Chinese debt diplomacy turns out to be a major concern in Indo-Pacific region

China’s Ambassador to Sri Lanka, Qi Zhenhong, announced on March 21 that his country was considering a billion dollar loan and a credit line worth $1.5 billion for Colombo to purchase goods from China. There is, however, growing resistance in Sri Lanka against borrowing more from China after the island nation had to cede control of the Hambantota port in 2017, as it fell short of its repayment commitments.

The ongoing multibillion dollar Colombo Port City project, too, is bankrolled by China. Beijing’s debt-trap diplomacy, which critics say is a ploy to take over strategic assets by providing loans on terms that end up being impossible for countries to repay, is turning out to be a major geopolitical challenge.

China is now the world’s largest lender, according to AidData, a research lab at the College of William and Mary, a major public research university in Virginia, United States. It offers more money to the developing world than traditional lenders, including the World Bank, the International Monetary Fund and countries belonging to the Organization for Economic Cooperation and Development (OECD) put together.

The funding usually goes to projects under President Xi Jinping’s flagship project, the Belt and Road Initiative (BRI), and are concentrated largely in the Indo-Pacific region. Unlike development finance offered by traditional lenders, these are like regular commercial loans. They often come with non-disclosure clauses under which the borrowing country has to keep the terms and sometimes even the existence of the loans a secret. It violates the basic principle that public debt should be transparent so that borrowing governments can be held accountable by taxpayers. According to AidData’s latest figures, Chinese loans to the developing world is about $843 billion, while the hidden debt is $385 billion.

As most loans are granted to countries with weak economies which are unlikely to get loans from reputed lending institutions, China is often able to impose favourable terms and high interest rates. And the hidden nature of these loans make them untraceable and immune to proper scrutiny. Often, only Chinese companies are allowed to work on projects funded by these loans and most of the work, excluding casual labour, is done by Chinese citizens.

For instance, in both major projects in Sri Lanka—the Hambantota port and the Colombo Port City—the loan agreement specified that the China Harbour Engineering Company would be the construction contractor. The failure to support local economy and the preference for Chinese workers have led to widespread protests in several countries, including Beijing’s “all-weather friend”, Pakistan.

The Pakistani coastal city of Gwadar, where China is building a port and allied infrastructure as part of the China-Pakistan Economic Corridor, witnessed multiple protest demonstrations last year as the Chinese started monopolising fishing rights in the region and imposed humiliating security screenings for local people.

Chinese lenders offer loans at higher rates of interest which are close to commercial rates. For instance, the rate for the Hambantota project was nearly 6.5 per cent, which was about three to four times the rate offered by the IMF and the World Bank for similar projects. Equally stringent are the repayment schedules. Chinese loans often have a repayment window of less than 10 years, while traditional lenders offer up to 30 years.

Around 40 low and middle-income countries now owe more than 10 per cent of their annual economic output to Chinese lenders. In the case of Djibouti, Laos, Zambia and Kyrgyzstan, the corresponding figure is more than 20 per cent. As the indebtedness grows, it gives China the option to take over the projects and turn them into strategic assets. Most of the Chinese money is invested in infrastructure projects like roads, railways, ports, mines and energy resources.

Like the Hambantota and the Gwadar ports, there are many other major projects like the Entebbe airport in Uganda, the Mombasa port in Kenya, a military base in Djibouti and railway projects in Laos and Nepal, which are being financed by Chinese debt. In the days to come, when the Indo-Pacific will be the world’s preeminent theatre of great power politics, debt-diplomacy could give China unmatched leverage in the region and could turn into a strategic nightmare for India.