Who is at risk from China’s Belt and Road Initiative debt trap?

China’s Belt and Road Initiative (BRI) is raising the risk of a sovereign debt default among small and poor countries
By Nikita Kwatra

China BRI will potentially span 68 countries and could have implications for each of these countries’ public debt.

Mumbai -- China’s Belt and Road Initiative (BRI) which seeks to invest about $8 trillion in infrastructure projects across Asia, Europe and Africa, has come under intense scrutiny, not least due to suspicions over China’s intent behind the ambitious project. 

A study by the Centre for Global Development, a Washington-based think tank, analyses one important consequence of BRI: debt.
While the study finds that it is unlikely that the BRI will be plagued with wide-scale debt sustainability problems, it is likely to raise the risk of a sovereign debt default among relatively small and poor countries.
The BRI will potentially span 68 countries and could have implications for each of these countries’ public debt. 

To understand these effects, the study first uses sovereign credit risk ratings and World Bank debt sustainability analysis to identify 23 of the 68 countries currently at risk of debt distress. 

For these 23 countries, the study adds the Belt and Road Initiative lending pipeline into the countries’ overall debt and debt to China as of end of 2016.
They find that eight countries could face difficulties in servicing their debt because of the Belt and Road Initiative. 

These include Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan. 

Pakistan, which through the China-Pakistan Economic Corridor, serves as the centrepiece of the BRI and is by far the largest country exposed, with China reportedly financing about 80% of its estimated $62 billion debt. 

According to the think-tank, China’s case-by-case approach in dealing with debt relief in the past could prove “problematic”.
One example is China’s acquisition of Sri Lanka’s Hambantota port after the Sri Lankan government failed to service its debt.
Unlike most of the world’s other major creditors, China is not bound to a set of rules on how it addresses debtor repayment problems. 

Currently, China is only an ad hoc participant of the Paris Club, a collection of creditor nations which follow a set of rules in dealing with debtor nations. 

The think-tank advocates applying globally-accepted creditor disciplines and standards to the Belt and Road Initiative.
To do this, they recommend the World Bank and other multilateral banks work with the Chinese government to set the lending standards for the BRI projects.
Another recommendation is to establish a new creditor’s group which would maintain the core principles of the Paris Club.
To mitigate lending risks, China is also recommended to provide technical and legal support to developing countries. 

Finally, the think tank proposes that China should offer debt swap arrangements in support of environmental goals where borrowing country debt is forgiven in exchange for a commitment to an environmental objective, for instance, forest preservation.

China's debt traps

China's Silk Road project runs into debt jam
By Julien Girault
China's dictator Xi Jinping says trade with Belt and Road countries has exceeded $5 trillion

China's massive and expanding "Belt and Road" trade infrastructure project is running into speed bumps as some countries begin to grumble about being buried under Chinese debt.
First announced in 2013 by Xi Jinping, the initiative also known as the "new Silk Road" envisions the construction of railways, roads and ports across the globe, with Beijing providing billions of dollars in loans to many countries.
Five years on, Xi has found himself defending his treasured idea as concerns grow that China is setting up debt traps in countries which lack the means to pay back the Asian giant.
"It is not a China club," Xi said in a speech on Monday to mark the project's anniversary, describing Belt and Road as an "open and inclusive" project.
Xi said China's trade with Belt and Road countries had exceeded $5 trillion, with outward direct investment surpassing $60 billion.
But some are starting to wonder if it is worth the cost.
During a visit to Beijing in August, Malaysia's Prime Minister Mahathir Mohamad said his country would shelve three China-backed projects, including a $20 billion railway.
The party of Pakistan's new prime minister, Imran Khan, has vowed more transparency amid fears about the country's ability to repay Chinese loans related to the multi-billion-dollar China-Pakistan Economic Corridor.
China's "new Silk Road" envisions the construction of railways, roads and ports across the globe

Meanwhile the exiled leader of the opposition in the Maldives, Mohamed Nasheed, has said China's actions in the Indian Ocean archipelago amounted to a "land grab" and "colonialism", with 80 percent of its debt held by Beijing.
Sri Lanka has already paid a heavy price for being highly indebted to China.
Last year, the island nation had to grant a 99-year lease on a strategic port to Beijing over its inability to repay loans for the $1.4-billion project.

