chi-sigma
19th April 2022
[This expanded version – with new materials and arguments – is from a subsection on Entrapped in Debt Traps, published in firesstorms, 16 April 2022]
In a new cold war environment, especially after the implementation of the Belt and Road Initiative (BRI), China faces criticism for its lending practices to poorer countries, accused of leaving these indebted struggling to repay debts, and therefore, vulnerable to political pressures from Beijing.
1] There is not, however, a single country that has fallen into a so-called ‘debt trap’ as a result of borrowing from China, (read the Chatham House Report). In fact, an analysis of the Sri Lanka port project by the said UK-based think tank Chatham House has questioned whether the “debt trap” narrative strictly applies, given that the deal was driven by local political motivations.
a) As Chinese development financing is recipient-led, often these governments have not take greater responsibility to ensure that projects are viable and financially sustainable.
b) Recipient countries must also ensure to bargain harder and more judiciously with Chinese partners, who are primarily driven to make profits. Indeed, these countries must take the lead in ensuring developmental benefits for local people.
c) In addition, tendering should be open to minimize corruption. Since Chinese regulations continue to rely on host-country governance, recipients must bolster their domestic regulations, and their inspection and enforcement capacities, to ensure that projects do not inflict social and environmental harms.
d) In fact, though international donors can support the changes through capacity-building projects, but ultimately this is a political, not technical, task, that the domestic interests do not confront nor conflict the common wellbeing of the communities who have a stake on all these projects in sharing a common wealth.
Often involved than not are the exogenous entities
“How MI6 and BBC spread China’s debt trap myth”. South China Morning Post. 17 December 2021.
2] There is the further claim that China lends money to other countries which inevitably having to cede control of key assets if such countries cannot meet their debt repayments. In fact, China never took formal ownership of the Sri Lankan port of Hambantota. It further points out that a large proportion of Sri Lanka’s overall debt was owed to non-Chinese lenders, and that there is no evidence China has ever taken advantage of its position to gain strategic military advantage from the port, (The Atlantic February 6 2021). Indeed, there are no cases, among the hundreds of loan arrangements studied by AidData and some other researchers, of Chinese state-owned lenders actually seizing a major asset in the event of a loan default. and various state-owned entities, such as public enterprises and public banks.
As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.
Deborah Bräutigam, a professor at Johns Hopkins University’s School of Advanced International Studies (SAIS), described debt-trap diplomacy as a “meme” which became popular due to “human negativity bias” based on anxiety about the rise of China. According to a 2019 research paper by Bräutigam, most of the debtor countries voluntarily agreed to the loans and had positive experiences working with China and “the evidence so far, including the Sri Lankan case, shows that the drumbeat of alarm about Chinese banks’ funding of infrastructure across the BRI and beyond is overblown … a large number of people have favorable opinions of China as an economic model and consider China an attractive partner for their development.” (Brautigam, Deborah (2 January 2020). “A critical look at Chinese ‘debt-trap diplomacy’: the rise of a meme“. Area Development and Policy. 5 (1): 1–14.)
Indeed, a March 2018 report released by the Center for Global Development said that between 2001 and 2017, China restructured or waived loan payments for 51 debtor nations (most of the BRI’s participants) without seizing state assets, (Hurley, John; Morris, Scott; Portelance, Gailyn (March 2018), Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective (PDF), Center for Global Development. Similarly, the 2019 report by the Lowy Institute said that China had not engaged in deliberate actions in the Pacific which justified accusations of debt-trap diplomacy.
It needs to be explained that:
a) Chinese loan contracts have unusual secrecy provisions, collateral requirements, and debt renegotiation restrictions.
China’s contracts contain unusually broad confidentiality clauses, which prevent borrowers from revealing the terms or sometimes even the existence of the loans. The researchers also found that China’s contracts have become more secretive over time, with a confidentiality clause in every contract in the dataset since 2014. These confidentiality restrictions hide loans from the people who are bound to repay them via taxes.The contracts also contain provisions that position Chinese state-owned banks as senior creditors whose loans should be repaid on a priority basis. Nearly a third of the contracts required borrowing countries to maintain significant cash balances in bank or escrow accounts. These informal collateral arrangements put Chinese lenders at the front of the repayment line, since banks can simply dip into their borrower’s accounts to collect unpaid debts.
