The U.S. itslef is in a trap
In 2018, former U. S. Vice President Mike Pence used the phrase “debt trap diplomacy” to oppose China’s global strategy. Two years later, former Attorney General William Barr interpreted it thus: Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself.”
No one had used the term, “debt trap diplomacy,” until May 2018, when the U.S. State Department distributed to the media, a paper called "Debtbook Diplomacy" from Belfer Center for Science and International Affairs at the Harvard Kennedy School. The two writers of the paper, Sam Parker and Gabrielle Chefitz, commissioned by the U. S. State Department, were from Homeland Security and the Department of Defense, and not from an Economics background.
Soon this study became the source for the State Department to gain more funds from Congress and use it to create derisive reports on China's global investments, according to the FY 2018 Department of State Agency Financial Report: Collection of Sidebars.
As the number of countries joining China’s Belt and Road Initiative (BRI) rises, so is the negative reporting on it, by the West. The West uses the term "debt trap" to describe the investments from China in Asia, Africa, Latin America, and the Caribbean.
This false narrative portrays both Beijing and its allied developing countries as if in an ultra-colonial owner/slave setup. The deliberately drafted crooked fiction is that once a country is weighed down by Chinese loans, it is Beijing’s puppet.
The myth of Hambantota
The prime example of this heinous strategy is the misconstrued description of the Sri Lankan port of Hambantota. A study by Deborah Brautigam, Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University and Meg Rithmire, Associate Professor at Harvard Business School, has eminently exposed this myth of China's 'debt-trap policy' around Hambantota.
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At Hambantota port
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It was not China, but the Canadian International Development Agency that had financed the Canadian firm, SNC-Lavalin to carry out a feasibility study for the port. The study in 2003 batted for building the Hambantota port, and the Canadians’ greatest fear was losing it to European competitors. SNC-Lavalin recommended a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a private consortium on a build-own-operate-transfer basis.
The Canadian project failed, but the plan to build the port gained momentum during the rule of the Rajapaksas, who grew up in Hambantota. A second feasibility report produced in 2006 by the Danish engineering firm Ramboll, also made similar recommendations.
Armed with the Ramboll report, Sri Lanka approached the United States and India; both said no. A Chinese construction firm, China Harbor Group, stepped in. China Eximbank agreed to fund it, and China Harbor won the contract in 2007, six years before Xi Jinping introduced the BRI. China Eximbank offered Sri Lanka $307 million, a 15-year commercial loan with a four-year grace period, at a 6.3 per cent fixed interest rate.
Phase I of the port project was completed on schedule within three years.
Instead of waiting for phase I of the port to generate revenue, Mahinda Rajapaksa pushed ahead with phase II. In 2012, Sri Lanka borrowed another $757 million from China Eximbank, at a reduced post-crisis interest rate of 2 per cent.
By 2014, Hambantota was losing money. The SLPA signed an agreement with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years. China Merchants was using a new terminal in the Colombo port, and China Harbor had invested $1.4 billion in Colombo Port City.
In the 2015 elections, Rajapaksa was defeated by his health minister, Maithripala Sirisena. When Sirisena took office, Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank (ADB) than to China. Of the $4.5 billion debt Sri Lanka would pay in 2017, only 5 per cent was because of Hambantota. Sri Lanka's debt from China is only 10 per cent of the country's total foreign debt, while international capital markets borrowing makes up 47 per cent and the ADB 13 per cent.
Evidently, Chinese finance was not the source of Sri Lanka’s distress. Colombo arranged a bailout from the IMF, and decided to raise money by leasing out the underperforming port to China Merchants, making it the majority shareholder with a 99-year lease, and used the $1.12 billion to bolster its foreign reserves, without paying China Eximbank.
The U. S. thinktanks got fodder for its rumour mill and suddenly, Sri Lanka featured prominently in foreign-policy tirades in Washington. Pence said that Hambantota could become a “forward military base” for China, ignoring the fact that Hambantota’s location is strategic only from a business perspective.
Though India was alarmed by Hambantota, an Indian-led 100-year-old international banking advisory, Meghraj group, joined the U.K.-based engineering firm Atkins Limited, to write the long-term plan for Hambantota Port and a new business zone. The French firms Bolloré and CMA-CGM have partnered with China Merchants and China Harbor in port developments in Nigeria, Cameroon, and elsewhere.
Benevolent China in Africa
The other side of the debt-trap myth involves debtor countries such as Kenya, Zambia, and Malaysia.
In the past nine years, China has successively signed 200 cooperation documents for the joint construction of the BRI, Digital Silk Road and Health Silk Road programs with 138 countries and 30 international organizations.
