21 Dec 2018
Topics China
China's multi-trillion dollar Belt and Road Initiative (BRI) and accompanying accusations of the country's “debt-trap diplomacy” have attracted plenty of attention in Southeast Asia. Earlier this year, Malaysia’s Prime Minister Mahathir Mohammed halted several Chinese-backed infrastructure projects, citing concerns that Malaysia would be left “indebted” to China.

As tensions rise in the South China Sea, questions have arisen over Chinese loans throughout all of developing Asia and the South Pacific. The details and conditions of the loans are rarely made public and there is increasing concern on how they will be repaid.

In Southeast Asia, countries like Laos, Cambodia, Myanmar, Indonesia and Malaysia have signed up to the BRI. The loans fund critical infrastructure projects that are vital for each country's growth and development. Without foreign loans it's not clear how these massive projects would be financed.

The South Pacific has been particularly interested in China's perceived largesse. It is a vast region dotted with tiny island nations, many of them impoverished, and is largely reliant on aid.

In the Pacific region, Australia's ongoing diplomatic clout can be gauged by a study of international aid, conducted by the Lowy Institute. Australia remained the largest donor by far with projects worth a total of $US7.7 billion in the years between 2006 and 2014.

The next largest was the United States with $1.9 billion but China came close behind with $1.8 billion, confirming the growing sense of a new regional power on the rise.

Changing sources of aid

It comes as no wonder there is growing alarm at China’s possible use of so-called debt-trap projects as a Trojan Horse to spread its influence and military power across Asia and the Pacific.

Last month, Australia’s Prime Minister, Scott Morrison, announced a “pivot to the Pacific”, committing billions to create a regional infrastructure bank, establish a permanent Defence Force training team for the Pacific, increase naval deployments, boost trade, and open five new diplomatic missions.

The scenario this policy is aimed to prevent was spelled out by US Deputy Assistant Secretary for Defense for South and Southeast, Joseph Felter, who told The Australian newspaper last month China may be seeking a military foothold in the region.

Specifically, he pointed to investments that may be used to establish “dual-use ports and other facilities” that could at some point be converted to military use.

At the start of this year, Australia’s then Minister for International Development and the Pacific, Concetta Fierravanti-Wells, also angered China by accusing it of funding useless infrastructure projects, but also by voicing fears some nations may be accumulating debts they could not afford to pay.

Possible debt traps?

A debt trap has been defined as one in which a creditor nation deliberately provides loans to a value beyond what the debtor can realistically service, aiming to win political or other concessions when default inevitably looms.

The bulk of the work is performed by firms from the creditor nation, thus forming a closed circle of benefit.

The example most often raised is that of Sri Lanka’s Hambantota Port, a Belt and Road project surrendered to China on a 99-year lease when Sri Lanka proved unable to service $US1 billion in associated debt.

Further examples can be found across Asia. In Pakistan $US27 billion worth of projects are being built and already the country is feeling the debt pinch. The newly elected government is considering asking the IMF for a bailout.

In Laos, the Chinese funded and built railway is reportedly worth half of of the landlocked country's GDP. According to former Australian Foreign Minister, Gareth Evans, Laos and Cambodia are now “wholly owned subsidiaries of China” because of their levels of debt.

Among the Pacific economies, Papua New Guinea (PNG), Vanuatu and Tonga are cited as suffering potential debt-traps with China, including for BRI projects.

Tonga is said to owe the equivalent of one-third its annual GDP to China, with PNG and Vanuatu owing around one-quarter and half respectively of their total external debt.

In April, Vanuatu’s Foreign Minister Ralph Regenavu was forced to deny reports in Australian media that his government was already in direct talks with China regarding construction of a military base.

Reactions from other nations

China is far from the first country to be accused of using debt to bully poorer nations.

The third world debt crisis, beginning with the OPEC oil shock of the 1970s and culminating in mass write-offs 30 years later, saw largely Western countries in the frame.

There is debate about the extent of the threat posed by China’s role in the region.

Senior Lecturer in International Relations at La Trobe University, Michael O’Keefe, has argued Australia’s response can be seen as part of “a long history of alarmism” about strategic competitors in the region.

He says what’s missing is a thorough understanding of China’s true aims, not to mention a real appreciation of the dilemma faced by debtor nations suddenly offered access to unprecedented levels of funding.

And it must be remembered that Australia’s pivot to the Pacific occurs against the background of debate about Chinese interference within Australia itself, resulting in the passing in June of new laws aimed at curbing foreign political influence.

In fact, China’s aims in the region may at times seem opaque even to Beijing itself.

Associate Professor James Crabtree of the Lee Kuan Yew School of Public Policy has described how Belt and Road Initiatives, rather than forming part of some “grand masterful strategy” — as presented by China as much its competitors — may actually be more haphazard.

There is evidence many simply “emerge from below, cooked up by local politicians working with Chinese-backed companies and banks, often supported by Chinese state government officials”.

As Crabtree points out, Washington’s somewhat meagre answer of US$113 million to the scheme hardly offers any real financial alternatives to developing nations.

India certainly isn't waiting for the traditional world power structure to change the situation. It recently offered US$1 billion to the Maldives to help it pay down its Chinese debt. The loan does come with stipulations. The Maldives must distance itself from the Chinese Government and allow Indian military to permanently operate from the island.

It looks like the case of another power flexing its muscle but it would be foolish to discount the agency of developing nations themselves.

Indeed, there are halting signs some are already starting to become more assertive in their approach to China. Sri Lanka recently announced that as part of the 99-year Hambantota Port lease China was now allowed to use the piece of infrastructure for military purposes.

Dr Mahathir may have started another movement.
Topics China