Ambiguous partner
"China does not have a very competent international bureaucracy in foreign aid, in expansion of soft power," Anne Stevenson-Yang, co-founder and research director at J Capital Research, told AFP.
"So not surprisingly they're not very good at it, and it brought up political issues like Malaysia that nobody anticipated," she said.
"As the RMB (yuan) becomes weaker, and China is perceived internationally as a more ambiguous partner, it's more likely that the countries will take a more jaundiced eye on these projects."
The huge endeavour brings much-needed infrastructure improvements to developing countries, while giving China destinations to unload its industrial overcapacity and facilities to stock up on raw materials.
Chinese dictator Xi Jinping (C) says the initiative is 'not a China club'

But a study by the Center for Global Development, a US think-tank, found serious concerns about the sustainability of the sovereign debt in eight countries receiving Silk Road funds.
Those were Pakistan, Djibouti, Maldives, Mongolia, Laos, Montenegro, Tajikistan and Kyrgyzstan.
The cost of a China-Laos railway project—$6.7 billion—represents almost half of the Southeast Asian country's GDP, according to the study.
In Djibouti, the IMF has warned that the Horn of Africa country faces a "high risk of debt distress" as its public debt jumped from 50 percent of GDP in 2014 to 85 percent in 2016.
Africa has long embraced Chinese investment, helping make Beijing the continent's largest trading partner for the past decade.
On Monday, a number of African leaders will gather in Beijing for a summit focused on economic ties which will include talks on the "Belt and Road" programme.

'Not a free lunch'
China bristles at criticism.
Sri Lanka has already paid a heavy price for being highly indebted to China

At a daily press briefing on Friday, foreign ministry spokeswoman Hua Chunying denied that Beijing was saddling its partners with onerous debt, saying that its loans to Sri Lanka and Pakistan were only a small part of those countries' overall foreign debt.
Stevenson-Yang said China's loans are quoted in dollar terms, "but in reality they're lending in terms of tractors, shipments of coal, engineering services and things like that, and they ask for repayment in hard currency."
Standard & Poor's said Beijing structures the infrastructure projects as long-term concessions, with a Chinese firm operating the facility for a period of 20 to 30 years while splitting the proceeds with the local counterpart or government.
The head of the International Monetary Fund, Christine Lagarde, raised concerns about potential debt problems in April and advocated greater transparency.
"It's not a free lunch, it's something where everybody chips in," she said.

Warning sounded over China's 'debtbook diplomacy'

Academics identify 16 countries loaned billions that they can’t afford to repay
By Helen Davidson
Sri Lankan monks take pictures at the opening of an airport built with Chinese money in Hambantota.

China’s “debtbook diplomacy” uses strategic debts to gain political leverage with economically vulnerable countries across the Asia-Pacific region, the US state department has been warned in an independent report.

The academic report, from graduate students of the Harvard Kennedy school of policy analysis, was independently prepared for the state department to view and assessed the impact of China’s strategy on the influence of the US in the region.
The paper identifies 16 “targets” of China’s tactic of extending hundreds of billions of dollars in loans to countries that can’t afford to pay them, and then strategically leveraging the debt.
It said while Chinese infrastructure investment in developing countries wasn’t “inherently” against US or global interests, it became problematic when China’s use of its leverage ran counter to US interests, or if the US had strategic interests in a country which had its domestic stability undermined by unsustainable debt.
The academics identified the most concerning countries, naming Pakistan and Sri Lanka as states where the process was “advanced”, with deepening debt and where the government had already ceded a key port or military base, as well places including Papua New Guinea and Thailand, where China had not yet used its amassed debt leverage.
Papua New Guinea, which “has historically been in Australia’s orbit”, was also accepting unaffordable Chinese loans. 