i. However, even the IMF agrees (SHINING A LIGHT ON DEBT, March 2022) contractual agreements are a two-way process. On top of the covid-19 pandemic, to complicate matters, the extent of many emerging market and developing economy liabilities and their terms are not – or yet – fully known or disclosed appropriately by indebted countries. On this matter, IMF had expressed that these recipient countries have to foster a sustained recovery and limit the risk of a crisis, they must make a full accounting of hidden debts, both public and private.
ii. Emerging market and developing economies are facing complex challenges, with weaker growth prospects, limited fiscal space, and higher refinancing risks due to the shorter maturity of public debt, as confirmed by the IMF’s October 2021 Fiscal Monitor. Many are debt intolerant because, among other factors, of their credit history and greater macroeconomic volatility. Many have encountered crises at lower debt levels (Chart 1) than those prevailing in 2021 (Reinhart, Rogoff, and Savastano 2003).
iii. Further, it needs to be reiterated that a common feature of debt crises has been a sudden jump in debt levels, often driven by large exchange rate depreciations in countries with foreign currency debt, and governments’ assumption of so-called contingent liabilities amassed by state-owned enterprises, subnational governments, banks, or corporations. Because these crises are associated with lower growth, higher inflation, and setbacks in the fight against poverty and other development goals, protracted defaults are damaging to the economic and social fabric of the debtor country. There is, thus, the politico-economic (mis)management of state of nations that are being confronted, confounded and compounded.
Public sector foreign currency debt remains a vulnerability (though perhaps less so than in the past, but it remains an existential liability). Sustained exchange rate depreciation could pressure governments to rescue private entities that have large foreign currency liabilities. Such rescues could trigger a sudden rise in public borrowing needs, as happened in numerous earlier crises in both advanced and emerging market and developing economies; see Malaysia fiscal crises and her impaired debts and an indebted economy.
iv. That there is the external factor impinging upon affected countries as a resultant of neoliberalism pervading low-income and emerging countries dominated by the US strategy of economic (read Michael Hudson, Super Imperialism: The Economic Strategy of American Empire) which, through monetary imperialism in collusion with the United States of America Treasury bill standard, is Machiavellian.
v. Inflation in the United States would be
conveyed abroad by the persistent and growing dollar glut, and the resulting rise in world prices would erode the value of the “dollar overhang.” The $75 billion that the U.S. Treasury owed to the world’s central banks at 1968–72 prices and exchange rates would be repaid with the equivalent of perhaps less than $40 billion in purchasing power as measured by the original debt. To the extent that gold was revalued and part of this $75 billion repaid in bullion, the gold tonnage price of this dollar borrowing would be written down to less than one-fifth of its original value as measured by the yearend 1974 price of almost $200 an ounce.
Gold prices subsequently soared to over $700 an ounce.
Even the Global North is not exempted from such US economic dominance and her malfeasance motivation. Europe was forced to choose between permitting the dollar to devalue further or acquiescing “voluntarily” in the U.S. tariff and quota offensive. U.S. officials were quite open in acknowledging how the crisis situation favored their maneuverability.
“In an atmosphere of presumed crisis,”
Shultz explained, “one often finds that one can get something done if you know what it is you want to get done. The Administration has found a
crisis it took an initiative, and it obtained results.” His assistant Paul Volcker echoed these comments, observing that the monetary crisis and dollar devaluation had helped “to reinforce the thrust of a constructive reform of the international monetary system.”
This view was echoed throughout the Wall Street community. Sam Nakagama, chief economist
for Kidder Peabody & Co., reflected that “The so-called crises of the past two months appear to have been almost deliberately induced by the Nixon
Administration in order to achieve its monetary goals. Treasury Secretary Schultz appears to have almost everything he wanted in the way of
creating a more flexible monetary system.”
To say the least, the European response was angry, but was not backed up by any meaningful action. Jacques Serven-Schreiber, author of The American
Challenge, attacked “the ‘brutal act’ of devaluation [which] would affect every family in Europe.” The French socialist opposition leader François
Mitterrand warned that “the devaluation marks the opening of commercial war.” Pierre-Paul Schweitzer, outgoing head of the IMF, sought to ward off further U.S. devaluation by emphasizing that the dollar already had become an undervalued currency.
