Understanding the China ‘debt trap’
Credit to Author: BEN KRITZ, TMT| Date: Mon, 15 Apr 2019 16:24:15 +0000
ONE of the biggest fears of people in developing countries including the Philippines, so we are told, is that of the Chinese “debt trap.” The simplest explanation of the idea is that China, in its aggressive push to develop its intercontinental “Belt and Road Initiative,” is lending money to poor countries under unfavorable terms to finance badly-needed infrastructure projects. When the countries are unable to pay these loans, China then takes control of the leveraged assets, in effect carrying out a gradual, bloodless invasion.
That, at least, is what Western interests would like the rest of the world to believe. A more realistic explanation of the “debt trap,” however, is that the tale is utter bullshit, an example, and a rather unsophisticated one at that, of propaganda run amok.
A report by Agence France-Press (AFP) over the weekend is a typical example. Under the headline, “IMF, World Bank air China loan warning,” the story grimly announced that” Increased lending by China to developing nations is increasingly under the spotlight amid concerns that growing debt burdens and onerous conditions could sow the seeds of a crisis.”
The story then explains how the two multilateral lenders are indeed worried about the global debt load generally, and quotes David Malpass and Christine Lagarde, the heads of the World Bank and the International Monetary Fund, respectively, sharing their concerns about the expansion of debt in the developing world in particular.
Despite neither official uttering a word about China, the AFP story forges ahead with its thesis, noting that “China has been lending throughout the developing world as part of its ‘Belt and Road Initiative,’ especially focusing on resource-rich nations “But the loans have come under increasing scrutiny. Mozambique has been engulfed in scandal over $2 billion in fraudulent loans that were hidden from the public.”
The government of Mozambique is indeed up to its eyeballs in a very African sort of corruption scandal involving illicit loans, but despite the clumsy implication of the AFP story, China has nothing at all to do with it.
The case involves the government-guaranteed debt of three semi-public entities controlled by a senior official of the SISE, Mozambique’s security service – $1.157 billion in outright loans from the London offices of Credit Suisse and VTB Bank (a Russian bank), and $850 million in bonds sold on the European market. The scandal was first uncovered in 2016, and a leaked audit report in 2017 that indicated multiple laws were broken caused the IMF and 14 other major development finance institutions to suspend their programs for Mozambique.
The whole “Chinese debt trap” fable got its start in December 2017 with a New York Times report that the government of Sri Lanka had been forced to hand over a Chinese-funded container port to its creditors after being unable to pay its loans. The implication of the story was that China had maneuvered Sri Lanka, which was already in financial straits as a result of excessive borrowing, into a deal it couldn’t possibly manage, thereby securing a key node in its Belt and Road network at a bargain price. The story of the Hambantota Port has since become Exhibit A in the evidence of China’s nefarious intent.
A closer examination of the circumstances, however, casts China’s involvement in a decidedly more favorable light. The idea of a new port in Hambantota on Sri Lanka’s southeast coast was first raised but rejected in 2003. The election of Hambantota native Mahinda Rajapaksa as president in 2005, however, gave the port project new life, particularly since the area had been devastated by the December 2004 Indian Ocean tsunami. A combination of bonds and Chinese loans in 2007 financed construction of Phase 1 of the port, which was opened in 2010 – a full three years before China’s Belt and Road Initiative was launched.
Just as the 2003 feasibility study had predicted, the new Hambantota Port was a financial disaster, racking up $304 million in cumulative losses by the end of 2016. In July 2017, the port’s builder, China Harbor Engineering Co. (CMPH), proposed a rescue: $1.12 billion in additional investment under a public-private partnership (PPP) scheme, in exchange for 85 percent of the shares of Hambantota International Port Group (HIPG), the joint venture given a 99-year concession by the Sri Lanka Port Authority (SLPA) to operate the port. HIPG would then acquire 58 percent of Hambantota International Port Services (HIPS), which had a similar concession to operate the port’s common user facility.
Under the arrangement, SLPA would retain 15 and 42 percent of HIPG and HIPS, respectively, would have the option to buy back 20 percent of the HIPG shares after 10 years, and would have all shares of both concessionaires returned to it at the end of the 99-year term.
Although the deal is obviously favorable to the Chinese investors, when explained properly it begins to sound much more like a conventional PPP arrangement than the seizure of collateral as characterized by the media and skeptical politicians. And it is worth noting that the investment over and above the port’s original $1.4 billion price tag carries more than a little risk, as the facility has been demonstrably unprofitable. To improve its viability, the Chinese firm is adding a 50- square kilometer economic zone, a liquified natural gas plant, and a tourist port to the existing facilities, and will sink $400 million to $600 million into the port’s Phase 3 expansion, scheduled to be completed in 2021.
The world at large, and developing economies in particular are flirting with a debt crisis, a significant part of that debt probably can be attributed to unsound decisions to accept loans with some dubious terms, and given the volume of business done by Chinese businesses around the world, it is likely that some questionable loans indeed have their sources in China. There is not, however, an obvious plan on the part of China to lay “debt traps” in other countries, nor is there discernible evidence happening at all. Loan deals for development should be transparent and publicly monitored, and that is not happening with consistency, as the World Bank and IMF leadership has pointed out. Focusing on that problem rather than the “debt trap” phantom may not be as entertaining, but it will be more productive in the long run.
Email: ben.kritz@manilatimes.net
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