While this wasn’t a significant concern yet, the report said, the country offered a “strategic location” for China, as well as large resource deposits.
While there was a lack of “individual diplomatic clout” in Cambodia, Laos and the Philippines, Chinese debt could give China a “proxy veto” in Asean, the academics said.

They also warned that the 2023 expiration of the compact of free association between Micronesia, Palau and the Marshall Islands could “threaten the unfettered basing access and right of strategic denial the US has enjoyed since world war two, and help the Chinese navy extend its reach past the first island chain into the blue-water Pacific”, it said.
China’s methods were “remarkably consistent”, the report said, beginning with infrastructure investments under its $1tn belt and road initiative, and offering longer term loans with extended grace periods, which was appealing to countries with weaker economies and governance.
Construction projects, which the report said had a reputation for running over budget and yielding underwhelming returns, make debt repayments for the host nations more difficult.
“The final phase is debt collection,” it said. 

“When countries prove unable to pay back their debts, China has already and is likely to continue to offer debt-forgiveness in exchange for both political influence and strategic equities.”
As a case study, the report cited specific concerns about Sri Lanka granting China an 85% stake in a 99-year lease on a major port in Hambantota.
The deal, which the report described as “opaque and contentious”, came after a decade of deepening debt ties with China. 

In 2007 China offered financing for the $361m port at a time when other entities were concerned about human rights and commercial viability, and then loaned a further $1.9bn for upgrades and an airport.
By 2017, when the port deal was signed, Sri Lanka owed more than $8bn to Chinese-controlled firms. 

The port, which was yet to generate a profit, became a “debt trap”.
“Once Sri Lanka made the initial commitment, the sunk cost and need to generate profit to pay off the original loans drove it to take out additional loans, a cycle that repeated itself until it was finally cornered into giving up the port in a debt-for-equity swap,” it said.
“This has sparked fears that Hambantota could one day become a Chinese naval hub, and sent a worrying signal to other debt-strapped developing nations.”
China has invested in or financed infrastructure developments across the Asian and Pacific regions, including large-scale projects representing sizeable portions of host nations’ GDP. 

The loans often require that Chinese companies build the projects, and complaints that locals are overlooked for a fly-in Chinese workforce are frequent.
It has also sought to expand its military presence, prompting warnings for nearby countries including Australia. 

Australia’s major parties have also voiced concern about the country’s diminishing influence in the Pacific.
The report recommended that the US target and streamline its investments, strengthen alliances and manage debt burdens, including through bolstering India’s role as a regional leader.
Last year India warned against China’s expanding BRI and urged financial responsibility with projects that didn’t create “unsustainable debt burden for communities”.

Impoverished Laos Shows Resistance To Becoming A Client State Of China

By Ralph Jennings

Laos typically welcomes help from China. 

About 23% of the landlocked Southeast Asian country’s 6.8 million people live in poverty. 

Rural infrastructure lags behind most of its neighbors. 

So the Lao government supports growing investment from China as part of the “Belt and Road” program, a 4-year-old effort to extend the giant country’s trade and infrastructure network across Asia into Europe. 

A bellwether 414-kilometer China-Laos railway that broke ground in December is one of the “most important” projects in the Lao government’s economic development plan through 2020, Chinese official Xinhua News Agency said in a report this week.
Laos and China are both communist. 

They share a land border. 

No wonder Laos, with a GDP of just $12 billion, sometimes gets described as a client state of the world’s second-largest economy. 

But China is not the biggest foreign investor in Laos, by some measures, and pockets of resistance are emerging to the quick surge in Chinese projects.
Vietnam led other countries in 2015 in value of approved projects. 

