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Is China deploying a debt-trap strategy?

Author: Lim Shi Jie Josiah, Tan Chok Geow

Research Head: Tan Chok Geow

Editor: Sakshi Sanganeria


Abstract


China plays a major role in contributing to rising debt levels in Africa by financing infrastructure loans. This has led to accusations from The West that China is using debt to gain geopolitical leverage as it traps poor countries in unsustainable loans. The term ‘debt-trap diplomacy’ is one such term used to label Chinese lending activities. For some, debt-trap diplomacy is reflective of a concerted national strategy to benefit at Africa’s expense. Such benefits include the creation of business opportunities for Chinese contractors, gaining control over natural resources and deepening geopolitical influence over the region. However, others have likewise defended Chinese lending by illustrating the economic benefits it has brought to the region. In addition, it is argued that China does not benefit from borrowers defaulting and thus, reckless lending is to blame-and not debt-trap diplomacy. This article seeks to examine both viewpoint.

It must be acknowledged that the terms of Chinese loans appear to advantage China disproportionately. As such, this has led to speculation that China has a hidden agenda in extending financial assistance to Africa.


The creation of business opportunities, control of strategic resources and consolidating geopolitical influence are key factors often cited.


1. Suspicions against China


Creation of unfair business opportunitiesAs China pursues a strategy of tied-financed in its BRI (loans that require the usage of Chinese contractors in the construction of the financed infrastructure), this has meant that more often than not, much of Chinese money ends up back where it came from, with little going to stimulate the local economy or to provide employment. Indeed, according to a CSIS study

Illustration by Jasmine


done on Eurasian infrastructure projects between 2006 and 2018, Chinese-funded projects hired Chinese contractors 89% of the time while those funded by multilateral banks and institutions only did so 29% of the time. This stark contrast has thus led to the perception that Chinese loans do little for the local economy-and instead create business opportunities for Chinese firms.


2. Is China vying for control over strategic resources and consolidating its geopolitical influence?


In addition, China is always seeking to expand its pool of natural resources. With Africa’s abundance of minerals and oil, this has led to speculation that China is attempting to secure the control of these strategic resources through resource-backed deals. Data from the China-Africa Research Initiative reveals that between 2000 to 2014, natural resource-backed deals made up 33% of Chinese loans to Africa. Furthermore, Deborah Brautigam and Jyhong Hwang highlighted that the top recipient of government-to-government Chinese loans was the resource-rich Angola. With China’s heavy reliance on Africa for natural resources, including being one of the top 7 destinations for cotton exports from Africa (Economic Development in Africa Report 2019), and rising competition for resources from the West, it appears that China might be deploying a debt strategy to guarantee continued access to African resources.


Lastly, with strategic assets being listed as collateral for Chinese loans, this has led to concerns that China is using debt to gain geopolitical control over Africa. Indeed, defaulting African countries might have to surrender assets and majority equities to Chinese lenders. Kenya is one such country at risk of losing control over its strategic Port of Mombasa if it defaults on loans issued by the China Exim Bank as quoted by Kenya’s audit general. A similar situation has already occurred in Sri Lanka in2017 where it handed over a majority equity stake of the newly-built port of Hambantota to a Chinese operator in order to satisfy part of its debt. Such incidents have thus led to concerns over national sovereignty. Despite the above, however, to assert that China is deploying a concerted national strategy demands a few assumptions -namely that China is capable of orchestrating the entire enterprise and that it actually benefits from defaults. These however, are not necessarily true.


3. In China’s defence: crony diplomacy, losses from default and longstanding geopolitical ties?

Indeed, according to Mark Akpaninyie, the debt trap isn’t a national strategy. Instead, it is the independent, unrestrained profit motive of numerous Chinese banks and firms that are driving them to exploit African borrowers. This is becauseAfrica presents a growing appetite for infrastructure projects and relaxed regulations due to its undersupply of finance which has allowed Chinese firms to operate with limited oversight. This, in contrast with tightening regulations and an oversaturated market back home, have then translated to easy capital in the name of the BRI which have led Chinese firms to engage in the construction and financing of unsustainable or impractical infrastructure in Africa. This behaviour is thus termed “Crony Diplomacy” which is opposed to the idea of a national geopolitical strategy.


In addition, evidence suggests that China does not benefit from its borrowers defaulting. For instance, the case of Venezuela clearly contradicts the idea that China benefits from its debt-trap strategy by securing access and repayments in the form of natural resources. Despite defaulting and then having to make repayments by increasing oil exports to China, the collapse of the Venezuelan economy, fuelled partly by easy access to finance, has caused a net decrease in oil exports from the oil-rich nation. Not only does this threaten China’s energy security interests, the decline in oil exports have also consequently increased global oil prices which have led to greater spending in China’s massive oil import bill.


Further research has also shown that Sri Lanka has had trade relations with China since before the BRI and the Hambotona deal as it signed the landmark Rubber-Rice Pact with China in 1952. During the island’s civil war spanning the early 1980s to 2009, Beijing was one of its biggest lenders as China donated over $1 billion in aid and military equipment. Thus, China’s increasing participation in Sri Lanka’s post-conflict economy should come as little surprise and should not be seen as part of a plot to gain geopolitical influence.

4. Allowing Africa to grow


Africa benefits from Chinese loans as these loans are issued with lesser interventionist demands and delays, as opposed to those issued by Western institutions. On average, African countries have been able to secure funding and complete infrastructure projects within 2 years under Chinese loans which would have taken an average of 9years otherwise. This speed is crucial to helping African countries build up their infrastructure to realize economic growth.


In addition, as China increasingly issues untied loans in Asia under the Asian Infrastructure Investment Bank , it appears that there is hope for Africa to eventually negotiate loans that utilize local resources and provide local employment, thus benefiting the local economy.


In conclusion, the disproportionate terms of loans and convenient resource-backed deals have led to the perception that China is orchestrating a national debt-trap strategy to benefit at Africa’s expense. However, such a narrative necessarily runs the risk of becoming weaponized in an era of increasing political polarisation. Therefore, it is crucial that we acknowledge the possibility that China’s lending is driven by other factors, not only as part of an exploitative trap. In addition, to do so would be to assume that African governments are sitting ducks without any capacity for resistance. Western institutions then, instead of levelling accusations, should do more to crowd the currently empty field of international loans and in so doing, provide African nations with more choices. Between a rock and a hard place then, African nations can find a third way.

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