Ricardo, a Mexican friend, once told me the story of how he managed to get his house cheaply. In the 1990s, with a well-paying job, he had taken a long-term mortgage from the bank. Then Mexico had a major financial crisis. The Peso went down by nearly 50%. Ricardo decided it didn’t make any sense to keep on paying the mortgage. He went to the lending bank with the house keys. Can’t pay any more, please take over my house, he said. He expected the banker to be pleased.
Instead the banker started begging him not to do so. He
had more than 2000 customers coming to him with their house keys. What should
the bank do with so many houses? Our business is money, not real estate, the
banker said. Ricardo negotiated, and got the house for 20% of the original
cost. The bank wrote off 80% of the debt, rather than confiscating the
collateral.
*****
Belt and Road Initiative (BRI) is China’s major vehicle to literally make
inroads into several geographies. This spectacularly grandiose infrastructure
and investment project covers more than 68 countries, benefits 4.5 billion
people. “Belt” are land routes including roads and rail network. “Road” are sea
routes. The ambitious project due to finish in 2049, will nostalgically reproduce
the historic silk road routes that connected China to the west. BRI will
facilitate the seamless movement of goods and people across the vast geography
of Asia, Africa and Europe. USA is welcome too but has not joined. China, as the
sponsor of the project, plans the investment and lends money.
The project is not smooth sailing. For example, the
China-Pakistan economic corridor will cut the transport time from China to the
Middle East from 12 days to merely 36 hours. But the route goes through the disputed
Kashmir region, Taliban territory and Baloch insurgents.
The stated objective of BRI is smooth international
trade. Centuries ago, the East India Company was also formed to trade in the
Indian Ocean region. That company ended up creating the world’s largest empire.
*****
The trillions of dollars that China is investing
abroad could have been used to make China’s own citizens wealthier. This is the
hallmark of Communist dictatorships. In order to conquer the world, they are
willing to keep their own people poor. When Soviets were queuing for rations of
bread and meat, their nation was busy throwing unconscionable amounts of money
to propagate communism abroad.
The Chinese people, particularly in pandemic times,
have started expressing their displeasure about China lending so much money abroad.
*****
Chinese companies with Chinese money planned to build
a cross-country rail line in Malaysia, a truly showcase project. Last year, Malaysia’s
new prime minister called it unfairly expensive, and threatened to cancel it. After
negotiations, China brought down the loan from $16 billion to $11 billion. This
was an acknowledgement of corruption, whereby the local leaders are bribed to trigger
over-invoicing.
Since March, countries, one after another, have
started throwing up their hands. There is simply no money to pay the principal
or the interest. Laos has handed over to China its national electric grid.
China can send Laos into darkness if it wishes. Pakistan has allowed China to
run its Gwadar port for the next forty years.
But most of China’s borrowers are in such bad economic
shape that there is a danger of the moneylending business boomeranging on the
lender. If the pandemic continues for another year, China may be similar to the
Mexican banker described at the beginning of this article. When the cash
inflows dry up, and the local Chinese start protesting, capturing and managing
physical assets in different parts of the world is not easy.
China’s so-called “Debt-trap diplomacy” along with its
Belt and Road initiative are in serious danger in pandemic times.
Ravi