China Power

China’s ‘Debt Diplomacy’ Is a Misnomer. Call It ‘Crony Diplomacy.’

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China Power

China’s ‘Debt Diplomacy’ Is a Misnomer. Call It ‘Crony Diplomacy.’

The debt trap isn’t a national strategy. Instead, unchecked profit motive is driving Chinese firms to exploit poor nations.

China’s ‘Debt Diplomacy’ Is a Misnomer. Call It ‘Crony Diplomacy.’
Credit: Wikimedia Commons/ Adbar

In the summer of 2018, Sri Lanka saw the last remaining airline pull out of its second international airport. As soon as the Middle Eastern low-budget carrier flydubai left Mattala Rajapaksa International Airport (MRIA), a project wholly financed by Chinese loans, the $210 million transit hub transformed into the world’s loneliest airport. Pundits branded Sri Lanka as the latest victim of China’s “debt diplomacy.”

Some small countries “take on loans like it’s a drug addiction and then get trapped in debt servitude,” opined the influential Indian strategist Brahma Chellaney. “It’s clearly part of China’s geostrategic vision.” Through debt diplomacy, China exerts bilateral influence by bankrupting partner nations with unsustainable debt and then demanding steep concessions as part of the debt relief – or so the thinking goes.

As China continues its global infrastructure financing push across the developing world, allegations of debt diplomacy keep arising. Upon taking office in May 2018, Malaysian Prime Minister Mahathir Mohamad suspended a host of Chinese-funded infrastructure projects, asserting that his country could not support the unprecedented level of debt and charging China with implementing a new version of colonialism. Ethiopia has also experienced debt concerns over Chinese-built projects: Repayment on its $4 billion railway linking capital Addis Ababa with neighboring Djibouti has been extended by 20 years over concerns of debt distress. Fears of unsustainable Chinese lending in Zambia led critics to allege that China will take control over key state assets due to the Zambia’s indebtedness. Most recently, in October, Pakistan sought a bailout due to its balance of payment crisis, partly stemming from its debts to China for infrastructure projects assumed under the $62 billion China-Pakistan Economic Corridor. In each of these cases, debt diplomacy has been used to define China’s engagement abroad.

However, little evidence actually suggests that Beijing coordinates a unified strategy to lure the developing world into unsustainable debt.

Instead of a state-led strategy, Chinese firms — motivated by profit and abetted by a toxic combination of bureaucratic disorganization, incompetence, and negligence at the state level — have exploited poor nations, which are dependent on cheap, and sometimes bad, loans. These companies, knowingly or unknowingly, persuade countries to pursue projects where benefits to the firms far outpace the benefits of the host nation. Asymmetric information or deception may even misrepresent the feasibility or sustainability of pursued projects. What is worse, governments sign onto nonconcessional loans that accrue high interest rates or carry onerous terms that disadvantage already vulnerable countries.

This practice does not trap recipient countries into taking on unsustainable debt. Instead, it allows Chinese companies to profit from often crooked deals building much-needed infrastructure in some of the world’s poorest countries, exploiting the undersupply of financing and these countries’ appetite for infrastructure projects. Forget debt diplomacy – call it crony diplomacy.

Beijing’s crony diplomacy encourages the inception of many economically unsound projects. Kyrgyzstan’s Kara-Balta oil refinery, funded in 2013 by Chinese partners to the tune of roughly $350 million, runs at no more than 6 percent of its capacity. The refinery’s difficulty stems from insufficient crude oil sourcing, which could have been easily identified early if the Chinese sponsor had adequately planned and evaluated the project. Projects that do generate economic activity can lack the necessary safeguards to mitigate adverse social and environmental impacts in host nations. Chinese investment in more than 30 casinos in Cambodia’s Sihanoukville has contributed to a rise in the eviction of families, the shuttering of hundreds of local businesses, and a loss of tourists – but the casinos have paid handsome returns to the Chinese investors.

What happened to the aforementioned Djibouti-Addis Ababa line was likely a combination of poor planning, incompetence, and corruption – in other words, crony diplomacy, not debt diplomacy. Although Ethiopia and Djibouti are in great need of a modernized rail system, China’s state-owned insurer admitted that the due diligence on the Africa’s first fully electrified cross-border railway had been “downright inadequate.”

Beijing’s strong backing for its Belt and Road Initiative (BRI) has helped create this crony diplomacy. Easy funding from leading Chinese commercial and policy banks for projects that meet the BRI’s goals – hazily defined as connecting the Asian, European, and African continents to China  – facilitate Chinese companies’ ability to invest for the sake of investing. This easy access to capital, coupled with an increasingly difficult business environment in China, incentivizes Chinese firms to participate in infrastructure construction in the dozens of countries that participate in the BRI.

In an environment where companies are eager to spend, less due diligence is devoted to ensuring project success. Companies either underestimate the difficulties in implementing overseas project or disregard best practices in their attempt to generate a profit. This helps explain why more than 270 out of 1,814 BRI projects undertaken since 2013 in the Indo-Pacific region have been halted due to concerns with practicality or financial viability.

It’s not just a problem for Chinese firms globally: Old-fashioned Chinese crony capitalism hinders infrastructure and development projects domestically as well. A 2016 investigation by four Oxford University academics found that “over half of the infrastructure investments in China have destroyed rather than generated economic value.” Overinvesting in ill-conceived projects creates financial and economic fragility. These infrastructure investments do not sufficiently focus on impact, and inadequate project evaluation and cost benefit analysis generate underperforming projects.

While there are plenty of success stories in China’s global infrastructure push, the scale and scope of its risky investments are what drive concerns over China’s crony diplomacy. Beijing should reign in bad practices employed by many Chinese firms building infrastructure projects abroad. Part of this involves reviewing the lending of its policy banks in the wake of economically risky projects, and actively tackling mismanagement and corruption in Chinese firms operating abroad. If not, Beijing will watch as risky and underperforming projects not only continue to grow but also prompt criticism that encourages countries to reject working with Chinese firms. And critics will blame Beijing for a pernicious grand strategy – when it’s just being negligent.

Mark Akpaninyie is a researcher at the Center for Strategic and International Studies (CSIS. He is also a member of the National Committee on U.S.-China Relations and a Young Leader with Pacific Forum.