Europe’s anxiety, and even, fears of continued U.S. economic dominance is not unfounded as the present Ukraine conflict had displayed, with the role of a Bretton Woods entity muddling amidst the turmoil. Through the weaponisation of finance: the west had unleashed ‘shock and awe’ on Russia. The sanctions on Russia’s central bank use the omnipresence of the US dollar to penalise an American adversary (Financial Times, 2022).
b) Chinese state-owned banks are muscular, commercially savvy lenders that use contracts to position themselves as “preferred creditors,” seeking repayment ahead of other commercial and official lenders. They often do so by asking borrowers for an informal source of collateral—bank accounts with minimum cash balance requirements that lenders can seize in the event of default—and prohibiting borrowers from restructuring their Chinese debts in coordination with other creditors.
On the other hand, the overall performance of the United States Government has also much positive results to be desired when, for instance, the profound events of 2007 and 2008 were not merely an accentuated dip in the financial and business cycles a free market economic system. It was a financial upheaval that wreaked havoc in communities and neighborhoods across this country. Even as the Financial Crisis Report went to print, there are more than 26 million Americans who are out of work, cannot find full-time work, or have given up looking for work. Further, up to four million families have lost their homes to foreclosure and another four and a half million have slipped into the foreclosure process or are seriously behind on their mortgage payments. Nearly US$11 Trillion in household wealth vanished, with retirement accounts and life savings being abruptly swept away.
Before casting blames or showering doubts on others, it needs to be emphasised that in the United States of America, there was a systemic breakdown in accountability and ethics, too. The integrity of her financial markets and the public’s trust in those markets are supposedly, and essentially, to the economic well-being of her nation. The soundness and the sustained prosperity of the financial system and that economy was supposedly to rely on the notions of fair dealing, responsibility, and transparency. In the U.S. economy, though businesses and individuals were supposed to pursue profits, at the same time that they are to produce products and services of quality and conduct themselves well. Unfortunately – as has been the case in past speculative booms and busts – what we had witnessed is an erosion of standards of responsibility and ethics that exacerbated the capitalism core financial crisis. This was not universal, but these breaches stretched from the ground level to the corporate suites. They resulted not only in significant financial consequences but also in damage to the trust of investors, businesses, and the public thoroughly through the imperial monopoly-capital financial system.
c) China’s contracts also give it broad latitude to cancel loans or accelerate repayment if it disagrees with a borrower’s policies. For example, China Development Bank (CDB) treats termination of diplomatic relations with China as an “event of default”. Expansive cross-default and cross-cancellation provisions also provide Chinese lenders with more leverage over borrowers and other creditors than was previously understood.
This is where indebted countries need to be tight in their politico-economic governance, and be willing to restructure each country’s individual infrastructure actuvities and introduce administration proficiency well-being, (to read Olin Liu in her Malaysia: From Crisis to Recovery, IMF Occasional Paper No. 207. Report) otherwise a country like Malaysia with all the endowed resources, including petroleum explorations and extractions since 1970s, we are in debts as a consequence of the perpetuation of neo-colonialism and ethnocapitalism policies that burdened country with odious debts (the nation often is touching the RM$1 Trillion indebtedness marker whereas across the causeway is another country without natural resources but yet be able to nest up to S$3 Trillions in her sovereign wealth fund vault).
3] Even an assertion arises that there is a systematic underreporting of Chinese loans which might have created a “hidden debt” problem – meaning that debtor countries and international institutions alike have an incomplete picture on how much countries around the world owe to China and under which conditions.
In a real-world business environment, many Global North enterprises and transnational corporations (TNCs) also have not reported fully or had even under-reporting their transactional dealings with foreign partners. In China’s case, up to presently, no “hidden debts” had surfaced nor disclosed completely to satisfaction. On the borrower side, though debt is accumulating fast, there is no opacity as in some western loans to authoritarian countries or a hegemonic state intruding into war-torn countries, see EVALUATING U.S. FOREIGN ASSISTANCE TO AFGHANISTAN and FOLLOWING THE MONEY IN YEMEN AND LEBANON.
Since the onset of the global debt crisis in 1979 the transition and developing Global South economies had paid cumulative US$7.673 trillion in external debt service alone. At the outbreak of the COVID-19 pandemic, external debt stocks of developing countries and economies in transition reached US$9.9 trillion, their highest level on record, more than twice their value of US$4.4 trillion registered in 2009, and more than four-fold their level of US$2.2 trillion in 2000. In short, the external debts of developing and transition countries are being translated as high as 29% of their GDP in 2019 (UNCTAD).
