Chinese Debt Trap? Multi-Billion Dollar Loan Pledge to Middle East Raises Questions

Published July 19th, 2018 - 09:42 GMT
Xi Jinping (Rami Khoury via AFP/FILE)
Xi Jinping (Rami Khoury via AFP/FILE)

 

  • China has pledged at least $20 billion in loans for development in the Middle East
  • Little is known regarding specifics of the loans
  • But China has a mixed history of providing toxic loans to developing countries
  • States in the Middle East may think twice before siging onto China's loan scheme

 

China’s plan to re-route the world’s economy toward Beijing has now officially come to the Middle East.

On July 9th, China’s President Xi Jinping pledged $20 billion in loans to the Middle East in addition to about $106 million in development aid, which includes $15 million for Palestine.

The pledge marks the entrance of China’s Belt and Road Initiative to the region, but experts are torn about China’s goals or intentions. Little is known about what China wants in the Middle East, as it has only recently become an important player in the region.

But if China’s track record in the developing world is anything to go by, countries that are set to receive the loans should be careful what they wish for. While helpful at jumpstarting infrastructure projects, benefits of the loans often flow to China and Chinese firms, while exacerbating economic divides and even caging some into debt traps.

The recipients of Chinese loans, Jordan, Yemen, Syria and Lebanon are all “significantly” at risk of falling into a debt trap, one study suggests, meaning the loans may do more harm than good.

Some have sounded the alarm that China is engaging in a new, worldwide neo-colonial project hidden as a development aid scheme.

 

What We Know

Chinese President Xi Jinping speaks at the Belt and Road Forum for International Cooperation (AFP/FILE)

Xi Jinping’s financial pledge to provide loans and grants to Lebanon, Syria, Yemen,Jordan and Palestine received brief coverage that betrayed how important the deal truly is.

The $15 million aid grant to Palestine will come at a time where Palestinians increasingly feel the brunt of the occupation as Israel tightens its regulations on Palestine’s economy. While China has managed to maintain a neutral but productive relationship with both Israel and Palestine and favors as ‘hands-off’ approach to the conflict, the grant is sizable and may mark the beginning of more development grants of its kind in the region.

Jinping also indicated that the promised loans will fund “economic reconstruction,” and “industrial revival,” with a focus on oil and gas. 

The loans signify as massive acceleration in China’s plans for the Middle East.

As recently as March, 2018, experts predicted that China would not involve Yemen or Syria in the near future.

But Xi Jinping likely senses an opportunity to invest in the region, and has pounced accordingly. The total amount of the loans is several times higher than any loan any of these countries have previously received from China. Jordan has an estimated $200 million in debts to China, while has about $500 million.

The loan would see that debt skyrocket into the billions.

That wouldn’t necessarily be a problem, but the Center for Global Development warns that Jordan, Syria, Lebanon and Yemen are all at “significant” risk for “debt distress.” In other words, these countries may not be able to pay back even modest loans from China and could fall into a vicious debt trap. This would give China significant leverage over them while giving China the option to essentially grab the development projects for their own use.

This would reverse any potential gains from the construction projects the loans initially funded.

 

China’s Troubling Record with Development

Sri Lankan and Chinese officials and executives at the Hambantota International Port Concession Agreement, which saw Sri Lanka hand over a naval port to China (AFP/FILE)

Mystery shrouds China’s specific ambitions with the Middle East, and there is little consensus as to the overarching goals of China’s loan programs in the developing world, but a few disturbing examples exist of when countries cannot pay back their loans.

China lends to nations at much higher rates on average than other international banking institutions. China can lend countries money with interests rates as high at 6.3 percent, making it much more likely that struggling and developing nations would be unable to pay China back and would default on their debt.

Many analysts and policy makers decry China’s development projects as a kind of neo-colonialism that includes predatory loans it knows will tether economies directly to the whims of Beijing. Former U.S. Secretary of State Rex Tillerson accused China of engaging in  “predatory loan practices,” while J Xiaochen Su writing for The Diplomat argues that the loan schemes “represent a brand-new type of neocolonialism.”

The most commonly cited example is of a naval port in Sri Lanka that China now controls.

In December, 2017, Sri Lanka handed China effective control of its Hambantota Port because it could not pay back the loan it had received from China that had an interest rate of 6.3 percent. China signed a 99-year lease on the naval port, giving it a new naval port.

“When a country is targeted by Mr. Xi's "Belt & Road Initiative" investments and loans, it should remind itself that the phrase ultimately means ‘Port & Navy Access Initiative,’” for its navy, said China analyst Bonnie Girard in an interview with Al Bawaba.

“Ultimately, this is what China is building.  Today's soft power is tomorrow's hard power… Therefore, the more water around it a country has, the more interested China is in making a deal with it.’

However, other experts are not convinced that this is China’s end-goal.

 

(AFP/FILE)

“It is not about expanding China’s military reach,” retorted Deborah Bräutigam, a professor at the Johns Hopkins School of Advanced International Studies.

“At the same time, China’s navy is growing and as it grows, the Chinese will increase their military diplomacy and negotiate naval access. But they don’t have to build elaborate infrastructure in order to gain navy access.”

Bräutigam was also quick to point out that China’s goal is not to “empower the developing world but to use China’s own excess construction capacity in ways that generate business for Chinese firms.”

For the Sri Lankan port that is now in the hands of Chinese executives, Bräutigam noted that this could be an outlier rather than the norm. “The port is in the home district of the previous president and it was a project he wanted very badly….When a new Sri Lankan administration came in, they didn’t want to keep paying for this project and the Chinese company [China Merchants Holdings].”

China’s ambitious Belt and Road Initiative involves nearly 80 countries so far, and Jinping has claimed that the initiative will completely revamp the infrastructure of each one, streamlining economic partnerships and facilitating growth.

Some countries may indeed experience an economic boost, but others, especially cash poor and/or volatile economies like Jordan, Syria, Yemen and Lebanon may think twice before accepting a multi-billion dollar loan that it cannot pay back.

They may end up sacrificing more than control of its development. If China demands they relinquish their self determination or even elements of their political sovereignty, many will have little choice than to relent.


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