Vietnamese firms parked more than $466 million that year, followed by Malaysia with projects worth about $430 million, according to Lao government statistics. 

Vietnam invested largely in farming, energy and natural resources, spawning 40,000 jobs, this Vietnamese news report says. 

Malaysian investment since 2000 has gone toward finance, insurance, construction and tourism. China ranked third in 2015 at about $89 million on the same list.
Singapore is now a rising star investor. 

The total 70 Singaporean-funded projects in Laos cover industry, property and farming, the Singapore Business Federation says. 

Total capitalized investment of $175 million makes Singapore the 11th biggest foreign investor by volume.

This photo taken in 2011 shows a woman working in front of her home inside Bopiat village in the Northern province of Louang Namtha where Chinese workers were doing soil analyses in preparation for a railway linking China to Laos.

Varied sources of aid and investment would put Laos, with a GDP of just 12 billion, in a league of other relatively poor Southeast Asian countries. 

Indonesia, Myanmar and Vietnam, for example, accept big blocks of investment and trade from China. 

At the same time they welcome investment from Japan, elsewhere in Southeast Asia and Western countries partly to keep Chinese influence in check. 

Beijing might tap too many natural resources, edge out domestic companies or seek political cooperation that the other country isn’t ready to offer.
China is promoting the “Belt and Road” initiative to give its companies space to expand outside a big but constrained domestic market while bolstering its geopolitical clout against old rival Japan.
“Although Sino-Laos relations have been relatively smooth and economic cooperation is on the rise, Laos is not completely subordinate to China,” says Yun Sun, senior associate with the East Asia Program under Washington-based think tank the Stimson Center. 

“Vietnam also has major influence in Laos, and the Laos government has not been completely acquiescent to Chinese views and projects.”
Chinese enterprises sometimes spar with “local authorities and residents” over land use and threats of environmental degradation, the Shanghai Institute for International Studies says in a 2016 paper. People believe Chinese companies and Chinese employees cause degradation associated with investments such as hydro-power plants, the paper says. 

“The strict control and management of land use imposes a hard constraint on Chinese companies,” it adds.
Laos, if it lets China invest too heavily, risks giving up potential jobs to Chinese workers as well, Sun adds.
The railway line that may shape up as a test case for Laos' acceptance of Chinese investment. 

It’s unclear how the $5.8 billion project will help Laos because it depends just lightly on trade, analysts say. 

A Lao official told Xinhua it should help farm production, cut travel costs, create jobs and attract more foreign investment.
But it may offer few jobs while causing “environmental degradation, land confiscation, and forced relocation,” says Andrea Giorgetta, Asia desk director with the International Federation for Human Rights in Bangkok. 

“Many communities have already had their land confiscated without receiving any compensation,” Giorgetta says. 

Conversely, she says, “the strategic importance of Laos for China is massive, as the country is crucial to give Beijing access to Southeast Asia's markets, natural resources, and infrastructure.”

Chinese Calamity

China's Huge Dam Projects Will Threaten Southeast Asia As Water Scarcity Builds Downstream
By Daniel Rechtschaffen

BEN TRE, VIETNAM - APRIL 28

A river is born high in the Tibetan Plateau, before snaking its way 3,000 miles south and emptying itself into the South China Sea. 

On its journey, it passes through six countries, sustaining their ecosystems and local economies, its fisheries providing a lifeline for 60 million people in its lower basin.
The Mekong changes names as it ventures southward through China, Myanmar, Laos, Thailand, Cambodia, and finally Vietnam. 

Its English title, from the Lao-Thai Me Khoong, or “Mother River,” emphasizes its life-giving nature. It has had a profound influence on the cultural traditions of the 95 ethnic groups who make their homes along its shores, and its basin is second in biodiversity only to the Amazon.
Water is the world’s most important resource, providing economic, agricultural and transportation benefits. 

