Is China a debt trapper..?

Or a big extravagant..?

China and Global Development Projects

(Sujith Mangala De Silva and Rumi Speelberg)

The latest evidence shows that China distributes at least twice the amount spent by the United States and other powerful countries on development activities around the world. Most of them are granted as loans from Chinese state-owned Banks at high interest rates.

The amount of loans granted by China is astonishing. Even though China relied on foreign aid a little while ago, now it has all turned upside down. According to data from the AidData Unit of William & Mary University in the state of Virginia of the United States, China has funded or lent 13,427 $ 843 billion on infrastructure projects in 165 countries, over the past 18 years

Much of this money is linked to Chinese President Xi Jinping's 'Belt and Road' strategy. The One Belt One Road Program is a global infrastructure development strategic initiative launched by the Chinese government in 2013 to invest in nearly 70 countries and international organizations. The One Belt One Road Program invests a huge amount of money on infrastructure projects with China's knowledge to build new global trade routes under the strategic process.

Chinese knowledge of infrastructure projects also invests heavily in foreign currency through the Belt and Road strategic process to build new global. Critics say, however, that China's high interest rates for many projects will inevitably tie large populations to skyrocketing debt.

AidData researchers, who spent four years researching China's global lending and spending, say Chinese government ministries regularly visit them to get information on how Chinese money is used abroad. The railway line between China and neighboring Laos is the best example of unofficial loans granted by China. For decades, politicians have been eager to learn more about this connection, which is built by connecting Southwest China directly with Southeast Asia, surrounded by a land screen.

However, the Engineers warned that the cost of the project would be high. It would take many bridges and tunnels to operate trains across the slopes. Laos is one of the poorest countries in the region and they cannot afford to bear even a fraction of the project cost, involved. Even though the Yumo trains line connects China and Laos, experts say it will be difficult for Laos to repay the loan.

However, Laos had to borrow $ 480 million from a Chinese bank to finance a small ownership of the rail track. The revenue earned by a small project called “Potash” , one of the revenue generation trades in Laos, had to be kept as a guarantor as a condition of obtaining this loan. Laos, which was on the verge of bankruptcy in September 2020, sold a part of their Power Generation Plant which was one of the  large assets to China for $ 600 million to obtain relief from Chinese lenders.  All this is happening even before the start of the railway project. This incident took place before the railway track project.

The Laos Railroad is just one of the risky projects, funded by the State Bank of China. AidData says that China is the major financial lender for many low- and middle-income countries. Even though China has surpassed all other countries in investing money for development projects of other countries, AidData says that how they have reached that level is "extraordinary".

The way China lends money is different from the accepted custom. Instead of providing financial assistance or loans for projects from one country to another, almost all the money is released in the form of a loan from a state bank of China. Such loans are not entered in the official accounts of government loans This is due to the fact that the transactions, made by Chinese state banks are not entered into the loan accounts of the China government.

Borrowing governments will not be able to know exactly what is being agreed upon outside the agreement, as such transactions are removed from government balance sheets and concealed under clauses aimed at maintaining confidentiality. Countries have to furnish extraordinary guarantees to obtain loans from China for development. It seems that very often China’s state banks get a commitment from the borrowing countries to settle debts from the proceeds earned from selling natural resources.

For example, in a deal with Venezuela, China has demanded that foreign currency earned from the sale of Venezuelan oil be deposited directly into a bank account controlled by China. In case of default on the loan, the Chinese creditor can immediately withdraw the money from the account. In December 2017, Sri Lanka had to allow China Merchants Port Holdings to take over the Sri Lankan port of Hambantota on the East-West shipping lane, one of the world's busiest shipping lanes being unable to repay a large loan from China. By this transaction China has raised fears around the world about using "debt traps" to exert its influence overseas.