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The Profitable Business of Debt Traps

Recently, China has cut lending to Africa in 2019 as debt fears grew.


The Chinese loans from public sector borrowing have fallen to $7bn in 2019, down from $28bn five years ago.


Chinese Banks mainly cut lending to Angola, Cameroon, Djibouti, Ethiopia and the Republic of Congo. The Top borrowers were Ghana, South Africa, Egypt, Ivory Coast and Nigeria.


But what business does China have in Africa? Let’s go back over a decade to 2009.


In 2009, the president of Sri Lanka began pushing for a new port to be built in the south of Sri Lanka.


Any infrastructure project which may be of success is a great macroeconomic policy, it increases employment, therefore spending increases and the government receives more revenue, a perfect recipe for growth, if it is successful.


However, even Sri Lanka’s government studies showed that the port would be unprofitable, and, when its neighbouring country, India, was asked to fund the project, they said the same thing, calling it an “economic dud.”


Despite this, the project went through, with the help of China, but why would the government want such a project?


The Chinese government’s import and export bank gave Sri Lanka a loan of $307m, on the surface, this may seem like a generous case of foreign aid, but, the terms associated with the loan were very clever.


First, the terms stated that the port was to be built by a major Chinese company, China Harbour.


This decision makes the investment much less of a risk. This is because, if the port is built by a Chinese company, with Chinese workers, those workers are paid for their labour, so instead, the money is funnelled back to the Chinese economy.


Additionally, the Chinese demanded that Sri Lankan government was to give them information about who was passing in and out of the port.


And, once the infrastructure project was completed in 2012, it was a failure, with only 34 ships docking in it as opposed to the Colombo Port which had 3,667 ships docking.


So, with an infrastructure project which was making a massive loss, the Sri Lankan government went to China for another loan of $757m to pay back the previous one, the equivalent of you using a bank loan to pay off your credit card payments.


China agreed to this but on the condition that the interest of the first loan would increase from a 1.2% interest rate to a 6.3% interest rate.


Once the new Sri Lankan president took over, he came to a country that was completely ravaged by debt, the countries debt had increased to $44.8bn and by the end of 2015, Sri Lanka had a $4.7bn payment due.


So, in response, Sri Lanka took out another loan of $1bn to pay out the current debts, and now, the country found itself at the mercy of China, not through military means, but debt.


With all of their options exhausted, Sri Lanka had to go to the bargaining table with China, hoping for China to cancel some of the debt, that did not happen.


Instead, China now owns 85% of the port and now owns 15,000 acres of land around the port, potting another infrastructure project to their portfolio.


So, through the guise of benevolent foreign aid, the Chinese government instead managed to control and subdue a national government through the means of debt, forcing them to agree to their terms.


And now China’s new target, despite the recent cuts in spending, is Africa.


And African governments find the loans which China are willing to give out great, this is because it allows them to build such infrastructure projects which develop the economy by providing jobs and stimulating spending, driving growth and thus developing the nation, yet of course, debt is a double-edged sword.


So, this strategy which China is deploying can be potentially great for both parties, China makes a profit on their investment and the nation which was invested in now has a successful infrastructure project and a growing economy, but, if the project turns sour, China still pockets control over the said nation.


But this strategy is not a new one, in fact, it takes a page out of the USA, however, they are doing it better.


In the ’70s, 80’s and 90’s, America deployed these strategies on other developing economies, and now China is doing the same, but when America did it, they had a clear motive, and that was the political influence.


Meanwhile, China’s terms are much more attractive as they have four main promises:

  • China will not interfere in the nations internal affairs

  • China will not impose their will on other countries

  • China will not attach political agendas to assistance programs

  • China will not seek selfish political gains through their investment policies.


So, China saw what the American government did wrong, improved it, and are now offering it at a cheaper price.


Hence, the debt trap which China is creating now has been occurring for many years from the US, but it is now done with the ruthless efficiency of the Chinese, and these traps are what will enable China to exert its influence over Africa, which is significant because, as the Chinese population begins to urbanise at breakneck speeds they will too require cheap labour to source products from.

 

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