– Today we’re gonna talk about China’s increasingly active role in international development financing. Through its multi-billion
dollar Belt and Road Initiative, a massive, ever-expanding, global infrastructure investment
project launched in 2013, China has been injecting
vast amounts of cash and resources into
countries across the globe from Malaysia to Pakistan,
Djibouti and Italy. Skeptics accuse China of lending poor countries too much money and trapping them in debt,
like a global payday lender, so that China can take over
land in those countries when the deals fail. Proponents, on the other hand, say that China’s overseas
lending is a natural extension of its new found economic might. No different from how the U.S. and European nations have engaged in international infrastructure
lending in past decades. So let’s dive deeper to truly
understand what’s going on and what the experts say. Dozens of countries have
taken out massive loans from Chinese banks for
infrastructure projects. What usually happens is that Chinese state-owned
construction companies then help these countries
build the roads, railroads, power plants, and ports that
they so desperately need. But these loans to fund
the projects are enormous, and need to be guaranteed
with some type of collateral. For many poorer countries,
that means land. Exactly this happened in
Sri Lanka, in December 2017. The Hambantota Port, on the
southern end of Sri Lanka, is being built by China
Merchants Port Holdings, with loans of over a billion dollars. But Sri Lanka has not been
able to service the loans. So it chose to balance its accounts by leasing the Hambantota
Port to China for 99 years, effectively ceding sovereignty over a piece of the country’s territory. Dept trap diplomacy is
what political commentators in India immediately dubbed this. And U.S. politicians piled on,
Vice President, Mike Pence, and even Mark Green, the administrator of the U.S. Agency for
International Development, have also speculated
without providing evidence, that Hambantota Port could become a base for the Chinese Navy. But was Sri Lanka exploited by China? Economists who have examined the issue don’t see it this way. One economic researcher, Umesh Moramudali, found that debt repayments
for the loans obtained for Hambantota Port
amount to only around 5% of Sri Lanka’s total annual
foreign debt repayments. By the end of 2017, only a little over 10% of Sri Lanka’s foreign
debt was owed to China. Other researchers in Sri Lanka have agreed that Sri Lanka’s debt repayment problems had very little to do with Chinese loans. Nonetheless, there are many
problems with Chinese loans. Terms are notoriously opaque and, from the evidence available,
corruption is prevalent. For example, in Malaysia, the
Wall Street Journal reported that the Chinese-funded East
Coast Rail Link was overvalued by potentially billions of dollars. With at least some of the extra padding going into the 1MDB fund associated with a massive
corruption scandal in that country. Back in Sri Lanka, though
the Hambantota Port project was not the debt trap that
some made it out to be, the country had to make
other political concessions like intelligence sharing that Beijing reportedly pried from the Sri Lankan
government in negotiations. However, there is still no
evidence to support the theory that Beijing is using
loans in a predatory way, or intentionally trapping
developing countries with loans for unsustainable
infrastructure projects. In fact, rather than pouncing
on developing countries when the money comes due on loans, China has actually
renegotiated or canceled debt in nearly 100 cases since the year 2000. Finally, it’s important to keep in mind that it may be years before we know which of these Chinese infrastructure
projects have succeeded and which have failed. If you’re interested in this topic, the political and economic
consultancy, Rhodium Group, recommends five countries to watch, where Chinese loan debts
could be renegotiated in the near future. So while there is no convincing evidence that Beijing is intentionally
setting debt traps for poorer countries,
watch this issue closely as it is sure to develop
further over the coming years as more of these projects go boom or bust.