For a long time now, China has been funding the developing world’s infrastructure growth. Recently though, the underlying intentions of the Chinese have been called into question. The term ‘debt-trap diplomacy’ and ‘neo-colonialism’ have been thrown around, with many people believing that the Chinese have nefarious intentions.
On the face of it, this perception isn’t baseless. The nations that the Chinese are extending finance to are often economically weak and dependant on financial aid. For some of these smaller nations, debt to China has exceeded 15% of their total GDP. This is a concerning statistic, especially considering that approximately half of China’s lending to developing nations has been done “off-book” and hasn’t been recorded by any multilateral surveillance institutions.
The form of finance being extended to these struggling nations is loans, not aid. Often, these loans are made at market-interest rates, they don’t meet the concessionality guidelines of the International Monetary Fund and include collateral clauses to secure payment in the event of default. Their ability to extend these seemingly predatory loans originates from the fact that they are willing to fund projects that no-one else in the developed world will touch.
“We like China because they bring the red flags, not the red tape.”
Finally, the projects themselves are at times not up to standard. Loaning significant sums of money to economically weak nations for the construction of projects that aren’t always necessary nor built to an acceptable standard, and the debt-trap theory doesn’t seem to be so outlandish.
The most obvious example of what can be considered ‘debt-trap diplomacy’, is the Hambantota port in Sri Lanka. Described by some as the first step towards the sale of their sovereignty, Sri Lanka gave away a majority equity stake in the port to the Chinese and gave them a 99-year lease as a settlement of debts that they were unable to furnish. Most concerning is that the economic potential for Hambantota is not great, which has led to worries that China plans to use it as a military naval facility.
Although it may appear that ‘debt-trap diplomacy’ is a strategy being deployed by the Chinese, it must be remembered that appearances can be deceiving.
A study into the Chinese’s much-criticized financing of Pacific island projects, performed by the Lowy Institute, has found that China isn’t engaging in ‘problematic debt practices in the Pacific’. However, the study did conclude that although it currently isn’t a problem, the Chinese would need to reform their lending practices in order to remain in the green area. They’ve been doing exactly that.
A new IMF training center has been established with the support of the Chinese, to improve the debt management capacities of the Belt and Road Initiative (BRI) involved countries. They have also committed themselves to the G20 Operational Guidelines for Sustainable Financing and the G20 Principles for Quality Infrastructure Investment.
These G20 guidelines and principles both contain provisions relating to debt-sustainability, which include compliance with the policies of the World Bank and IMF that relate to debt-burdened developing nations.
Furthermore, a BRI debt-sustainability framework has been created by China to provide guidelines for financing BRI projects in developing countries. The framework is modeled on the best practices of the IMF and World Bank, but compliance with it is not yet an enforced requirement.
China’s road to dispelling the concerns around their developing nation debt practices and rebuilding trust in the international community will be long and will require many steps to be taken. The first of these steps, however, is already behind them and the road ahead is that much shorter. Given what China has managed to achieve in the past 60 years, it’s unlikely that these reforms will prove to be out of their reach.