This is especially true for the developing countries of Southeast Asia, who rely on rivers like the Mekong to spur economic growth and support local industries. 

But although the Mekong was the lifeblood of Southeast Asia long before modern-day borders were delimited, it has been at the root of acute political turmoil in recent years. 

As the supply of water fit for irrigation and maintaining ecologies becomes increasingly scarce in the region, upstream countries that control vital transboundary resources, like China, wield an enormous amount of power. 

Although all of the Mekong’s riparian countries harness or plan to harness its waters for hydropower, extensive damming in China’s section has had the severest effects on downstream states.
The Mekong River is divided into upper and the lower basins. 

The upper basin falls mainly within China’s borders and its upstream location effectively allows for a chokehold on the river’s lower riparian states. 

China’s effects on the river are most evident in its extensive dam projects—hydropower is second only to coal as the country’s largest energy source. 

This represents a larger shift by the government toward renewable energy in the wake of rapid environmental decline and social unrest due to air pollution in recent years. 

Luckily for China, authoritarian governments have a much easier time than democracies commissioning dams, which often cause mass displacement of populations and destruction of local ecosystems. 

China currently has seven dams completed in the upper basin, with another 20 set to be finished in the near future.
Chinese dam-builders are incentivized by the fact that the vast majority of the Mekong’s drop in elevation occurs within China’s borders in the southwestern province of Yunnan, creating a powerful downstream flow ideally suited for hydropower. 

However, this region is also famous for being one of China’s most biodiverse, and this damming comes at great harm to local ecosystems. 

Not surprisingly, hydropower projects in Yunnan have been met with fierce resistance, sometimes violent, by local environmental organizations.

GUANLEI, CHINA: A man brushes his teeth on the banks of the Mekong River. Environmentalists have warned that China's aggressive dam building and development plans threaten fish stocks and add to the pollution of Southeast Asia's strategically important Mekong River, which connects Cambodia, China, Laos, Myanmar, Thailand and Vietnam. 

But perhaps the gravest concern surrounding Chinese dams is their potential for an international crisis—studies in recent years have increasingly shown that China’s many dams are having serious effects on the countries in the lower basin who share the Mekong. 

By changing water temperatures and altering sediment loads that are carried along the river, China’s dams pose a serious threat to fisheries downstream, the yields of which provide the major source of protein to the region’s inhabitants. 

More noticeable are the severe droughts and floods brought by a change in water flow caused by the dams. 

In March last year, China was approached by a desperate Vietnam asking that the Jinghong hydropower floodgates be opened to quench a downstream water shortage.
Mitigating a water crisis in the region is an issue the international community has sought to address for decades. 

In 1997, China was one of three countries that voted against the United Nations Watercourses Convention, an agreement establishing the non-navigational uses of transboundary waterways. 

Since the 1960s, China’s per capita renewable internal freshwater resources have diminished by half thanks in no small part to explosive population growth and rapid industrialization; the country’s available water per person in 2017 is one-third of the world’s average. 

And this water crisis, compounded most recently by pollution, is likely a major factor in China’s close guarding of water resources within its boundaries. 

Although Beijing has sought out less comprehensive regional initiatives with Southeast Asian countries to moderate the Mekong, these are difficult to enforce without the backing of the international community.
And unfortunately, the potential for crisis isn’t limited to the Mekong. 

China controls the “Water Towers of Asia”—the lofty sobriquet given to the Tibetan glacial plateau. 

The Mekong, Irrawaddy, Brahmaputra and the Salween all begin as trickles in these mountains before spilling across China’s borders to eager downstream riparian states. 

Getting first call on how these waterways are manipulated means that China poses a severe security risk to its neighbors.

This photo taken on March 18, 2015 shows a small hydro-electric power station above the Nu river near Gongshan, in southwest China's Yunnan province. Many smaller hydro power stations already generate electricity from water running off the mountains into the Nu river. 

China controls the life essence of eastern Asia: The towers within its domain provide water to 1.3 billion people. 

