The One Belt, One Road (OBOR) initiative of China has become the focal point of its economic and foreign policy strategy. Under the pretext of this ambitious OBOR initiative, China in the name of assisting the low income countries for infrastructural development, has extended a colossal amount of credits and loans. But this mammoth infrastructural plan has come under severe criticisms for lumbering the already economically diseased countries with a staggering amount of debt and China has been accused of pursuing debt-trap diplomacy. To be fair, such allegations are not far-fetched. China does have a track record of taking over assets, when countries indebted to it fail to repay the loans. The Hambantota port in Sri Lanka being the latest addition to that list. Another tactic of China which is concerning, is the problem of “Hidden Debt”. Here, the exact amounts owed by the debtor countries are not exactly known. This practice has been flagged by the WTO and the World Bank, as an impediment to tackling the debt crisis in the developing economies. The Asian dragon, at times also demands collateral in terms of kind, such as oil exports and the loans are denominated in the barrels of oil. This “barter deal” has been labeled by the World Bank as “opaque” and deceiving, as the true payment amount remains unknown.
Initially, China has gained a lot from extending loans and then taking over important public assets in the defaulter countries. But from the past two years the Chinese banks were sensing a problem of bad loans. They could rightly foresee the inability of some low-developed economies to repay such vast sum of debt and the Chinese economy in turn facing the brunt of it. And that’s exactly what happened, when the pandemic hit! China’s Debt Trap Diplomacy boomeranged back. With the imposition of lockdowns in the OBOR countries, several major BRI (Belt and Road Initiative) projects amounting to billions have been stalled. The economies of almost every country in the OBOR project have been wrecked. There has been a severe drop in export revenues, coupled with increased domestic spending, that has affected the ability of the borrower countries to repay the debts to Chinese Banks. Many are already asking China, for debt relief. It is under tremendous pressure to extend those loans or even “write them off”.
Despite a positive growth in GDP, China’s economy is suffering a massive blow. Its banking industry amounting to 45 trillion USD, is set to suffer the worst decline in profit. In the face of a whacking amount of pending debt, the Chinese banks have decided to sacrifice a whooping amount of 218 billion USD in profit, to save the economy from ravage. Conventional methods of debt extraction used by China, like taking over assets, or the “barter deals” has also turned out to be counterproductive. As the pandemic has hit the oil prices significantly, the countries that entered into barter deals with China should theoretically produce more oil to repay off the debt. But with the disruption of all kinds of industrial activity, it is now next to impossible to meet that production level. With no other options, the Chinese companies may have to take over joint ventures or has to be compensated by assets, which is again becoming tricky for China. Many of such public assets in these countries are already suffering from loss. Taking over such assets would not be profitable but would be nugatory. The other option that is left is to “write off’ these loans at the cost of its economy.
The OBOR is one of the most important projects that China has embarked upon. Not only is this initiative going to give tremendous boost to China’s economy and overall trade, but is also equally important from a strategic viewpoint. In the face of a raging trade war with the US, apprehensions about China’s real intention in the minds of the EU countries, and in the brink of losing a huge Indian market, the success of the OBOR initiative is of paramount significance for China. Already “mis” adventures in the strategic domain and an over ambition to take the “US’ place” in global politics, is costing China heftily. This has made many analysts to think, that in order to maintain good relations and reputation among the member countries of OBOR, China might be forced to pardon off the debts of some countries, even at a huge economic cost of its own. Unfortunately, the OBOR project in place of boosting China’s economy has now put it into a difficult juncture. Economists are of the opinion, that China has to go through this negative phase of return, until the member countries of the OBOR, starts recovering from economic downfall. This might make a lasting impact on the future of this project. The only option China is left with now, is to hope for the best and at the cost of its own economy should take steps to mitigate off the risk, so that its ambitious OBOR project don’t start going south.
-Anondeeta Chakraborty (Freelancer)
Picture Credits: swarajya.com