In my last post, I discussed the scope of China’s robust application of “economic aggression” within the global economic landscape. I noted that China pulls upon various trade levers in furtherance of China’s geopolitical agendas across the globe. In addition to issuing veiled threats to disrupt the economies of countries who dissent against China’s diplomatic maneuvers, China is engaged in what appears to be far more damaging – predatory lending. These loans are advertised as infrastructure investment projects under Xi Jinping’s Belt and Road Initiative (BRI). Many countries have bought into BRI initiatives which rapidly lose their luster before the first payout hits the books. Philippines is one of the latest countries arriving at this conclusion and are joining what seems to be the beginning of an exodus out of the dark debt ridden valleys of BRI.
BRI As Advertised
In September 2013, PRC President Xi Jinping announced the Belt and Road Initiative (BRI). On its face, BRI appears to be an ambitious undertaking with reasonable objectives resulting in firm trade routes linking Asia and Europe through infrastructure (roads, rail, and seaports). The countries that dot existing trade routes would theoretically benefit from this initiative through the modernization of transport infrastructure and associated economic booms typically resulting from construction of large scale development projects.
At its inception BRI gained the buy in from upwards of 140 countries, purportedly providing employment and residual economic growth to developing countries. This was the elevator pitch for BRI, and all said, it sounds like a fantastic opportunity particularly for countries with fledgling economies with relatively weak vectors of revenue.
It goes without saying that BRI provides clear strategic benefits for the PRC. One obvious benefit, and one that the PRC is fairly transparent about is that BRI will certainly drive Chinese influence across approximately three quarters of the world. Having a direct hand in improving the way of life for the inhabitants of participating countries would expectedly yield support needed in other sectors of diplomacy. Finally, it appears that the PRC is well aware of the liberal application of economic sanctions by the United States and its allies as a deterrence measure against aggression. Being the sole financier of the BRI, this would ensure the PRC will maintain economic ratlines amidst any sanctioning activities leveraged against them.
So far, nothing really stands out as overtly threatening to western interests. However, the cracks soon reveal themselves as agreements are reached and the fine print of loan contracts is examined.
Debt Trap Diplomacy
I’m certain that if you are reading this, you are someone who is keen on the term “debt trap diplomacy.” If this is new to you, Debt Trap Diplomacy is a termed applied to describe the predatory loan practices allegedly use by the PRC, namely for projects funded under the BRI.
Prime candidates for borrowing under the BRI must meet three key attributes, so far as I can tell. First, the borrowing country is already in the midst of a debt crisis, or has a weak Gross Domestic Product. Long and short, these aren’t economic “high-ballers.” Second, the borrowing country enters into loans with absurdly high interest rates, rates calculated by macro-economic experts who analyze a borrower’s capacity to pay. And third, the borrowing country must secure these loans with collateral of strategic interest to the People’s Republic of China.
I gathered these components by identifying the common denominator in the vast majority of defaulted loans or loans at high risk of default, issued by the PRC under BRI.
BRI – The “Wish” Edition
Have you ever ordered anything from Wish or Alibaba? If you have, you can appreciate my cleaver heading for this section. BRI as advertised, boasts potential for the overall enrichment of global economy ushered in by a philanthropic China – who is known to be a state that has an interest in improving the lives of people everywhere. Except of course if you disagree with the Chinese Communist Party about anything, call Xi Jinping “winnie the pooh,” or are a big fan of freedom.
However, once these loans are received and unpacked by the borrowing country, it becomes fairly evident that it was probably the worst idea ever to become indebted to the PRC. As mentioned before, if you qualify for a “BRI” loan, you likely have a credit score of 200, and are already near bankruptcy.
While most people who suspect nefarious motives of the PRC, a vast majority of people believe that the PRC is the sole cause of countries defaulting on their financial commitments. In reality, the PRC typically constitutes, on average, between 10 and 20 percent of that country’s debt. However, the terms, conditions, interest rates, and structure of the loan likely accelerates the borrower’s default. It is not uncommon for PRC loans to contain a “pay in full” clause that is triggered by things like public disagreement with PRC foreign policies, or engaging in similar development projects with competing economies.
All things considered, economic and political conditions almost ensure that borrowing countries will default. What happens then? The same thing that happens when you or I default on a loan, we get repo’d. Even worse, we likely lose the collateral we posted as a condition for acquiring the loan. Certainly not something the borrowing country expected by participating in Xi’s great BRI idea.
Dispelling the Myth that Debt Trap Diplomacy is a Myth.
For those who say that China also loses when engaged in debt-trap diplomacy, they are clearly attempting to dispel the “myth” of debt trap diplomacy. I’m here to dispel the myth that debt trap diplomacy is a myth. China clearly wins, from control over a strategic deep water port to geo-synchronous satellite slots above Guam and Japan, China always wins.
I read one article (source of which shall remain known only to me) that debt trap diplomacy is impossible because China simply is not sophisticated enough to pull it off. Well, I can’t say that assertion was even remotely convincing, so much so that I will not waste time explaining why that was a ridiculous argument. The article I am referring to was published by a “think tank,” probably by someone with more college than I have. To date, I have not been able to find a cohesive explanation attached to the headline “Debt Trap Diplomacy is a Myth. Every argument presented to me has fizzled out, defies basic principles of debate, and abandons logic in its most basic form.
BRI and Chinese initiatives like BRI are yet another weapon in the PRC’s economic arsenal. However, it seems that reasonable countries are becoming keen on Chinese Economic warfare. Honestly, it doesn’t take much analysis to arrive at the basic conclusion that China will apply any measure of control to disrupt global economy in a manner that suites the interest of the Chinese Communist Party. While this has been going on for the better part of this past decade, the implications of these activities are far more acute. The consequences come into sharp focus as tensions rise in the West Philippine Sea, and the specter regional conflict with China looms. I hope I can help in shining a bright spotlight on these tactics and will do so with more posts. Stay tuned.
Philippines Security Watch 