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Monday, April 15, 2024

Why China’s BRI not a Debt Trap

Who controls the Sri Lankan port of Hambantota? Does China intend to capture the world through its debt-trap diplomacy? What is the future of China’s economic model? This essay explains the case of the port of Hambantota and sheds light on the organized propaganda against the Chinese-led investment across the world. A must-read for the students of Political Science, History, and International Relations.

 ‘Until the lions have their own historians, the history of the hunt will always glorify the hunter’ – Chinua Achebe.

Chinua Achebe, a celebrated Nigerian author who attempted to liberate African literature from the colonists’ influence, wrote these lines in a particular context. His point was simple; unless the colonized have their own historians the history will glorify the colonialists.  Achebe is important for any serious students of history, politics, and international relations in this region of the world i.e. South Asia. His thesis not only helps reexamine our politics, culture, and society with a unique historical sensibility but also urges us to be skeptical of what these historians and writers—architects of colonial rule— have to say about our friends.

China— the world’s second-largest economy—is one of the few countries in the world to have positive growth during a deadly pandemic. According to the latest report in Financial Times, “China’s gross domestic product expanded 6.5 per cent in the fourth quarter of 2020, beating forecasts and making the country one of the few in the world to register positive growth for the year”. The report further revealed that “China’s rebound from Covid-19 has been powered by higher industrial production, which benefited from state support and added 7.1 per cent in the fourth quarter, compared with 5.8 per cent in the previous quarter”.

China is a rising economic power with an aim to increase its soft power. This has posed serious threats to the American-led Western world. The rise of China encouraged scholars to mull over some serious questions about the future of the world order. Some of them focused on the Thuycidide trap and others opine a neo-colonialist power in the making. Former Attorney General William Barr said that China is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.” Similarly, former Vice President Mile Pence said in 2018 that “we’ll be giving foreign nations a just and transparent alternative to China’s debt-trap diplomacy”.  These speculations lead us to ask a simple question: Does China have a plan to colonize the poor countries?

Notably, there have been some scholarly claims and speculations that the China-Pakistan Economic Corridor (CPEC) will potentially turn Pakistan into modern-day Sri Lanka. These claims are generally the result of organized propaganda where China is considered a monster having the ability and will to alter the global world order.

However, the chief criticism against China is about its alleged control of the Sri Lankan port of Hambantota. The story is sharply narrated as follows: Beijing tactfully urged Sri Lanka to borrow money and Chinese banks for the completion of the projects. There were no prospects of commercial success. Ultimately, it pushed Sri Lanka into a default and China got what it really wanted to; “forcing the Sri Lankan government to surrender control to a Chinese firm”. This story is shared by scholars, political commentators and economists to warn countries like Pakistan: Be aware of Beijing.

Deborah Brautigam, Bernard L. Schwartz Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University, and Meg Rithimire, F. Warren McFarlan Associate Professor at Harvard Business School, wrote a groundbreaking article entitled The Chinese ‘Debt Trap’ Is a Myth, and attempted to offer an alternative view. The bottom line of their piece is that “the debt-trap narrative is just that: a lie, and a powerful one”.

This essay explains this “lie” in order to help Pakistani readers better understand China, its economic model and its partnership with Pakistan.

Brautigam and Rithimire point out that; a) Chinese banks are willing to restructure the terms of existing loans; b) these banks have never actually seized an asset from any country; c) the port of Hambantota has never been taken over by China as a result a presumed default.

Read More: CPEC & the Greater Belt and Road Initiative (BRI)

Yes, there was no default as projected by the media. Sri Lanka got a bailout from the International Monetary Fund. Colombo also decided to lease out the port to an experience company. There were two companies on the site: China Merchants and China Harbor. China Merchants was chosen by Sri Lanka which became the majority shareholder with a 99-year lease, and Colombo used the $1.12 billion cash infusion to bolster its foreign reserves, not to pay off China Eximbank.

Port of Hambantota: A background 

The story of the port of Hambantota began around two decades ago when the Canadian International Development Agency financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. In 2003, the report had proposed that “building the port at Hambantota was feasible”. However, due to domestic political chaos in Sri Lanka, the project could not move forward.

After some discussion, the idea that the port in Hambantota should be constructed got widespread attention during the reign of Rajapaksas—Mahinda Rajapaksa and his brother Gotabaya.

In 2006 another feasibility report was presented by the Danish engineering firm Ramboll, and it made the similar recommendations. The Sri Lankan government then approached the United States and India for the construction of the port. Both countries said no. It was the time (2007) when China got in, lobbied for the project, and China Harbor Group won it.  China Eximbank agreed to finance this project.

China Eximbank offered a $307 million, 15-year commercial loan with a four-year grace period. Sri Lanka was offered a choice between a 6.3 percent fixed interest rate or one that would rise or fall depending on LIBOR, a floating rate. Keeping in view the global interest rates, the Sri Lankan government chose a 6.3 percent fixed interest rate.

In 2009, although there was an end to the Civil War, yet the government made some ill-thought decisions.  It did not wait for the phase 1 to be completed in Hambantota, as recommend by Ramboll team, and went on to initiate the phase 2. For that, it needed money. In 2012, once again, China Eximbank was approached to borrow another $757 million.  This time the money was borrowed at a post-financial-crisis interest rate of 2 percent.

In 2014, when it was realized by the SLPA that the Hambantota was losing money and there needed to be an effective mechanism to manage it, a new agreement was signed with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years.

Quite surprisingly, in 2015, Mahinda Rajapaksa announced to hold elections but lost it to his own health minister, Maithripala Sirisena.

Read More: China’s Belt and Road Initiative will change 32m lives: World Bank

“When Sirisena took office,” argue Brautigam and Rithimire, “Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China”. They also maintained that: “Of the $4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota. The Central Bank governors under both Rajapaksa and Sirisena do not agree on much, but they both told us that Hambantota, and Chinese finance in general, was not the source of the country’s financial distress.”

Attempts to silence an emerging economic giant?

China is appearing to be a global giant in the international construction business that was previously dominated by Europe. In 2000, China had 9 firms among 100 global contractors, but now it has 27. On the other hand, the US has 7, compared to 19 two decades ago. Similarly, Europe dropped to 37 from 41 in 2000.

China is also having partnerships with global companies to expand its economic influence. For example, the French firms Bolloré and CMA-CGM have partnered with China Merchants and China Harbor in port developments in Nigeria, Cameroon, and elsewhere.

Read More: Xinjiang crackdown at the heart of China’s Belt and Road

The US has special concerns as a result of China’s preeminence.  Dr. Yascha Mounk, Associate Professor of Politics at Harvard, and Dr. Roberto Stefan Foa, a political scientist at the University of Cambridge, collected data in liberal democracies and offered some politically disturbing conclusions.

Foa-Mounk’s studies suggest the end of the consolidation paradigm in the established democracies where citizens are increasingly becoming critical of liberal democracy. The most disturbing finding was the response of 46 percent of respondents in the USA who claimed they either “never had” or had “lost” faith in US democracy. Governance failure at home – and rising trends – deprives the present American government to assume the role of global leadership.

There is a strong view that the US and its allies are now attempting to deal with China through soft-power: branding China as a monster with an intention to capture poor countries. Therefore, states like China and Pakistan must focus on increasing their soft-power in order to effectively counter organized propaganda in this post-fact world.

Farah Adeed is Assistant Editor, Global Village Space (GVS). The views expressed in this article are the author’s own and do not necessarily reflect Global Village Space’s Editorial Policy.