In Indonesia, the Jakarta-Bandung High-speed Railway is a landmark project of BRI. Bangladesh is receiving nearly $ 42.5 billion from China, which is more than 10 times the money any country has invested there, be it Japan (3.21 billion) or India (3.95 billion).
The rate of interest on Chinese loans is a mere 12% which is lower than India (18.5%) or Japan (14.5%). The starting period of repayment can be as late as 18 months and delays of up to 18 months can be permitted due to financial stress, and China has given such breathers to nine African countries.
Contrary to the western campaign, Chinese banks are willing to restructure the terms of existing loans and have never seized an asset from any country.
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First Jakarta-Bandung highspeed train
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Thus, in a study, Sweden-based researcher Hussein Askary, the West Asia coordinator for the Schiller Institute, found that the 'debt trap' accusation against China is a deliberate attempt to undermine the BRI.Askary argues that countries have invested the loans from China into building infrastructures like roads, ports, railways, hospitals and schools that boost productivity and increase the repayment capacity, whereas the loans from Western financial institutions are normally used to cover trade and fiscal deficit with high-interest rates.
In countries like Sri Lanka, there's a massive investment by the U. S., not in infrastructure, but in political groups to move them into the so-called Indo-Pacific Strategy.
Another study, released recently by British charity Debt Justice, has revealed that the West, instead of China, is to be blamed for the African debt crisis.
The study shows that African governments owe three times more debt to Western banks, asset managers and oil traders than to China, and are charged double the interest.
Debt Justice's analysis of World Bank data of 49 African governments showed that up to the end of 2020, nearly 75 per cent of their total $696 billion external debt is owed to non-Chinese private creditors and multilateral institutions.
Over the next seven years, 35 per cent of African governments' external debt service will be due to non-Chinese private lenders. For the 24 countries with the highest debt burden, their median average of debt payments by creditor grouping is 32 per cent to non-Chinese private lenders.
Another study by the Center on Global Energy Policy at Columbia University and the University of Oxford, published in June 2022, debunked the China debt trap narrative. The report says most of the debt in Africa is due to private Western holders. The China debt trap narrative in Africa is a construct of US-China strategic rivalry more than a reflection of ground realities.
Capital, in the form of debt repayments, thus continues to flow from Africa to Europe and North America. The report cited confidential estimates of international financial institutions (IFIs) that showed sub-Saharan Africa’s government debts to Chinese entities at the end of 2019 totalled around US$78 billion. This was about just 8 per cent of the region’s total debt of US$954 billion and 18 per cent of Africa’s external debt.
Roughly half of Africa’s public debt was domestically issued, and the other half was owed to external actors. Of the latter, one-third was owed to bilateral official partners, one-third to international financial institutions and one-third in the form of Eurobonds denominated in a currency other than that of the issuing state. Of the bilateral debt, about half was owed to China.
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My article in Chinese
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The Global Development Policy Center at Boston University and the China Africa Research Initiative at Johns Hopkins University estimate that Beijing has lent about US$150 billion to African countries since 2000, mostly through the China Eximbank (60 per cent) and the China Development Bank (25 per cent), suggesting that about US$75 billion has been paid off already.The data revealed that Chinese lending, rather than driving a continentwide expansion of debt, was concentrated in five countries: Angola, Ethiopia, Kenya, Nigeria and Zambia.
Thus, China is helping hundreds of underdeveloped countries by jointly investing with the local companies in building the infrastructure with shared risk and profit in the best interest of the citizens of that country.
For instance, to develop its Doraleh Container Terminal, Djibouti borrowed $268 million from seven banks at 9 per cent over nine years. By comparison, its first Chinese loan was $620 million over 20 years at 2.85 per cent, and it came with a seven-year grace period.
The money that various countries owe to China is negligible, compared to what they owe to others.
Most African countries owe far more to other countries and the IMF than they do to China. Southeast Asian countries owe Japan just under $300 billion for infrastructure projects while they owe China about half of what they owe Japan, less than $150 billion. Pakistan owes China about $20 billion while it owes other countries and the IMF $100 billion.
According to Zimbabwe-based The Herald's report, reporters from the Daily found that private media journalists are being trained by an outfit called Information for Development Trust (IDT), which poses as an independent investigative journalism centre, with funding from the U.S. Embassy at Harare.
Through the Embassy, local journalists were sponsored to smear China's investments as engaging in malpractices and violations of human rights. The U.S. Senate has passed an act named Strategic Competition Act of 2021 which authorized the "Countering Chinese Influence Fund."