Up until now China has been compliant in releasing water when requested by downstream states, but the country’s water supplies are drying up. 

And as they do, assertions by recent scholars that 21st-century wars will be fought over water are becoming increasingly convincing.

Thailand’s detention of Joshua Wong shows how deeply some Southeast Asian nations are in China’s orbit

By Isabella Steger

Standing up to China.

Thai authorities yesterday (Oct. 5) detained Hong Kong pro-democracy activist Joshua Wong at Bangkok’s airport and barred him from attending an event at a university, drawing attention once more to how Thailand and some neighboring countries are increasingly bowing to China’s demands.
In response, some Thai citizens have been circulating a drawing on social media showing Thailand as an extension of China. 

The artist highlighted Taiwan in the drawing, a nod to comments by Thai student Netiwit Chotiphatphaisal, who noted that the 19-year-old Hong Kong activist had no problems entering Taiwan earlier.

According to a statement by the Thai government, it received no direct order to arrest Wong, but the decision was taken to avoid an “escalation of political conflict” as Wong’s activism in other countries could “affect Thailand’s relations with other nations.”

The Nation, an English-language newspaper in Thailand, cited an official at Bangkok’s Suvarnabhumi Airport as saying that the request to arrest Wong came from China. 

Thai prime minister Prayuth Chan-ocha said Wong’s expulsion from Thailand was “China’s issue.”
The incident comes after Gui Minhai, a Hong Kong bookseller with Swedish citizenship, went missing last October in Thailand and later reappeared in China. 

In January, Chinese journalist Li Xin disappeared (paywall) while traveling from China to Thailand via Laos.
Writing after Gui’s disappearance, Kerry Brown, a professor of Chinese Studies at King’s College London, said that “we seem to be seeing a wholly new form of the Chinese state acting outside its borders in ways which are opaque, arbitrary, and worryingly predatory.”
As the Wall Street Journal notes in an editorial, what happened in Thailand fits a “global pattern.” 

China’s long arm of the law has extended as far as Kenya and Armenia, where authorities deported suspected Taiwanese suspects of fraud to China. 

Beijing claims Taiwan as a Chinese province.
Nicholas Bequelin, regional director for East Asia at Amnesty International, said that following violent protests in Tibet in 2008 and Xinjiang in 2009, after which many Tibetans and Uighurs fled China for neighboring Nepal, Central Asia, and Southeast Asia, China started to systematically put pressure on those countries.
It’s not illegitimate for China to demand the repatriation of people who have committed offences in that country, or who have committed crimes against Chinese citizens from abroad. 

The problem is the fact that the government systematically conflates criminal offences with the exercise of fundamental rights of freedom such as expression or assembly when it is critical of the Chinese government.
Thailand last year repatriated about 100 Uighurs from detention camps back to China. 

Laos and Cambodia had also sent Uighurs back to China in the past. 

Malaysia last year also barred pro-democracy activists from Hong Kong, including Wong, from entering the country.
Aaron Connelly, a research fellow at the Lowy Institute in Sydney, said that Southeast Asian countries are increasingly reliant on China’s aid and investment—which comes without criticism of human rights abuses, unlike that of the US or other Western countries. 

Cambodia, ruled by strongman Hun Sen, scuppered a statement critical of China’s position in the South China Sea at an Association of Southeast Asian Nations (ASEAN) meeting this summer, for example. 

In Thailand, where the military junta is increasingly cracking down on any form dissent, China’s influence may be of secondary importance, said Connelly.
“Would Thailand under Yingluck Shinawatra’s government have returned Joshua Wong? I’m not so sure,” said Connelly, referring to Thailand’s previous prime minister who was ousted in a military coup in 2014.

“The key dynamic in Thailand isn’t so much China’s investment, but it’s first and foremost that it’s not a democratic government… but any ASEAN country would have been pretty receptive to banning Wong.”