Between 1980 and 2006, according to figures published by the International Monetary Fund (IMF). debt of the Asian developing countries alone had risen to US$955 billion, even though they have already repaid, in interest and capital, far more than the original amount due in 1980!
Of the 50 main developing country recipients, it is estimated that the average stock of debt owed to China has increased from less than 1% of debtor country GDP in 2005 to more than 15% in 2017. A dozen of these countries owe debt of at least 20% of their nominal GDP to China (Djibouti, Tonga, Maldives, the Republic of the Congo, Kyrgyzstan, Cambodia, Niger, Laos, Zambia, Samoa, Vanuatu, and Mongolia). Lee Harris has reported in The American Prospect, with this combination of pressures has set alarm bells ringing at the UN, World Bank and IMF.
As an instance, Tunisia’s public finances have deteriorated further during the COVID-19 crisis and, with the government unlikely to be able to push through much-needed fiscal austerity, a debt restructuring looks increasingly likely in the coming years, (James Swanston).
For many developing countries, currency devaluation against the dollar is an important driver of inflation: domestic currency depreciation raises the domestic price of imported goods and therefore headline inflation measures. As the Fed and other central banks in developed countries central banks tighten, the currencies of developing countries are likely to devalue further. Policy tightening in the North, in response to supply-side bottlenecks, thus worsens the problem of rising prices in developing countries, as cited by Adam Tooze in Chartbook #108, April 6 2022.
Whereas, the Committee for the Abolition of Illegitimate Debt reported that “The [World Bank] and the IMF have systematically made loans to States as a means of influencing their policies.” Levitt, Kari Polanyi (1992), writing IMF Structural Adjustment: Short-Term Gain for Long-Term Pain? in the Economic and Political Weekly. 27 (3) has this to say “Scores of countries caught in a debt trap are being ‘adjusted* to a new world order designed by the economic elites of the major industrial countries.” More so when both the IMF and World Bank have been accused of predatory lending practices to keep emerging economies in debt, including: demanding structural adjustment programmes as a condition for loans, often to governments who see these loans as a last resort, pressuring for privatization and exerting undue influence over central banks as components of neoliberalism as part of neo-Imperialism, read Cheng Enfu and Lu Baolin May 2021 paper.
Equally, all the developed nations had contributed to the global debts of US$226 Trillion, not China alone assuming the major proportion.
Towards an indepth analysis, goto Paulo Nakatani and Rémy Herrera, The South Has Already Repaid its External Debt to the North: But the North Denies its Debt to the South, Monthly Review, June 2007; with selective case countries, see (UNCTAD 2020, Developing country external debt: From growing sustainability concerns to potential crisis in the time of COVID-19); Eric Toussaint and Milan Rivié, Evolution of the external debt of developing countries between 2000 and 2019, Part 1,(2020); Threats over the external debt of Developing Countries Part 2 (November 2020); Developing countries in the stranglehold of debt Part 3 (April 2021); Eric Toussaint and Milan Rivié, An unsustainable burden of debt afflicts the peoples of Sub-Saharan Africa, Part 5 (May 2020); World Bank, International Debt Statistics 2021; Bank Negara Malaysia 2019, Profile of Malaysia’s External Debt – Bank Negara Malaysia; International Monetary Fund, The Debt Pandemic 2021; UNICEF, Families on the Edge, May 2021; UNFPA 2020.
4] Then, there is a persistent doubt that China does not report on its international lending, and Chinese loans literally fall through the cracks of traditional data-gathering institutions.Even, for example, credit rating agencies, such as Moody’s or Standard & Poor’s, or data providers, such as Bloomberg, focus on private creditors, but China’s lending is state sponsored, and therefore off their radar screens similar to many Global North government-to-government deals with Global South countries.
Similarly, it can also be attested that many Global North enterprise transactions are also hampered when some parts of a country’s debt are also unknown where assessing repayment burdens and financial risks might be with insufficient detailed knowledge on all outstanding debt instruments especially in targeted regime-change countries by a hegemonic-power state. Many a times, the IMF has used geopolitical considerations, rather than exclusively economic conditions, to decide which countries received loans, (see Toussaint, Eric (2 February 2021). “The World Bank and the Philippines”. CADTM and Julien Reynaud and Julien Vauday (November 2008). “IMF lending and geopolitics” (PDF). ecb.europa.edu).
