A recent report from the financial times suggests that China is leaving numerous Middle and Low-Income countries with ‘hidden debts’.
New findings suggest that many countries’ financial debts are linked to President Xi Jinping’s BRI scheme that has been systematically under-reported for years. This has resulted in mounting “hidden debts”, or undisclosed liabilities that governments might be obliged to pay.
So why has China been doing this?
China is using these loans to fund and outsource the development of the nation's largest and most likely most ambitious infrastructure project in the world, the Belt and Road Initiative (BRI). This is a new railway link stretching from China across to Europe.
How does China benefit from this?
This would increase the geographical mobility of labour for China. At the moment China is currently seeing increasing wages, consequently, this means rising labour costs which is a massive problem for China as its economy has been historically fuelled by investment from foreign firms. Increased geographical mobility of labour between BRI countries would help China outsource cheap labour and also increase its productivity which would help increase economic growth and this would essentially create a trading partnership between these nations.
As China is a fairly large country, it can utilise its monopoly of land over trade in the BRI region. This gives China further control of its supply chain, therefore giving China more power over trade agreements as it becomes an increasingly hegemonic state.
However, China would not give these loans out without security and that's exactly what they've done.
These loans are very safe, especially from a fiscal standpoint. This means if a country was to default - China would be able to seize their assets.
The prime example of this is the Sri Lankan port of Hambantota. Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for a project, which had no prospect of commercial success. Onerous terms and little returns eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.
Some people have observed this, such as the former Vice President, Mike Pence, who called it “debt-trap diplomacy”. However China has hit back suggesting it's no different to ‘dollar imperialism’ and that if a country sees success from the loans China has given it and they repay the money to China, they would seep the profits of it from then onwards.
Therefore most of the low and middle-income countries are taking advantage of these loans by building infrastructure as the potential long term growth is very attractive to LICs as they are currently at a stage of depression (from the business cycle) and want to hopefully recover and expand into a higher-income country in the future.
The way China sees their loans to low and middle-income countries are like guaranteed investments. In which they either get their money back or they could repossess the projects which were built from the loan if a country is unable to repay China - which would happen more often as it's a low-income country.
China has taken a smart initiative by investing its money into low-income countries in the hope of gaining further power, overtaking the U.S. economy and becoming an ultimate hegemonic power.
Written by Rohan Dhir
Research compiled by Billy Ryan