises of economic development, but it may only be a matter of time until they, too, are overwhelmed by debt.

And the increasing reliance on Chinese investment around the world is raising concerns about how geopolitical power dynamics are shifting in the 21st century.

Some countries, spooked by Sri Lanka’s port handover last year, are starting to wind back their reliance on Chinese finance — Nepal and Pakistan for instance cancelled major projects in 2017.

But it’s not just developing countries that find themselves indebted to China.

In fact, Beijing is the number one holder of US debt, owning $US1.1 trillion ($1.52 trillion) in government bonds.

One man smiles and another maintains a neutral expression as they look in front of where they stand Photo: Xi Jinping and Donald Trump have been at odds over their countries’ ongoing trade war. (AP: Andrew Harnik)

Amid the debates about China’s growing influence and fears Beijing wants to expand its strategic military presence across the globe, it’s easy to forget they have only one overseas military base — in the small east African nation of Djibouti.

The United States meanwhile has an estimated 800 bases across 70 countries.

So while Chinese money may be putting some countries at risk, and Beijing could be wielding its loans as a strategic tool, it’s not the only country projecting its power around the world.

Just how deep Mr Xi’s ambitions run remains unclear, but there’s no doubt he plans on China leading the way in what has been dubbed the Asian Century — and not following the pack.

 

https://www.abc.net.au/news/2018-11-16/are-china-cheap-loans-to-poor-nations-a-debt-trap/10493286

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