China should not try to compete for projects by off ering low interest rates on loans

As both China and India are trying to increase their infl uence in Bangladesh, it may seem less favorable for China to insist on treating loans off ered to Bangladesh as commercial credit, especially when India has announced it will give the country a line of credit on easy terms.

Nevertheless, interest rate competition would be unsustainable for China’s participation in infrastructure projects under the Belt and Road ( B& R) initiative in the long run, and China needs to take a more sophisticated approach in clarifying its loan arrangements in overseas cooperation.

China has suggested Bangladesh change the pattern of loans for projects under the B& R to commercial credit, which will incur higher interest rates that may “put Bangladesh in a debt trap,” according to a report by The Economic Times on Saturday. At the same time, India has off ered a $ 7.5 billion credit line to Bangladesh for several projects at a relatively low rate. While the report didn’t specify the interest rates on India’s credit to Bangladesh, it mentioned that the rates in In- dia’s credit to neighboring countries are usually as low as 1 percent or even less. It should not be a problem that Bangladesh accepts loans from India, even though some may be concerned that China’s relatively high- interest loans could aff ect the development of projects Bangladesh signed with China during Chinese President Xi Jinping’s visit to Dhaka in October 2016. But there is no need for China to compete with other countries in off ering competitive interest rates just to please partners or win contracts, to the detriment of its own interests.

China should maintain its bottom line by avoiding interest rate competition in loan off erings, and the fact that it lost out to Japan to construct a high- speed railway in India is a typical example. In December 2015, Japan won the contract to build India’s fi rst bullet train network linking Mumbai and Ahmedabad, partly by off ering extremely attractive fi nancing terms.

Soft loans of course help a country to obtain contracts, but that doesn’t mean China should treat all projects as infrastructure aid and give out low- interest loans without thinking about the bottom line, as that would be unsustainable for the B& R. It should be made clear that the B& R is not a charity program, and most projects under the initiative are reciprocal, rather than aid.

On the other hand, charging an appropriate level of interest may impose pressure on the borrower, which should be helpful to enhance its productivity and stimulate the vitality of the local economy. That’s what the B& R is really for, rather than off ering a free lunch.