a) Almost all of China’s lending is undertaken by the government and various state-owned entities, such as public enterprises and public banks. China’s overseas lending boom is unique in comparison to capital outflows from the United States or Europe, which are largely privately driven. It is also khown that China tends to lend at market terms, meaning at interest rates that are close to those in private capital markets. Other official entities, such as the World Bank, typically lend at concessional, below-market interest rates, but with longer maturities that beholden serviced countries to its clutch not unlike an along gangsta.
b) In addition, many Chinese loans are backed by collateral, meaning that debt repayments are secured by revenues, such as those coming from commodity exports, that is, they are self-serving. The United States would most likely, in pursuit of recovering outstanding loans, after a due consideration, imposes politico-economic controls through her Treasury’s Foreign Funds Control into the Office of Foreign Assets Control (OFAC) or through multilateral measures such as the Coordinating Committee for Multilateral Export Controls (CoCom), see Michael Mastanduno, Economic Containment: CoCom and the Politics of East West Trade (Ithaca, NY: Cornell University Press, 1992) as part of global financial sanctions in partnership with the IMF.
Secondly, the private sector will misprice debt contracts, such as sovereign bonds, if it fails to grasp the true scope of debts that a government owes. As a result, private investors and other competing creditors may underestimate the risk of default on their claims. However, whatever problems are eased by the fact that many Chinese official loans have collateral clauses, and that China often offers treated preferentially in case of repayment problems.
Thirdly, forecasters of global economic activity who are unaware of surges and stops of Chinese lending miss an important swing factor influencing aggregate global demand. One could look to the lending surge of the 1970s, when resource-rich, low-income countries received large amounts of syndicated bank loans from the U.S., Europe, and Japan, for a relevant precedent. That lending cycle ended badly once commodity prices and economic growth slumped, and a few dozens of developing countries went into default during the bust that followed. However, China has continued indirect financial support to these primary exporting countries where they were able to maintain consistent transactions through the export trading system by a barter process in place.
5] There is currently an initiative by the G20 nations – those countries which have the largest and fastest-growing economies – to offer debt relief for poorer countries to help them deal with the impact of the pandemic. China has joined this and says it has contributed “the highest amount of debt repayment” of any country taking part in the plan.
Though China is not a member of the Paris Club (an informal group of creditor nations) or the OECD, but she is doing a community-based approach whereby the common wealth of nations are shared on an common prosperity ethos, China Daily, 17/04/2019.
6] The last comparable surge in state-driven capital outflows was the U.S. lending to war-ravaged Europe in the aftermath of World War II, including programs such as the Marshall Plan. Even then, about 90% of the $100 billion (in today’s dollars) spent in Europe comprised grants and aid.
There was minimal processes in market terms and without strings attached to such as collaterals.The China People’s Republic, on the other hand, has always been an active international lender. In the 1950s and 1960s, when it lent money to other Communist states, China accounted for a small share of world GDP, so the lending had little or no impact on the pattern of global capital flows then. Today, Chinese lending is substantial across the globe, see the chart above – at the introduction of this article. It comes about at an epoch era when emerging markets and developing countries contribute more than 78 percent to world economic growth. These countries also account for more than 40 percent of the world’s total economic output.
7] Yet another important element to China’s presence in global finance is the growing network of swap lines by the People’s Bank of China (PBoC). Central bank swap lines can be understood as standing lines of credit, where central banks agree on exchanging their currencies to facilitate trade settlements and to address liquidity needs. As of 2018, the PBoC has signed swap agreements with more than 40 central banks (ranging from Argentina to Ukraine), providing the right to exchange more than U.S. $550 billion of their own currencies for Chinese currency (the renminbi or RMB). As a result, nations facing financial strains can nowadays turn to China before the international financial institutions, including the IMF. Since 2013, Argentina, Mongolia, Pakistan, Russia and Turkey all have made use of their RMB swap lines in periods of market distress.
Figure as adoptef from UNCTAD
8] Always remembering that developing country loans are just one element of China’s overseas lending activities. When adding portfolio debts (including the $1 trillion of U.S. Treasury debt purchased by China’s central bank) and trade credits (to buy goods and services), the Chinese government’s aggregate claims to the rest of the world exceed $5 trillion in total. In other words, countries worldwide owed more than 6% of world GDP in debt to China as of 2017. It is this external dynamic within the circuitry of capital that maintains and sustains the smooth circulation of commodity, as well as value, chains in a pulsating world that benefit many, many people on planet Earth.
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Firestorms 