Original Post March 16/2022
There was a time it was fashionable for political leaders to see debt as a moral hazard. Acquiring debt constricted one’s ability to do what they wish. It put the government in danger of being unable to control its policy if the creditor came looking for their investment.
Part of Chinese foreign policy has been seen as an updated version of this practice, using loans to foreign governments as a means to get leverage over the indentured country’s decision making. While low income countries have been the largest recipient of financial agreements, middle income countries have fallen into the debt trap as well.
China holds more loans than the World Bank, the International Monetary Fund, and all the creditor nations of OECD combined. These loans now stand at more than 5% of Global GDP.
Central to Chinese policy has been infrastructure development loans that give the appearance of helping developing countries. In 2017 Chinese President Xi entrenched its Belt and Road initiative, the centerpiece of China’s trade policy seeking to connect large parts of the world with Chinese funded transportation networks. In all 144 countries have signed onto the agreement, although many (partly due to the pandemic and economic fallout from it) are struggling to pay the loans.
In addition to the Chinese state itself, and its development bank, there are also a number of Chinese-owned companies that are involved in the government's foreign initiatives. This is especially true with resource development projects (like mines).
A recent International Forum for Right and Security report tried to understand the structure of the loans that are outstanding. They looked at 100 loan contracts between 2000 - 2020 worth $36.6 Billion. The terms were unusual - not surprising they skewed towards the lender. China has not been in the habit of doing typical financial checks on a debtor’s credit worthiness. Instead loans are structured presuming a higher chance of default (even expecting it).
Among some of the unique features included in many of the contracts is a non-disclosure clause. The borrower is not supposed to disclose the contract terms. Many included the lender having the ability to cancel or call loan (ie. demand immediate repayment) without cause. This would give China an advantage in basically holding an ability to bankrupt a government if it saw it as advantageous.
To say that governments that have taken on Chinese debt are frequently limited in policy options is an understatement. A number of African nations were forced to pay increased interest payments over the pandemic impacting their ability to keep health and social spending at adequate levels. It has also been the case that if a country seeks to pursue a policy that may adversely impact either China or the Chinese company holding the loan, immediate repayment is requested to stop the policy action.
There are also clauses to control collateral arrangements should the borrower run into problems paying the debt (can’t bring in a third party to help mitigate leverage risks). This design puts the Chinese government in a particularly strong position to ensure it has control over projects that it loans money to.
Indeed, it is better to view most of this financing as a form of control rather than a fiscal arrangement to make income. There is a desire to look for leverage with a debtor country rather than ability to pay back. Among recent examples, Sri Lanka recently ran into financial trouble and found itself unable to make payments on a Chinese loan. The solution was a Chinese government directed company taking over control of a port in Sri Lanka on a 99 year lease. In short, China now has effectively claimed control of a seaport on the island nation to use as a base of operations.
Pakistan, Malaysia, Zambia, and the Congo all have similar situations. China claims control of ports or resources as an alternative to the country unable to meet its payment obligations. A Chinese owned power company owns more than 50% of Laos power grid after Laos had to default on a loan.
One of the crucial fallouts is that Beijing has gained control of a number of primary supply chains. Congo has ceded control of a large portion of its cobalt mines to China and as a result it is Chinese industry that now has the majority control of the supply of electric batteries.
This serves as an alternate form of imperialism. And it comes with the side advantage of not having to deal with territorial issues. Simply controlling a country's resources and being able to directly influence government policies with threats of loan calls. Beijing has been steadily establishing a means of using economic clout to direct influence. As a foreign policy it is potent.
If America had a Belt and Road Initiative, Americans would think of it as charity and be angry that the money isn’t being used for handouts for Americans. Meanwhile, it’s a way to literally take over the world- ports, etc. without military superiority or expenditure.