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One Belt One Road: is China a lending big loan or a good person?

Release time:2020-05-11 Reading volume:404 Source:Z.H Group

China has been accused of controlling poor countries through predatory loans under the “One Belt One Road” initiative. However, a recent research report questioned China's claims of "debt trap diplomacy." However, it also pointed out that Western countries’ worries are not completely unfounded.

 
 

(Deutsche Welle Chinese website) Western hardliners who are concerned about national security issues, especially the American war hawks, regard China as a new empire that is conquering cities through predatory loans.

The large-scale "Belt and Road Initiative" (BRI) has aggravated their anxiety. This is a global infrastructure development project, mostly controlled by China.

According to an estimate by the Mining Company BHP Billiton, the total investment in "One Belt One Road" related projects may be close to 1.3 trillion U.S. dollars (1.16 trillion euros) in the ten years to 2023, which is bigger than seven times of the "Marshall Plan" for the United States to rebuild the European economy after World War II.

Some people praised the "One Belt and One Road" as the new Marshall Plan, which will drastically reduce trade costs, increase ties, and gradually help some countries get rid of poverty.

Others criticized that even if China provides loans to poor countries, even if it provides a lot of economic help, the purpose is to expand its own influence. They took the Hambanthota port in Sri Lanka as an example to be alert to the financial traps brought about by dependence on China. In 2017, Sri Lanka was unable to repay the accumulated debts and was forced to lease this strategically important port to China.
 

 

Hambanthota Port in Sri Lanka was built by Chinese workers

 
  

Is "debt trap diplomacy" true?

However, a recent report by the Rhodium Group, a consulting firm based in New York, questioned China's claims of "debt trap diplomacy."

The author of the report analyzed 40 cases of renegotiating Chinese debts in 24 countries and found that only the Hambanthota Port in Sri Lanka clearly involved the issue of asset deduction. In addition, Tajikistan allowed China to control a piece of land in 2011, possibly in exchange for debt relief.

Analysis shows that China has a moderate attitude towards most debtors. In the past ten years, China has renegotiated $50 billion in debt with borrowers, and the most common results are debt relief and deferred loan repayments.

The renegotiated debt accounts for a significant portion of China’s overseas loans. From 2000 to 2017, scholars from the Institute of China-Africa Studies at Johns Hopkins University in the United States have been tracking Chinese loans worth US$143 billion to Africa. Researchers at Boston University confirmed that since 2005, China has issued more than $140 billion in loans to Latin America and the Caribbean.

The above report found that compared with the financing channels of the International Monetary Fund or other international capital markets, Chinese loans have greater flexibility.

 

China expands its influence in Africa through loans?

China has deepened its economic and military ties with Africa, which makes Western China hardliners often uneasy. China surpassed the United States in 2009 to become Africa's largest trading partner.

US National Security Adviser John Bolton said at the end of last year that China is "strategic use of debt to capture African countries in accordance with the wishes and requirements of the Beijing authorities."

However, Jordan Link, project manager of the China-Africa Institute at Johns Hopkins University, said in an interview with Deutsche Welle that a careful study of Chinese loans will reveal that signing the "One Belt and One Road" has not allowed African countries to get more from China loan.

 
 

Xi Jinping's trip to Africa visits Rwanda (July 2018)

 
 

On the contrary, after the launch of the "One Belt and One Road" initiative in 2013, China's loans to Africa dropped sharply that year and have been hovering at this level ever since. The Export-Import Bank of China, the largest source of African loans from China, has drastically reduced its loan lines to Africa in the past five years.

"If Xi Jinping uses the 'One Belt and One Road' to seek economic influence and strategic results in Africa, increasing the total amount of loans is not a key factor." Lin Ke said.

 

Uncollectible debt

The above report shows that China lacks leverage tools in resource-collateralized loans.

Since 2007, China has encountered difficulties in recovering debts from Venezuela. Venezuela is China's largest overseas debtor country with more than 60 billion U.S. dollars in loans. China had expected Venezuela to repay the loan with oil revenue, but the country’s political turmoil and oil production cuts down could only repay the interest part of the loan.

China has also encountered similar problems in Ukraine. For a loan that was originally expected to be repaid by food transportation, China had to resort to international arbitration to resolve the dispute.

The report said, "Ukraine's case shows that despite China's strong national strength and increasing international influence, the means to resolve disputes are still limited, and even if it has disputes with these small countries, it is still incapable."

 

Unsustainable loans

However, the concerns of Western politicians are not entirely unfounded.

The report said that "a large amount of debt needs to be renegotiated, indicating the rationality of concerns about the sustainability of Chinese loans". Given that many loan projects were launched between 2013 and 2016, the number of countries in debt distress may increase in the next few years.

Usually, Chinese state-owned enterprises have taken over the development of Chinese-funded projects without a transparent bidding process. This behind-the-scenes operation creates opportunities for corruption and increases project costs. The quality of construction is also worrying. The overvaluation of projects and the increasing reliance on Chinese loans have made many developing countries full of doubts about the ambitious "One Belt and One Road" initiative.

The study also found that debt relief provided by China is sometimes accompanied by more loans, and these loans are usually larger, rather than ultimately reducing debt to China. China relieved Botswana of 7 million U.S dollar in debt last year, in exchange for a new loan of up to 1 billion U.S dollar for infrastructure construction.

 

Debt reduction or exemption without difficulty in repayment?

The report also found that even if there is no indication that the borrower is in financial trouble, China often takes the initiative to reduce or forgive its debt without going through a formal negotiation process.

This situation shows that China may use debt relief to express support to debtor countries to improve relations.

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