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Doraleh container terminal, Djibouti
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A total of $300 million for each fiscal year from 2022 to 2026 will be appropriated to counter the "malign influence of the Chinese Communist Party," according to the Act. The Act states the need to support and train local media and journalists to investigate the BRI.
The American trap
It is a known fact that the U.S. use debt trap diplomacy to crush developing countries, as revealed by three books: The New Confessions of an Economic Hitman: How America Took Over the World by John Perkins, A Game as Old as Empire: The Secret World of Economic Hit Men and the Web of Global Corruption by Steven Hiatt and Winner Take All: China's Race for Resources and What It Means for the World (2012) by Dambisa Moyo.
Moyo, an expert in global commodities markets, records that the breadth of China's operation is awesome and seemingly unstoppable.
John Perkins was a U.S. economic hit man (ECH). The highly paid economic hitmen cheat countries out of trillions of dollars. They channelise money from the World Bank, the U S Agency for International Development (USAID), and ‘Aid’ organizations into the treasury of huge conglomerates and a few wealthy families that control natural resources.
Perkins affirms that if the leaders of poor countries resisted and refused to accept loans that would enslave their countries in debt, the CIA would overthrow or assassinate them. Jaime Roldos of Ecuador and Omar Torrijos of Panama died in different air crashes in 1981, in May and July respectively, opposing the nexus of corporate, government, and banking heads. Honduran activist Berta Caceres resisted a dam across the Rio Gualcarque and was assassinated in 2016 by US-trained forces.
The Indian Prime Minister Lal Bahadur Shastri and his nuclear program chief Homi J Bhabha were killed by the CIA n 1966, according to the book, Conversation With The Crow by Gregory Douglas. They had refused to toe the U.S. line and got killed in air crashes.
Confirming the confession by Perkins, an analysis by a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zurich, exposed the nexus of a small group of western companies, mainly banks in controlling the global economy. The Zurich team, as early as 2011, pulled out details of 43,060 TNCs and the share ownerships linking them from Orbis 2007, a database listing 37 million companies and investors. The work revealed a core of 1318 companies with interlocking ownerships. Each had ties to two or more other companies, and on average, they were connected to 20. Although they represented 20 per cent of global operating revenues, all appeared to collectively own through shares, the majority of the large blue chip and manufacturing firms, representing a further 60 per cent of global revenues.
The team further traced a “super-entity” of 147 tightly knit companies – all of their ownership was held by other members of the super-entity – that controlled 40 per cent of the total wealth in the network. In effect, less than 1 per cent of the companies were able to control 40 per cent of the entire network. Most were financial conglomerates, and the top 20 included Barclays Bank, JPMorgan Chase & Co, and Goldman Sachs.
At the same time, U. S. is the world's largest debtor nation, with an accumulated federal debt now topping $28 trillion. China holds the number two position after Japan, holding $980.8 billion of U.S. Treasurys—3.2% of the total U.S. debt.
In comparison, China’s national debt comes to about $ 7 trillion. Less than 5% of Chinese equities and bonds are held by foreigners.China is already a heavyweight, with its $14 trillion economy. For more than a century, no US adversary or coalition of adversaries has reached 60 percent of US GDP. And yet, this is a milestone that China itself quietly reached as early as 2014. When one adjusts for the relative price of goods, China’s economy is already 25 percent larger than the US economy. It is clear, then, that China is the most significant competitor that the U. S. has faced.
There are two main economic reasons Chinese lenders bought up so many U.S. Treasury securities. The first is that China wants its currency, the yuan, pegged to the dollar. Dollar-pegging adds stability to the yuan.
A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets.
Second, China relies on American markets to buy Chinese-produced goods. Artificially suppressing the yuan has made it difficult for a growing Chinese middle class; so, exports are needed to keep businesses running.
U.S. Treasury bonds and bills remain the safest investment in an uncertain world. The U.S. dollar holds its position as the de facto reserve currency for the world, but those positions are not forever. They are anachronistic in a new-normal world with multiple centres of economic power.
If China withdraws all of its U.S. holdings, the U.S. dollar would depreciate, whereas the yuan would appreciate, making Chinese goods more expensive.
The ability of the U.S. to maintain its dominant position in global affairs depends heavily on the health and management of its domestic affairs. But the health of both the debt-ridden U.S. economy and President Biden is seeing a downslide. Taiwan and Pelosi's gimmick will not cure the inherent malevolence.
Thus the real trap lies not in China, but elsewhere. The skeleton lies frozen in a bloody cupboard in the West.
This article was published in the China-India Dialogue:
http://chinaindiadialogue.com/the-chinese-debt-trap-is-a-myth
© Ramachandran
