An expression that is used more and more when analyzing China’s foreign policy is the Debt-Trap Policy or the Debt Trap Policy. It is not exclusive to the Chinese giant, but it seems that it is the one that is implementing it most effectively lately: It would be a bilateral relationship between two countries in which one invests massively with the aim of achieving political influence and/or natural resources or strategies of the recipient country.
The best example of this is the New Silk Belt / Belt and Road Initiative (BRI) promoted by the President of China, at the end of 2013 and which began in Kazakhstan and Indonesia. This Initiative (this term was chosen instead of the original strategy to avoid suspicion in the countries involved) today affects almost seventy countries that account for three quarters of the world population and 40% of world GDP with data from two years ago. .
Of all the countries involved, one of the most cited to illustrate the implementation of this theory has been Sri Lanka, the small country strategically located at the center of the trade routes between Asia and the Middle East.
In 2008 the country’s authorities accepted a loan from the Chinese Exim Bank for the construction of two important infrastructures: the Hambantota port and the Mattala international airport. The cost of the loan was 6.3% per year and the contractors in charge of developing the infrastructure were two companies owned by the Chinese State. In 2017 and due to the inability of the borrower to meet the debt payments, the country’s authorities granted, as an alternative to its repayment, the exploitation license through a leasing of the aforementioned port currently called Magampura for 99 years to the government. Chinese. This rent is supposed to limit the military use of the facilities, but the management of the port will remain in the hands of the authorities of the Asian giant, which is following similar policies in other nearby countries such as Myanmar, Pakistan, the Philippines or Laos.
In addition to China’s impressive evolution in the last two decades, the country’s huge trade surplus allows it to have a gigantic investment capacity that has gone from being almost irrelevant in 2000 to more than USD 700bn today. With this, it becomes the largest official lender in the world with more than double the amount handled jointly by the World Bank and the IMF.
The end of the 2008 crisis brought a long period of low interest rates and appetite for loans in emerging economies. In 2019 it seems that rising rates and depreciation of local currencies may make it more difficult for debtors to meet the significant amounts owed. And who will end up setting the guidelines on the well financed will be the borrower. The best way to avoid being subjected to financial colonialism is to recognize that debts can be refinanced but must always be paid back-the alternative is default and the loss of credibility of the markets that it entails, with which a very high amount can put strategic elements of a country in the hands of the lender.
happy summer 2019
