More Countries May Fall Into China’s Debt Trap With COVID-19

More Countries May Fall Into China’s Debt Trap With COVID-19
A Chinese worker carrying materials for the first rail line linking China to Laos, a key part of Beijing's 'Belt and Road' project across the Mekong, in Luang Prabang, on Feb. 8, 2020. (AIDAN JONES/AFP via Getty Images)
Emel Akan

WASHINGTON—Through its Belt and Road Initiative (BRI), China has poured billions of dollars in loans into low-income countries to help build their massive infrastructure projects. And now with the COVID-19 pandemic, concern about a looming debt crisis has increased in developing nations, as most of them are already bent under massive Chinese debt.

Launched in 2013, China’s BRI, also referred to as “One Belt, One Road” or the “New Silk Road,” is one of the world’s most ambitious and controversial development programs. In recent years, the initiative has been perceived as a “debt trap,” due to Beijing's predatory lending practices.

The BRI has contributed to the substantial external debt buildup in many low-income countries, according to a recent report by the Institute of International Finance (IIF).

Over the past two decades, China has become a major global lender, with outstanding debt exceeding $5.5 trillion in 2019—more than 6 percent of global gross domestic product, the IIF report stated.

The BRI has played an important role in driving China's lending activity in recent years, making Beijing the world’s largest creditor to low-income countries. Since its launch, the initiative directed more than $730 billion to overseas investment and construction projects in over 112 countries, according to the report.

Among the BRI countries, Djibouti, Ethiopia, Laos, the Maldives, and Tajikistan are rated at “high risk of debt distress” by the International Monetary Fund (IMF), meaning they are likely to default or face problems servicing their massive debt.

In addition, a recent academic study published by the Kiel Institute for the World Economy suggests that the Chinese overseas loans may be higher than reported. The study says that up to 50 percent of Chinese loans are “hidden,” as they're not reported to the IMF or World Bank. China’s nontransparent lending practices amplify debt vulnerabilities in poor countries.
Amid a looming financial crisis, Sri Lanka is currently piling on more Chinese debt. Although the debt-ridden country must make $4.8 billion in loan repayments this year, it has reached an agreement with China for at least $1 billion in additional lending, according to Nikkei Asian Review.

Sri Lanka is often cited as a clear example of becoming trapped in Chinese debt and being forced to hand over strategic assets to China. A Chinese state-owned firm took control of Sri Lanka’s southern port of Hambantota in 2017 on a 99-year lease after the country defaulted on its loans.

“Ports have dual use in almost every country—for civilian use as well as for military use,” Bonnie Glick, deputy administrator of the U.S. Agency for International Development, told The Epoch Times’ American Thought Leaders program.

“And the way China has mapped out the globe, it has been very strategically looking at the most valuable ports first and approaching those countries accordingly.”

The same thing happened in the East African country of Djibouti, she noted, where China built a concessionary port. The country is located at the entrance to the Red Sea, where the United States has strong defense interests. Nearly 10 percent of the world’s oil exports and 20 percent of all commercial goods navigate through the Suez Canal, passing close to Djibouti.

“Djibouti defaulted on its loan, and China ultimately controls operations in the port in Djibouti,” Glick said, calling the BRI “One belt, one road, one-way trip to insoluble debt.”

Debt Relief

Both the World Bank Group and the IMF have urged the G-20 economies including China to provide debt relief to the world’s 76 poorest countries and allow them to redirect funds toward fighting the pandemic.
China is a signatory to the debt service suspension initiative agreed to by the G-20 nations, which provides a freeze of debt repayments for the poorest nations upon request. The suspension will run from May 1 through the end of 2020.

According to Glick, the initial Chinese response to debt forgiveness was positive.

But later, “they started putting all kinds of conditions on what type of debt would be considered for debt forgiveness, carefully trying to thread the needle to keep bilateral debt owed” to China off the table, she said.

BRI’s massive construction projects are financed mainly through a wide range of Chinese local government and state-controlled institutions.

The Trump administration has voiced a hard line against China’s ambitions to grow its footprint in emerging markets, and the pandemic has amplified these concerns.

Secretary of State Mike Pompeo said the whole world is waking up to the challenges posed by the Chinese Communist Party.

“China’s been ruled by a brutal, authoritarian regime, a communist regime, since 1949. For several decades, we thought the regime would become more like us through trade, scientific exchanges, diplomatic outreach, letting them in the WTO as a developing nation,” he told reporters on May 20.

“That didn’t happen. We greatly underestimated the degree to which Beijing is ideologically and politically hostile to free nations.”

Emel Akan is a senior White House correspondent for The Epoch Times, where she covers the Biden administration. Prior to this role, she covered the economic policies of the Trump administration. Previously, she worked in the financial sector as an investment banker at JPMorgan. She graduated with a master’s degree in business administration from Georgetown University.