Corona Daily 273: China’s Debt Trap Diplomacy

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.

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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.

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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.

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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