China’s cred­i­tor im­pe­ri­al­ism

Just as Euro­pean im­pe­rial pow­ers em­ployed gun­boat diplo­macy, China is us­ing sov­er­eign debt to bend other states to its will. As Sri Lanka's han­dover of the strate­gic Ham­ban­tota port shows, states caught in debt bondage to the new im­pe­rial gi­ant risk losin

Financial Nigeria Magazine - - Contents - Brahma Chel­laney

Last month, Sri Lanka, un­able to pay the oner­ous debt to China it has ac­cu­mu­lated, for­mally handed over its strate­gi­cally lo­cated Ham­ban­tota port to the Asian gi­ant. It was a ma­jor ac­qui­si­tion for China's Belt and Road Ini­tia­tive (BRI) – which Pres­i­dent Xi Jin­ping calls the “project of the cen­tury” – and proof of just how ef­fec­tive China's debt-trap diplo­macy can be.

Un­like In­ter­na­tional Mon­e­tary Fund and World Bank lend­ing, Chi­nese loans are col­lat­er­al­ized by strate­gi­cally im­por­tant nat­u­ral as­sets with high long-term value (even if they lack short-term com­mer­cial vi­a­bil­ity). Ham­ban­tota, for ex­am­ple, strad­dles In­dian Ocean trade routes link­ing Europe, Africa, and the Mid­dle East to Asia. In ex­change for fi­nanc­ing and build­ing the in­fra­struc­ture that poorer coun­tries need, China de­mands favourable ac­cess to their nat­u­ral as­sets, from min­eral re­sources to ports.

More­over, as Sri Lanka's ex­pe­ri­ence starkly il­lus­trates, Chi­nese fi­nanc­ing can shackle its “part­ner” coun­tries. Rather than of­fer­ing grants or con­ces­sion­ary loans, China pro­vides huge project-re­lated loans at mar­ket-based rates, with­out trans­parency, much less en­vi­ron­men­tal- or so­cial-im­pact as­sess­ments. As US Sec­re­tary of State Rex Tiller­son put it re­cently, with the BRI, China is aim­ing to de­fine “its own rules and norms.”

To strengthen its po­si­tion fur­ther, China has en­cour­aged its com­pa­nies to bid for out­right pur­chase of strate­gic ports, where pos­si­ble. The Mediter­ranean port of Pi­raeus, which a Chi­nese firm ac­quired for $436 mil­lion from cash-strapped Greece in 2016, will serve as the BRI's “dragon head” in Europe.

By wield­ing its fi­nan­cial clout in this man­ner, China seeks to kill two birds with one stone. First, it wants to ad­dress over­ca­pac­ity at home by boost­ing ex­ports. And, sec­ond, it hopes to ad­vance its strate­gic in­ter­ests, in­clud­ing ex­pand­ing its diplo­matic in­flu­ence, se­cur­ing nat­u­ral re­sources, pro­mot­ing the in­ter­na­tional use of its cur­rency, and gain­ing a rel­a­tive ad­van­tage over other pow­ers.

China's preda­tory ap­proach – and its gloat­ing over se­cur­ing Ham­ban­tota – is ironic, to say the least. In its re­la­tion­ships with smaller coun­tries like Sri Lanka, China is repli­cat­ing the prac­tices used against it in the Euro­pean-colo­nial pe­riod, which be­gan with the 1839-1860 Opium Wars and ended with the 1949 com­mu­nist takeover – a pe­riod that China bit­terly refers to as its “cen­tury of hu­mil­i­a­tion.”

China por­trayed the 1997 restora­tion of its sovereignty over Hong Kong, fol­low­ing more than a cen­tury of Bri­tish ad­min­is­tra­tion, as right­ing a his­toric in­jus­tice. Yet, as Ham­ban­tota shows, China is now es­tab­lish­ing its own Hong Kong-style neo­colo­nial ar­range­ments. Ap­par­ently, Xi's prom­ise of the “great re­ju­ve­na­tion of the Chi­nese na­tion” is in­ex­tri­ca­ble from the ero­sion of smaller states' sovereignty.

Just as Euro­pean im­pe­rial pow­ers em­ployed gun­boat diplo­macy to open new markets and colo­nial out­posts, China uses sov­er­eign debt to bend other states to its will, with­out hav­ing to fire a sin­gle shot. Like the opium the Bri­tish ex­ported to

China, the easy loans China of­fers are ad­dic­tive. And, be­cause China chooses its projects ac­cord­ing to their long-term strate­gic value, they may yield short-term re­turns that are in­suf­fi­cient for coun­tries to re­pay their debts. This gives China added lever­age, which it can use, say, to force bor­row­ers to swap debt for equity, thereby ex­pand­ing China's global foot­print by trap­ping a grow­ing num­ber of coun­tries in debt servi­tude.

Even the terms of the 99-year Ham­ban­tota port lease echo those used to force China to lease its own ports to Western colo­nial pow­ers. Bri­tain leased the New Ter­ri­to­ries from China for 99 years in 1898, caus­ing Hong Kong's land­mass to ex­pand by 90%. Yet the 99year term was fixed merely to help China's eth­nic-Manchu Qing Dy­nasty save face; the re­al­ity was that all ac­qui­si­tions were be­lieved to be per­ma­nent.

Now, China is ap­ply­ing the im­pe­rial 99year lease con­cept in dis­tant lands. China's lease agree­ment over Ham­ban­tota, con­cluded this [past] sum­mer, in­cluded a prom­ise that China would shave $1.1 bil­lion off Sri Lanka's debt. In 2015, a Chi­nese firm took out a 99-year lease on Aus­tralia's deep-wa­ter port of Dar­win – home to more than 1,000 US Marines – for $388 mil­lion.

Sim­i­larly, af­ter lend­ing bil­lions of dol­lars to heav­ily in­debted Dji­bouti, China es­tab­lished its first over­seas mil­i­tary base [last] year in that tiny but strate­gic state, just a few miles from a US naval base – the only per­ma­nent Amer­i­can mil­i­tary fa­cil­ity in Africa. Trapped in a debt cri­sis, Dji­bouti had no choice but to lease land to China for $20 mil­lion per year. China has also used its lever­age over Turk­menistan to se­cure nat­u­ral gas by pipe­line largely on Chi­nese terms.

Sev­eral other coun­tries, from Ar­gentina to Namibia to Laos, have been en­snared in a Chi­nese debt trap, forc­ing them to con­front ag­o­niz­ing choices in or­der to stave off de­fault. Kenya's crush­ing debt to China now threat­ens to turn its busy port of Mom­basa – the gate­way to East Africa – into an­other Ham­ban­tota.

These ex­pe­ri­ences should serve as a warn­ing that the BRI is es­sen­tially an im­pe­rial project that aims to bring to fruition the myth­i­cal Mid­dle King­dom. States caught in debt bondage to China risk los­ing both their most valu­able nat­u­ral as­sets and their very sovereignty. The new im­pe­rial gi­ant's vel­vet glove cloaks an iron fist – one with the strength to squeeze the vi­tal­ity out of smaller coun­tries.

Be­cause China chooses its projects ac­cord­ing to their long-term strate­gic value, they may yield short-term re­turns that are in­suf­fi­cient for coun­tries to re­pay their debts.

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