Chinese Strategy of Investments in Economically Vulnerable Nations

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China has invested in sectors that have failed to yield promised outputs but have added additional economic burdens on the nations maintaining these white elephant infrastructural projects. To decipher how such projects come into existence, it is important to unravel the Chinese process of indebting countries to their finances.

China’s economic powerhouse as leverage

China’s economic growth has been portrayed to be an aspirational guiding light for many, if not all, developing nations. Its financial might has helped it gain significant leverage over countries barely managing to stay afloat economically, paving the way for China’s bilateral relations with countries worldwide, even more specifically with nations that require financial assistance. This form of financial aid has invariably led to China becoming the third largest official creditor in the world by mainly lending finances to developing and underdeveloped countries. It currently withholds an outstanding claim of more than 5% of the globe’s total GDP, and more than a dozen under-developed and developing countries owe a debt of at least 20% of their GDPs to China. However, there seems to be a disguised agenda that the Chinese dragon seems to be pursuing in such investments, and they are certainly not for economic purposes.

In its time-tested strategy, China has been capitalising upon its economic dominance through the veil of providing loans and finances for its multi-trillion-dollar pet project. The Belt and Road Initiative (BRI), supposedly meant to revive the ancient silk trade route, has been at the centre of Chinese funding. Under the pretext of developmental projects, China has masqueraded its economic assistance to nations that have been financially volatile due to various concurrent reasons. Countries like Sri Lanka, Zambia, Maldives, Djibouti, Congo, Kyrgyzstan, Laos, and Cambodia, amongst others, have been pushed into economic crisis due to the heavy and high interested loans that have been granted to them by Chinese developmental banks and the Chinese Government itself.

The recurring practice of ‘hidden debts’ in these agreements of loans has wrecked these countries’ economies to the extent of causing severe economic and, more importantly, political instabilities. However, the Chinese have always demanded strict discretion with the details of those MoUs; therefore, particulars of such hidden debts are not often disclosed to the public. Yet there is enough evidence to conclusively state that Chinese finances have directly affected the overall stability of the sovereign nations concerned.

How China has lured nations into its debt

In the island nation of Sri Lanka, for example, the situation has been going from bad to worse, economically and politically. Sri Lanka, until 2020, had borrowed over US$4.6 billion and has constantly been seeking more funds to help revive its economy, which is facing the worst financial crisis in its ‘independent’ history. These monetary aids, however, should not be mistaken for China’s claim of an ‘all-weather ally’ to Sri Lanka but should be seen through the lens of Sri Lanka’s strategic geographical importance. China has multiple high-value projects ongoing in Sri Lanka, amongst which are the infamous Hambantota Port and the Colombo Port. On the other hand, the ruling elite’s closeness with China is no hidden secret. The Rajapaksa family, who had been ruling the island nation for nearly two decades now, has been known to be cordial with their Chinese counterparts. This has also been a significant factor regarding the sanction of such projects in the first place. China’s notorious game plan of capturing the ruling political elite in their target country is a contemporary practice exercised by China throughout the world.

In January 2022, right before the economic instability obliterated Sri Lankan livelihoods, the President’s Counsel (Dr) Wijeyadasa Rajapakshe in his letter to Chinese President Xi Jinping through the Chinese Ambassador, predicted that China’s continuing incursion into the Sri Lankan decision making prospects, would lead to the current government being overthrown. Prophetic in nature, the letter even elaborated on how China was infringing upon Sri Lankan sovereignty and how the country should reconsider all such agreements that had been reached between the erstwhile Rajapaksa family and the Chinese Government.

He clearly stated that China was attempting to bankrupt the island nation in the sphere of economic aid. The then Sri Lankan Government had entered into agreements with Chinese financial institutes to obtain loans at a commercial interest rate of over 6 per cent. In contrast, global financial agencies provided them with a minimal interest rate of 0.01to 1 per cent. These were some of the many unfavorable transactions that China had charted to enable economic leverage over volatile countries’ decision-making processes through the promise of the BRI project. The infamous transfer of the Hambantota Port to China, is a story of a debt trap well documented all around the world. It is a testimonial to China’s strategic takeover of the country.

The Chinese method of encircling economically vulnerable nations, however, is not limited to their disbursement of high-interest loans alone. These high investment projects have failed to generate yields expected to pay off the loans and their subsequent interests. As in the Lankan experience, the expensive Mattala Rajapaksa International Airport in Southern Sri Lanka has been operating at a loss since it began its operation and deemed to become the world’s most-emptiest international airport.

As it came to be known in many African nations, these white elephant developmental projects have riddled nations with excessive debts, thereby leading them to cough up strategic national assets in return.

A noteworthy example in the African continent, where China has been investing heavily since the launch of the BRI project, is Zambia. The African nation has incurred an unsustainable debt crisis primarily due to infrastructural projects that China and its infrastructural banks have funded. The excessive loans have created a situation where the nation has requested a restructuring of its debt agreements. This has also led to the country having to cancel around US$1.6 billion worth of undisbursed loans from Chinese lenders leading to a widespread halt to infrastructural projects around the country.

Chinese strategy of indebting strategically significant nations

The story is familiar across indebted nations. China has invested heavily in debt-distressed countries in the past decades, and they currently seem to be bearing the brunt of easy financial access at a high cost to the price. By the end of 2020, China’s loan to lower and middle-income countries has tripled in the past decade to US$170 billion. These figures, however, still do not present the true nature and figure of the Chinese debts the world owes to them. Details of such agreements and figures are not disclosed due to their sensitive nature. The pattern of China’s strategy is, however, very clear. The countries that seem to be indebted to China hold significant strategic value for them to be able to spend billions of dollars on financial assistance.

Geographically important countries such as Djibouti, Laos, Kyrgyzstan, and Sri Lanka, amongst others, are a common case in point. The BRI project alone has left lower and middle-income countries with hidden debts that amount to around US$385 billion until 2020. This is also evident in China’s game plan of using investment-led debts instead of financial aid to establish a dominant position in the international community.

It would be worthwhile to state that nations already suffering from economic hardships must avoid agreements with the Chinese Government to safeguard their sovereignty and political and financial stability. As for countries still burdened by high-interest loans, the Sri Lankan President Counsel’s advice must be given its due importance. A complete revamp of such non-transparent transactions is required where the figures have been inflated against the country’s exchequer. A further precautionary step would lead to the cancellation of such sinister projects that have proved to be not worthy of any economic benefits but have only indebted the nation further. If not, a global financial crisis is lurking over the world where nations’ economic and political sovereignty would depend on China’s discretion.

(Global Strait View)

By Global Strat View Analysis