Many countries risk defaulting on their debt to China
China has provided billions of dollars in loans to developing countries, but now, as COVID-19 has accelerated the pace of record global debt levels, countries could be threatened with default and China’s relationship carefully nurtured. could be on the verge of unraveling.
In 2013, the Chinese president Xi Jinping announced the launch of the Belt and Road Initiative (BRI), an ambitious multi-billion dollar project dubbed the Chinese Marshall Plan, which China says aims to improve economic connectivity and cooperation across the world.
Made up of land corridors and maritime waterways, the program concerns 71 countries and half of the world’s population. China says initiative is an economic stimulus package, designed to help state-owned enterprises in what it sees as a win-win situation. Critics accused it of being a ploy to create a China-centric order.
China’s loans to African countries amounted to $ 152 billion between 2000 and 2018, according to the South China Morning Post, much of which went to Belt and Road projects. It has become “debt trap diplomacy,” where a country lends money with the intention of making political or economic concessions if the loan cannot be repaid.
In the event of a country defaulting, it is feared that a situation similar to that of Sri Lanka, where the government was unable to service the port’s debt. It was then leased by the government to Chinese companies for a 99-year lease. The United States has expressed concern that the port could be used by China as a naval base.
The Trump administration has repeatedly warned African countries that accept Chinese loans could also cause them to lose control of strategic assets. He warned that a strategic port in the small Horn of Africa nation of Djibouti could succumb to the same fate, a prospect the government has denied.
Now, with the global economy grappling with the fallout from COVID-19, these concerns about default are more real than ever. Yet is there any truth in the claims that China is deliberately trapping poorer countries in debt and the rest of the world, including the United States as well as smaller and poorer countries, should? he worry?
“Debt trap diplomacy is a form of financial pressure or coercion, but not the only form used by China to accumulate influence, position, military access and power around the world. », Rick Fisher, principal researcher at the American think tank International Assessment and Strategy Center, tells Newsweek. “China’s goal is a revival of its Middle Empire style of global hegemony, in which Beijing ultimately has a say in a country’s prosperity and security.”
China has been the dominant trading partner with Africa and established the China-Africa Defense and Security Forum in 2018.
“This group meets in China, is organized by the People’s Liberation Army and most African countries are members,” Fisher said. “From there, China will advance military relations which, in coordination with economic and political incentives, will lead to Chinese military access. So these are not just debt traps, they are just one tool among a much wider array of political, economic and military ploys. . “
Zambia has just issued a stern warning that it is about to default on its debts to Chinese creditors, with China accounts for about a quarter of the country’s $ 12 billion in foreign debt. Kenya has also said it wants to renegotiate its $ 4.5 billion loan deal with China.
Kimani Ichung’wa, chairman of Kenya’s parliamentary budget and budget committee, told The EastAfrican: “It is very easy to solve this loan repayment problem by just sitting down with the Chinese and telling them that we made a mistake. We owe you all of this. but you also ask us a lot in terms of reimbursement. It is a debt. Look, our economy is battered and we are unable to pay. We’re not saying the debt isn’t there, we’re just renegotiating what we owe you and the terms of payment. “
As China pledged to ease the debt of 77 countries, including Kenya, under a recent G20 deal to help poor and developing states during the pandemic, Kenya has already said it will not seek debt relief, fearing that it will undermine its ability to tap capital markets.
Beijing reportedly balked at demands for cancellation of countries’ future debt and with China’s failure to fully participate in agreements with all of its public institutions, this means that in a meeting with the International Monetary Fund, the Bank world urged parties to “hope for the best and prepare for the worst. “ A solution has yet to be found between China and Kenya. In 2015, the China-Africa Research Initiative (CARI) at Johns Hopkins University identified 17 African countries who were considered to be exposed to risky debt to China, and were potentially unable to repay their loans.
With the pandemic pushing poor and developing countries to take on more debt, there are fears that China’s indebtedness to these countries will increase. While China has canceled interest-free loans to Africa, according to researchers at Johns Hopkins University, interest-free loans represent less than 5% of Africa’s total debt to the country. * Countries like Kenya and Zambia say more help is still needed. .
Matters are further complicated by the fact that the debt that African countries have incurred does not only concern Chinese state-owned enterprises, but also Chinese private enterprises operating on the continent. Even though an agreement between the Chinese government and recipient countries can be reached, researchers at Johns Hopkins University have identified more than 30 banks and companies with loans in Africa, some at commercial rates, with which we still have to negotiate.
So far, the G20 has simply called on private companies to join debt relief efforts, with the World Bank calling on China to put pressure on domestic creditors. Yet not everyone is convinced that China engages in debt trap diplomacy and that it will seize assets if countries default.
“This is complete nonsense, this is a myth,” Dr Lee Jones, international politics reader at Queen Mary, University of London and Chinese foreign policy expert, told Newsweek. “The idea that China is deliberately committing developing countries into debt knowing that they are going to fall into debt distress and knowing that this will allow China to seize the projects built there is just absurd. There is not the slightest proof for all of this.
“This is a myth that has been propagated by Indian think tanks and picked up in the United States for purely political reasons, it just is not happening. Is China lending money to countries in development for projects that may not be very good and that may not make enough money to pay them back? Absolutely. But it is not doing it because it is trying to trap developing countries. the fact because he needs to get contracts for public enterprises, he has a lot of excess capital that he wants to get rid of. He is trying to curry favor with developing countries.
“The idea is that China has proposed these projects and pushed them on these countries and lured them into debt so that when they fall, China can seize these assets, which is totally wrong. These projects have been offered to China by the governments of these countries and in fact this is the way Chinese development finance works, its beneficiaries must apply for the projects to China and they must accept all the projects that take place in their territory. wouldn’t agree if they didn’t think it was a good idea. “
China is continuing its Belt and Road initiative, with the country’s Foreign Minister Wang Yi saying the country’s interest in the initiative remains “unchanged.” With the increase in trade between China and these countries, even during the pandemic, what will happen to the growing debt will be watched closely. With half of the world’s population directly involved in one way or another, it’s easy to see why.
* Study methodology and notes
- Johns Hopkins School of Advanced International Studies research used The data on Chinese loan commitments from the SAIS China Africa Research Initiative and the World Bank, and data on Africa’s borrowing and indebtedness levels from World Bank and Fund international debt statistics international monetary policy.