A trail of financial wreckage
With China’s Belt and Road projectobserving its tenth anniversary amid debt default, corruption and environmental concerns, Yvonne Gill doubts there is much to celebrate
The third Belt and Road Forum (BRF), marking ten years of China’s mammoth Belt and Road Initiative (BRI), was held in Beijingon October 17-18 against the backdrop of a sagging Chinese economy, growing concerns about several developing countries straining to pay back their debts, and a post-Covidworld economy struggling to cope with surging energy and food prices in the wake of the Russia-Ukraine war.
Launched by Chinese President Xi Jinping in 2013, the BRI is an ambitious infrastructure development programme whichtoday spans continents to cover more than 150 countries, having dispersed more than one trillion dollars in loansfor infrastructure and energy projects. China signed more than 200 cooperation agreements with over 150 nations and 30 international organisations involving 3,000 BRI projects,mainly the building of roads, railways, ports, dams and power plants.
As the largest global infrastructure financing programme ever launched,the BRI enabled China to export its industrial overcapacityand to invest its burgeoning foreign currency surplus in overseas projects. The BRI also gave a huge boost to China’s diplomatic clout and influence, especially among countries of the Global South, opening up new markets for export of Chinese goods and procurement of cheap raw materials from debtor countries.
Addressing the BRF, Xi asserted that the Silk Road spirit of peace and cooperation, openness and inclusiveness, mutual learning and benefit, is the most important source of strength for Belt and Road cooperation.
But what has been the experience of many of the beneficiary countries caught in a trap of high-cost Chinese debts?
An analysis of a dozen countries most indebted to Chinashows that debt repayment is gobbling up most of the revenues earned by their governments. As a result, they are forced to cut welfare programmes, as well as education and health budgets. These countries are facing a severe foreign currency crunch and are unable to pay for imports of energy and food critical to their economy.Consequently, they have been forced to take out additional loans, often from the Chinese, as others don’t want to lend, given their precarious finances.
Zambia, Ghana and Sri Lanka have already defaulted. Pakistan, China’s largest debtor, is on the verge of default as it desperately seeks a loan from the IMF to meet repayment obligations.
Pakistan’s foreign debts have nearly doubled since 2015 to over $100bn. Chinese banks have reportedly lentsome $30billion tothe country, which spends around half of its revenues on servicing foreign debt, according to campaign group Debt Justice.Some 40 per cent of the China-Pakistan Economic Corridor (CPEC) projects, a BRI flagship venture, have been stalled due to corruption, cost overruns, lack of feasibility, etc. As Chinese companies are not prepared to set up manufacturing units in Pakistan, the sprawling CPECindustrial estates lie vacant alongside the CPEC highways that are supposed to link China and Pakistan’s Gwadar sea port on the Arabian Sea.
The Chinese contracts contain confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt
In order to alleviate its debt problems, Pakistan has already given China exclusive rights, coupled with a tax holiday period, to operate the strategic Gwadar Port for the next four decades. China is entitled to 91 per cent of the port’s revenues. It also plans to build near the port a Djibouti-style naval outpost, which will give China an outlet to the Arabian Sea.
Another BRI debtor, Kenya, which owes China $6bn, is seeking an additional $1bn in loans to service its earlier debts. Among the several infrastructure projects in Kenya is the $4.7bn Standard Gauge Railway line connecting the port city of Mombasa to the Rift Valley via the capital, Nairobi, which remains incomplete. The completed section of the linehas been loss-making, due to lack of connectivity to other neighbouring land-locked countries. The assets of the Port of Mombasa could be taken over by China if the rail line continues to make losses and fails to meet its debt repayment schedule.
And that brings us to Sri Lanka, which had embarked on a deep sea port project in Hambantota under the BRI, but was saddled with recurring debts and a port which has failed to attract adequate maritime traffic. In 2017, Sri Lanka agreed to give state-owned China Merchants a controlling 70% stake in the port on a 99-year lease. About 6,000 hectares of land around the port was also leased out to Chinese companies.
Smaller countries have been the worst hit by spiralling Chinese BRI debts
Zambia, a landlocked African country of 20 million, borrowed billions of dollars from Chinese state-owned banks to build dams, railways and roads. Initially, the loans helped Zambia’s economy to grow. But the high interest rates proved to be a bane, forcing the country to slash its healthcare and social welfare spending and do away with subsidies given to farmers towards the purchase of seed and fertiliser. Today the country faces a financial crisis, unable to service its debts.
Lack of transparency, hidden debts, corruption and routing of debts through shell companies are the hallmark of BRI agreements, according toa study titled ‘How China Lends’. The Chinese contracts contain unusual confidentiality clauses that bar borrowers fromrevealing the terms or even the existence of the debt. They seek advantage overother creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (‘no Paris Club’ clauses), the study pointed out.
Paris Club is an informal group of officials from major creditor countries whose role is to find co-ordinated and sustainable solutions to the payment difficulties experienced by debtor countries. Chinese banks and companies involved in the BRI projects have been reluctant to cancel debts and are not a part of the Paris Club, despite being the world’s largest creditor. They also charge interest rates of 4%, which is close to commercial rates and double that charged by other creditors. Multilateral creditors charge lower interest, and a portion of their credit includes aid. The aid component of Chinese loans is usually very small. Moreover, the BRI loans have a shorter term, making it difficult for debtors to pay them back.
China has also been setting up shell companies, which helped heavily indebted countries to avoid showing their new debts in their public records. Zambia was routed a $1.5 billion loan from two Chinese banks through a shell company to build a giant hydroelectric dam.The loan was not shown on the country’s books for years, according to research by the US think-tankAidData.
Similarly, Chinese banks routed $4 billion as credit to Indonesia for a railway project through a similar mechanism. The loan just didn’t show up in government accounts. It came to light many years later whenthe Indonesian government was forced to bail out the railroad twice and had to debit the amount in the government’s budget.
Smaller countries have been the ones worst hit by spiralling Chinese BRI debts. Laos was forced to give China a majority stake of its national electric grid after its state-owned electricity company was stuck with debts equal to almost 26% of its GDP. Hydropower contributes four-fifths to Laos’s total electricity generation. Another $3.5bn hidden loan extended by China to build a railway system connecting Laos to China has been revealed by AidData research, which says that it would take nearly a quarter of the country’s annual income to pay off the loan.
The countries with the biggest burden of Chinese debts in relation to their gross national income were Angola (35%), the Maldives (29 %) and Laos (30 %),followed by Djibouti (24 %) and Mongolia (23%). Banking experts consider such levels of debt to be unsustainable for the debtor country.
Aware of the criticism of the BRI on the environmental front, at the recent forumthe Chinese leader talked about ‘green’ or environmentally friendly projects and ‘blue’ initiatives related to ocean projects. The ‘Digital Silk Road’, with emphasis on science and technology, innovation and e-commerce,was enthusiastically recalled.While announcing the launch of the ‘Artificial Intelligence (AI) Global Governance Initiative’, Beijing also indicated smaller future projects, reflecting the constraints of a shrinking Chinese economy. In view of corruption and lack of transparency plaguing the BRI, Xi announced the setting up of an ‘Integrity and Compliance Evaluation System’ for companies participating in BRI projects.
When all is said and done, the BRI is a part of China’s geopolitical game plan to dominate the world financially, culturally and militarily. Xi’s ‘three global initiatives’ – the Global Development Initiative, the Global Security Initiative and the Global Civilisation Initiative – unequivocally allude to a grand strategy to challenge the rules-based world order of mutual cooperation,in which the BRI plays a crucial role.
Yvonne Gill is a freelance journalist based in London