China’s Debt-Trap: Chance for India to Step Up Its Game?

Is China’s Belt & Road Initiative a scheme to entrap countries in debt? Should India play its diplomacy card now?

5 min read
Hindi Female

China’s Belt and Road Initiative (BRI) is reeling under a slew of criticism around the world. No doubt some of this is geopolitical envy, but some of it should have Beijing rethinking its grand global scheme. But whether or not it presents opportunities for India, is another matter.

According to a recent report in the Wall Street Journal, Chinese officials offered to help bail out the beleaguered Malaysian 1MDB state fund, in exchange for stakes in the Belt and Road railway and pipeline projects in Malaysia in 2016.


The Case of Hambantota

This only appeared to strengthen the narrative that, far from being a “win-win” project to develop infrastructure in Asian and African countries shunned by western investors, the BRI is a scheme to entrap various strategic countries in debt traps, and transform them into client states for Beijing.

Too busy to read? Listen to this instead.

The case of Hambantota of course, has been held up as an example of Chinese mendacity, though the story is more complicated. The then President Mahinda Rajapaksa wanted a port in his constituency, and against commercial advice, he pushed forward – and Sri Lanka made an open request for funding.

China was the only one to respond, and the price it charged was the high 6.3 percent interest rate for the USD 307 million loan that the Export-Import Bank of China provided for the first phase.

Despite the poor performance of the port, China continued to invest, and the port kept losing money. By this time, more than 90 percent of Sri Lankan government revenue was going towards servicing debt.

To ease the debt, in return for USD 1.1 billion, it handed over 70 percent of the ownership of the port to the China Merchants Group, on a 99-year lease. The CMG is a state-owned entity with revenues bigger than the Sri Lankan economy.


Myanmar Govt Afraid of ‘Hambantota Effect’

According to reports, the oil and gas pipelines linking Myanmar to China’s Yunan province, mooted as an example of China’s strategic foresight, are barely being used after five years in operation and an investment of USD 2.5 billion. The Chinese planned to build a port there for USD 7.3 billion and wanted to spend another USD 2 billion to create a special economic zone, but have been forced by the Myanmar government to scale it down to USD 1.3 billion.

Afraid of the Hambantota effect, the Myanmar government is reportedly refusing to give any sovereign guarantees.

There are other projects like the Mombasa-Nairobi standard gauge railway (SGR) built by the Chinese at a cost of USD 3.8 billion by China’s Road and Bridge Corporation, and will be run by the Chinese Communications Construction Company for its first decade. Kenya holds the third highest Chinese debt in Africa, and if it fails to repay it, it could, like Sri Lanka, lose its assets – in this case the SGR.


Pressure on China Due to CPEC

Countries like the Maldives are not even aware of the debt they have incurred. According to Mohammed Nasheed, the adviser to President Soli, the Chinese have said that the government owes some USD 3.2 billion. The  Chinese have denied the report and other authorities estimate the debt to be around USD 1.5 billion. Given the fact that the annual government revenues are around that figure, it will not be easy for the Maldives to service the debt.

As for Pakistan, Imran Khan is not about to abandon the CPEC, but what he seems to be doing is rationalise its projects.

As part of this, he has shelved the 1320 MW Rahim Yar Khan power project, in view of the fact that there is already sufficient generation capacity, and that its use of imported coal would further strain the foreign exchange situation.

In addition, he is planning to axe another 400 projects under the Public Sector Development Programme (PSDP). Some of the projects in Central Punjab were, in the opinion of many, boondoggles to enrich politicians and bureaucrats.

Meanwhile, in response to the numerous articles criticising the CPEC, raising issues about the debt trap, and the secrecy surrounding the financial terms of repayment, the Chinese Embassy has twice had to issue statements providing information on the CPEC.

Problem is Local Greed, Not Chinese Investment

In its most recent statement at the end of 2018, it noted that the figure of USD 40 billion for the extent of Pakistani debt to China, was incorrect. It noted that the Pakistan government’s repayment commitments are only of about USD 5.9 billion of low interest loans; the balance comprised commercial deals between companies.

We need not take everything in the Chinese embassy statement at face value. But it is a statement of record, and shows the debt to be much smaller than is stated. Of course, the bit about Chinese companies having to deal with their investment on their own on purely business terms, must be taken with a pinch of salt, as many of these entities are state-owned or subsidiaries of state-owned companies.

One thing common to many of the countries that have found themselves in the debt trap, is corruption. Many of the loans and extravagant projects have been undertaken by governments, and money has been channeled into private pockets.

The problem is not Chinese investment, but local greed. Chinese investments have done perfectly well in societies like Singapore or Germany, where opportunities for corruption are rare.

India Need Not Worry About CPEC’s Success

So should India bail out Maldives? Prime Minister Modi has offered Maldives USD 1 billion to repay Maldives’s debt to China. But whether India should bail out a Chinese effort to undermine the Indian position in a strategic island chain, is moot.

Likewise, we probably need to take a relaxed view of Hambantota or other assets Chinese may gain through their debt-trap system—they will end up running a railway in Kenya and a failed port in Sri Lanka in the indefinite future. It’s not clear whether or not this is a prospect that they will relish in the longer run.

In the case of Pakistan there does seem to be some  subliminal worry in India that CPEC may succeed. Actually, on that account we need not worry. Till Pakistan opens up its anemic economy to South Asia, and its largest country India, its chances of getting onto the fast and sustainable growth path are remote.

And there we have the brave and resolute Pakistan Army, standing four-square against anything that will change things in their country, no matter what the Chinese want.

(The writer is a Distinguished Fellow, Observer Research Foundation, New Delhi. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same)

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

Read Latest News and Breaking News at The Quint, browse for more from opinion

Topics:  Politics   OBOR   Belt and Road Initiative 

Speaking truth to power requires allies like you.
Become a Member
3 months
12 months
12 months
Check Member Benefits
Read More