Twin pieces with the latter cross-referencing the former, together summarising the point that China’s Belt and Road Initiative is less of a conspiring move on the part of the Chinese Government to colonise large parts of emerging Asia and Africa as contemplated by several commentators including our own Brahma Chellaney than a case of a simple extension of crony capitalism that has flourished within China through its development of local infrastructure and now.

“Some small countries “take on loans like it’s a drug addiction and then get trapped in debt servitude,” opined the influential Indian strategist Brahma Chellaney. “It’s clearly part of China’s geostrategic vision.” Through debt diplomacy, China exerts bilateral influence by bankrupting partner nations with unsustainable debt and then demanding steep concessions as part of the debt relief – or so the thinking goes.

…As China continues its global infrastructure financing push across the developing world, allegations of debt diplomacy keep arising. Upon taking office in May 2018, Malaysian Prime Minister Mahathir Mohamad suspended a host of Chinese-funded infrastructure projects, asserting that his country could not support the unprecedented level of debt and charging China with implementing a new version of colonialism. Ethiopia has also experienced debt concerns over Chinese-built projects: Repayment on its $4 billion railway linking capital Addis Ababa with neighboring Djibouti has been extended by 20 years over concerns of debt distress. Fears of unsustainable Chinese lending in Zambia led critics to allege that China will take control over key state assets due to the Zambia’s indebtedness. Most recently, in October, Pakistan sought a bailout due to its balance of payment crisis, partly stemming from its debts to China for infrastructure projects assumed under the $62 billion China-Pakistan Economic Corridor. In each of these cases, debt diplomacy has been used to define China’s engagement abroad.

However, little evidence actually suggests that Beijing coordinates a unified strategy to lure the developing world into unsustainable debt.

Instead of a state-led strategy, Chinese firms — motivated by profit and abetted by a toxic combination of bureaucratic disorganization, incompetence, and negligence at the state level — have exploited poor nations, which are dependent on cheap, and sometimes bad, loans. These companies, knowingly or unknowingly, persuade countries to pursue projects where benefits to the firms far outpace the benefits of the host nation. Asymmetric information or deception may even misrepresent the feasibility or sustainability of pursued projects. What is worse, governments sign onto nonconcessional loans that accrue high interest rates or carry onerous terms that disadvantage already vulnerable countries.

This practice does not trap recipient countries into taking on unsustainable debt. Instead, it allows Chinese companies to profit from often crooked deals building much-needed infrastructure in some of the world’s poorest countries, exploiting the undersupply of financing and these countries’ appetite for infrastructure projects. Forget debt diplomacy – call it crony diplomacy.
From Andrew Batson’s piece

“It’s become increasingly clear that the “debt-trap diplomacy” meme started by Indian commentator Brahma Chellaney is not an accurate description of how the Belt and Road actually operates, despite the fervent embrace of this idea by China hawks. Basically, China is not actually organized enough to come up with such a clever and nefarious plan, and there is no evidence that there is a deliberate strategy to trap other countries in debt. A detailed examination of debt transactions by Rhodium Group also found that in many cases borrowers were able to get China to write off or renegotiate their loans.

The flaw in the debt-trap diplomacy theory, and with many other analyses, is that it mistakes the Belt and Road for a for a “highly centralized and coordinated” initiative. In reality, it is more of a slogan attached to the decentralized actions of state-owned enterprises and banks.
The Belt and Road is really the expansion of a specific part of China’s domestic political economy to the rest of the world. That is the nexus between state-owned contractors and state-owned banks, which formed in the domestic infrastructure building spree construction that began after the 2008 global financial crisis (and has not yet ended).

Local governments discovered they could borrow basically without limit to fund infrastructure projects, and despite many predictions of doom, those debts have not yet collapsed. The lesson China has learned is that debt is free and that Western criticisms of excessive infrastructure investment are nonsense, so there is never any downside to borrowing to build more infrastructure. China’s infrastructure-building complex, facing diminishing returns domestically, is now applying that lesson to the whole world.
In Belt and Road projects, foreign countries simply take the place of Chinese local governments in this model (those who detect a neo-imperial vibe around the Belt and Road are, in this sense, onto something). Even the players are the same. In the 1990s, China Development Bank helped invent the local-government financing vehicle structure that underpinned the massive domestic infrastructure boom. Now, China Development Bank is one of the biggest lenders for overseas construction projects.”

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Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.

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