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The BRI is Not a Debt Trap!

Oct 16 , 2018

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Xi and friends before the G20 summit in Hangzhou

 

The Center for a New American Security (CNAS) recently released a report titled “Responding to China’s Belt and Road Initiative”, which suggested that China seeks to build a parallel international system with the Belt and Road Initiative (BRI). Apparently the BRI has been on the top of the agenda of the American political circle. More importantly, perceptions of the BRI will significantly affect China-US relations.

The CNAS report, along with other critics of the BRI, has highlighted the alleged threat of “debt trap”. Earlier this year, the US-China Economic and Security Review Commission (USCC), an institution under the House and the Senate, held a series of hearings on the implications of the BRI. The hearings centered on the implications of China’s massive loans to participating countries for American national security interests.

In May this year, a study from the Harvard Kennedy School claims that China is using “debtbook diplomacy” to expand its strategic clout by providing exorbitant volumes of credit to developing economies in the Asia-Pacific, thus having significant ramifications for US foreign policy. In particular, some American experts questioned China’s loans to countries like Sri Lanka, Myanmar, and Djibouti. It cited Sri Lanka government’s grant of a 99-year lease on the Hambantota port to a Chinese company to repay debts.

What concerns the US most is the possibility that China might use the port as a military base, or employ other ports through similar arrangements. In early September, Assistant Secretary for Defence Randall Schriver said in his interview with Freebeacon that China employed the BRI as a means for both economic and military expansion, and the Chinese military was an important participant in BRI related activities. Apparently, the so called “debt trap” has become a new source of concern.

There is a need to straighten the facts a bit. China does not seek to make the BRI a “debt trap”, and labeling it as such is but an attempt by some Americans to stoke the perception of a “China threat”.

First, people with common sense about the participating countries would recognize that their debt level is not necessarily derived from loans from the BRI, but rather accumulated over the course of several decades. Some debtor countries have been borrowing from Western economies over the years, and their debt level was aggravated by weak economic growth, falling commodity prices and global financial turbulence. Oil-dependent African countries like the Republic of Congo bear the brunt of persistently low oil prices, making it harder for them to repay their debt. 

Second, as China is a latecomer to the global capital market, debts issued by it are not high in percentage terms. According to William Nyirenda, former Minister of Housing and Utilities of Libya, who is now a research fellow with the Center for Global Development, China only accounts for 2% of the $6 trillion external debt owned by African countries, with the main creditors being the World Bank, the IMF, and the Paris Club member states. According to the 2017 annual report by the Sri Lankan central bank, the country had a total external debt of $51.8 billion, out of which only 10.6% was financed by China, and 61% of China financed debts came with lower interest rates than the prevailing rates. ADB data showed that the Asia-Pacific region needs an annual investment of $1.7 trillion for infrastructure development. That amount of money cannot be provided by any single country alone, and China is no exception.

Third, infrastructure calls for massive investments, and usually such projects are initiated by the host countries themselves, who would then choose to enter into contracts on terms they deem appropriate. Take the Hambantota port as an example. The Sri Lankan government and people aspire to convert the port into a transportation hub in the Indian Ocean, and it was the Sri Lankan government who offered to enter into a franchising agreement with the Chinese participating company. Sri Lanka reserves the right to buy back shares of the port, and the Chinese company is only responsible for the operation and management of the port. In addition, it has been explicitly stated by both Sri Lanka and China that the port is for commercial use only, with no military purpose whatsoever.

As China’s own story tells, foreign investment is essential to any country’s endeavor to build its infrastructure and grow its economy. American critics of the BRI emphasize the debt part over the benefits generated by the BRI. For example, the railway linking Mombasa with Nairobi built by China for Kenya has generated 50,000 jobs locally, and it also helps other inland African countries to gain better access to the sea routes. Another example is the Puttalam Coal-fired Power Plant in Sri Lanka, which provided over 40% of the country’s electricity and created jobs for over 20 million local people.

In contrast, those critics bent on stoking the “debt trap” story do not care about the needs of people on the ground, nor can they provide tangible help to these developing countries in need. What they do instead is to throw a wrench into the growth of these countries, as evidenced by the experiences of Myanmar and Pakistan, who are starved of funds for development and investment, due to the onerous financing demands made by Western countries. Or worse still, in some cases, developing countries are subject to sanctions imposed by Western powers.

China is aware of potential financing risks, and it makes a point of averting any “debt trap”. Chinese President Xi Jinping likened the BRI to a “fine brush painting”, an analogy meant to stress that the BRI should in the coming years focus on high quality and high standards in developing infrastructure projects to meet the real needs of the host countries. China has endorsed the Guiding Principles on Financing the Development of the Belt and Road with the ministries of finance of 25 countries. In April, the China-IMF Capacity Development Center (CICDC), a new IMF center funded by the Chinese government, was established to provide training for officials and business communities from BRI participating countries, in order to improve the financial sustainability of related projects.

Guided by “America First”, the Trump administration has slashed funding for Africa aid by large margins, and that is only a taste of what is to come in other US international aid initiatives. The US should not deem the BRI as part of a zero-sum game, and go around spreading the “debt trap” alarm to the detriment of positive China-US relations. A report by AidData of the College of William & Mary believes that the BRI would help host countries ease development imbalances, and therefore improve political stability, which is vital for Western powers to focus more resources on global threats or crises.

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