Is Belt and Road debt trap diplomacy over?|Suen Chiu-kwan
As countries along the Belt and Road have incurred a huge amount of debts from large-scale construction projects, some people speculate that China is taking advantage of the situation by implementing a “debt trap diplomacy”. However, a recent study conducted by Boston University indicated that compared with 2016, China’s major policy banks saw a sharp decrease in the amount of overseas loans. Yet that does not mean the Belt and Road Initiative is declining. It is just that they now exist in a different form. Although the size of public loans on the book between the Chinese government and governments of Belt and Road countries is in decline, the public guaranteed loans outside the bilateral framework may continue to expand, and Belt and Road countries’ official support for Chinese enterprises remains strong.
According to official data, Central Asia’s bilateral debts to China appear to be decreasing gradually. In Kazakhstan, for example, the public debts of the state and related enterprises to China fell by 36 percent from 2014 to the second quarter of this year. In carrying out various projects, Kazakhstan tries to raise funds through other channels. In 2015, construction work of the light-rail system in the capital of Kazakhstan was launched, thanks to Chinese loan. Last year, however, China terminated the loan due to bilateral disputes. As a result, Kazakhstan had to raise funds via other means. Between 2013 and 2017, the annual growth rate of Tajikistan’s public debts to China remained at double digits. But in the last two years, the figure dropped to no more than five percent. Although Tajikistan’s overall external public debts have been increasing steadily in the past six years, growth of its debts to China has come to a halt. This suggests Tajikistan’s demand for funds has never ceased. It is just that the country has turned to other sources of financing. Except for Turkmenistan (where there is a lack of reliable data), Uzbekistan is perhaps the only country in the region that has recorded growth in bilateral public debts to China - the amount rose from USD1 billion in 2015 to USD1.9 billion in 2019.
Change of China’s investment direction - from infrastructure to factories
However, the above data, released by national institutions, have their limitations. In addition to public debts, there are also publicly guaranteed debts, which are debts incurred by private companies, with public institutions being guarantors. If the borrower defaults, government agencies, being guarantors, must repay the debts. In countries with more sophisticated fiscal and accounting standards, the government must disclose potential public debts on the national balance sheet. State-owned banks in Kazakhstan do disclose debts of this kind that involve other countries. Their balance sheets show that from 2017 to 2019, publicly guaranteed debts to China have been growing.
More importantly though, some databases may fail to examine the full operations of China’s overseas loans. It is therefore easy for one to get myopic. In The Diplomat, Tristan Kenderdine, research director of the think tank Future, dismissed the database of the Boston University, saying it overlooked the fact that China’s policy banks and commercial banks have set up local branches and directly issued loans to local companies outside the official bilateral framework. For example, China Development Bank, which established its presence in Kazakhstan in 2018, reached 32 financing agreements with local companies and signed USD28 billion worth of contracts. These loans are one of the potential sources of publicly guaranteed debts. Besides, that database only covers the loan records of China Development Bank and import-export banks, and these constitute only part of the Belt and Road initiative.
Meanwhile, China has on the whole reduced its loans to infrastructure projects in Central Asian countries in recent years. On the other hand, it encourages Chinese companies to set up factories and invest in the local manufacturing sector. Over the last decade or so, there have been two waves of Chinese capital inflow in Kazakhstan. The first occurred between 2007 and 2013, when the investment mainly targeted the oil and gas exploitation industries and fossil fuel-related sectors. The scope of the second wave, which began in 2016 and is still ongoing, has expanded to include chemical engineering, mining, food processing and other manufacturing industries. The investment mainly involves the establishment of factories through joint ventures, and the form of investment is more diverse. Projects include a bus factory in Karaganda, and a cement factory and a glass factory in Kyzylorda. Apparently, something similar has happened in Uzbekistan in recent years. The projects include a monitoring equipment manufacturing plant jointly established by the Uzbek government, CITIC Group and Henan Zhongguang Group. In recent years, Kyrgyzstan and Tajikistan have been welcoming a considerable amount of Chinese capital. They implement preferential policies and encourage Chinese capital to set up factories through joint ventures, and the industries involved are mostly mining, oil refining, cement and textile.
In truth, many agreements on bilateral loans between China and Central Asian countries require Chinese companies’ involvement in related projects, so that Chinese enterprises can go global. Now Chinese companies are also encouraged to set up factories in Central Asia and invest in the local manufacturing sector so as to align themselves with China’s drive to promote domestic economic and industrial upgrading. This suggests low-end industries have the priority in terms of overseas investment projects. This makes sure China’s geo-economic interests are fulfilled. In other words, it is China’s loan strategy to provide loans to Chinese enterprises investing in Central Asian countries.
China’s overseas debt operations are quite complicated, and it is hard to ascertain the current situation based on official figures. Regardless, one should be aware that while publicly guaranteed debts have added uncertainty to the current situation, the Wuhan coronavirus has contributed to the global economic recession and may set off a new wave of defaults by debtor countries. Besides, the sovereignty risk of Belt and Road countries (such as the demonstrations in Kyrgyzstan and the anti-China sentiment there) is likely to make the Belt and Road Initiative lose its ground.
(Suen Chiu-kwan, researcher at Global Studies Institute in Hong Kong and The Glocal)
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