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Is Debt Trapping the new Weapon for China in the 21st Century

While an economic crisis looms over Pakistan, China is set to make a


windfall from the CPEC.
It seems that man’s appetite for conquering foreign lands and increasing his dominance can
never be satiated. Over the past few centuries, only the weapon of choice has changed from
bows and arrows to weapons of mass destruction. As mankind has realised the catastrophic
implications of Nuclear Weapons and other WMDs, it appears that debt trapping has proven
to be the most effective weapon of the 21st century and the pioneer of this technology beyond
doubt is China.

In the recent past several countries have become a victim of this silent but effective weapon.
In Dec 2017 China took over the Hambantota Port after Sri Lanka failed to generate
adequate revenues to support its debt. The port was constructed despite the fact that most
feasibility studies indicated that it would not be viable due to the proximity of the port to
Colombo. Hambantota was constructed and remained deserted for years, Sri Lanka could not
service the debt due to poor revenues and has now handed over the port to China on a 99-
year lease.

Venezuela which is in the midst of an economic crisis had received 62 billion USD from
China. This came at a time when oil prices were at an all-time high and the investment
seemed very lucrative. After the collapse of oil prices in 2014, the situation took a turn for the
worst. Oil production in Venezuela now stands at 1.34 million bpd, down from an earlier
high of over 3 million bpd in 2008. If sources are to be believed, Venezuela is making
interest only payments to China which amount to exporting 305,000 bpd of oil. What is
remarkable is that Venezuela which is sitting on the world’s largest oil reserves (even larger
than Saudi Arabia) is today in the midst of an economic crisis caused mainly due to a
combination of the government’s mismanagement and Chinese debt trapping.

In 2013, the total foreign debt of Tajikistan reached $2.1 billion, of which it owed $ 862
million to China. This is despite the fact that in 2011, Tajikistan wrote off an unknown
amount of loan owed to China in exchange of 1,158 square kilometers of land and this was
only 5% of the land what Chinese demanded.

Turkmenistan sits on one-tenth of the world’s gas reserves. However, it is still one of
the poorest countries. In 2013 when Turkmenistan secured contracts to develop the second
phase of the Galkynysh field, CNPC (China National Petroleum Corporation) agreed to
develop it as a 30 bcm (billion cubic meters) per year programme of which 25 bcm is to be
supplied to China.

Kyrgyzstan’s external debt stands at 77.5% of its GDP and the Chinese share is more
than 50%. Although Kyrgyzstan has very high external debts, it has so far steered clear of
entrapment due to its ability to sustain the debt due to income from exports of Oil and Gas.
Though it remains vulnerable, Kyrgyzstan may be able to steer clear of debt trapping unlike
others.
Initially it appeared as though Nepal has understood this methodology being adopted by
the Chinese. Amidst fears of debt trapping, Nepal cancelled a $2.5 billion deal with China for
the construction of a much-needed hydroelectric dam. However, in June 2018 the Nepali PM,
signed deals worth $ 2.4 billion with China on infrastructure. The highlight being a 72 km
railway line connecting Kerung to Kathmandu running through the treacherous Himalayan
terrain and costing $ 2.25 billion. It is anticipated that the line would attract Chinese
tourists and boost trade. However, it is unlikely that an actual cost benefit analysis has been
undertaken.

The list of countries that have faced debt trapping by China does not end here. In addition to
the above, the ‘Center for Global Development’ also fears Djibouti, Laos,
the Maldives, Mongolia, Montenegro and ‘Pakistan’ which are part of the
BRI to fall prey to debt trapping by China.

Though there have been several reports of the economic state of the countries which have
faced debt trapping by China, the gains made by China have not been evaluated. A thorough
search of the internet brought a naught, such a report or analysis may be conspicuous by its
absence for obvious reasons. One may feel that China may not have gained much since these
countries are not able to service their debts despite low interest rates, but the truth may be far
from this assumption. There have been desperate attempts by the Chinese
and Pakistani Governments to highlight the benefits of CPEC to
Pakistan but none to indicate the benefits to China.
With limited availability on the Chinese investment in Pakistan and the opacity being
maintained by the governments it is not feasible to carry out an accurate analysis. One can
only make certain speculations based on the limited information available in the open
domain.

Let us now bit by bit analyse the implications of the CPEC not only on Pakistan but more
importantly on China

Actual Investments by China – The actual investment made by China in CPEC


continues to be mystery. However, if Governor of State Bank of Pakistan is to be believed, it
is $46 billion but actual figures may be higher. One may safely assume that it would not
be lesser than $ 55 billion, all of which is either on loan or in equity. The interest varies
from 2% – 6%. But these loans are payable in dollar terms, which essentially means Pakistan
will have to cater for its inflation which has averaged 7.5% over the last eight years. The
Pakistani rupee has depreciated by over 30% in the last five years. This means the CPEC
loans effectively would be at 8 – 12.5% for Pakistan. The annual payment is expected to
average $ 3 Billion a year. However, major part of the investment has not moved through
the Pakistani banking channel. The CPEC has been constructed mostly by Chinese firms with
raw material and a large amount of labour coming from China and minimal participation
from Pakistani firms or any other country. Thus, most of the money has already come back
into the Chinese GDP.
The Oil Pipeline for China – The CPEC also consists of an inconspicuous Oil
pipeline for transportation of Crude from Gwadar to its refineries in China. This pipeline has
found little mention in the CPEC evaluation reports as it is of no significance to Pakistan, but
it means a lot to China. The CPEC cuts the energy import route for China by 12000 km or
close to 7000 nm. The cost for transportation of oil by sea averages about $1 per barrel, $5
per barrel for road and $0.5 per barrel by pipeline for every 1000 nm. China today is the
largest importer of oil and imports upto 8.7 million bpd. According to reports, the CPEC
oil pipeline can handle only 1 million bpd with scope for future expansion. The saving in
transportation of each barrel translates to about $5. Which essentially means China will save
about $5 million per day or 1.8 billion per year. In the event China is able to
increase the capacity of the pipeline, these savings would swell even further.

The CPEC also constitutes a network of LNG pipelines. It is estimated that China would
at least gain a capacity to transfer a billion cubic feet of gas per day which roughly translates
to 21,000 tons per day. With an average cost of transportation of $23/ton/1000 nm and a
reduction in distance of 7000 nm, even if we take the transportation cost of transporting LNG
by ship and pipeline to be the same, the savings per day would be 3.3 million per day
or $ 1.2 billion per year.
Though it is apparent that China will make substantial savings consequent to the installation
of the Oil and gas pipeline, the quantum of these savings that will be passed onto Pakistan is
unclear. Open sources indicate that Pakistan expects to make most of its income from CPEC
from containers that would be moved via the road and rail route of CPEC from China to the
port of Gwadar.

The shipping distance from China’s Urumqui via Shanghai to Gwadar is 16,000 Km. The
CPEC would reduce this distance by a whopping 11,000 Km to just about 5,000 Km.
Prima facie, reduction of the shipping distance by 11,000 Km indicates that the land route
may be more profitable, but does it hold good in practice? The cost of shipping a container
from China to India is about $600 and from India to China is $1200. This is primarily due to
China’s superior road network and port productivity. Thus, the Shipping cost to Africa and
Middle East is unlikely to be higher than $2000 per container for China. However, it would
be critical to establish the cost of shipping a container by road through China and Pakistan. In
US, the cost of shipping a container by road is approximately $1/km. If we give the
advantage of low labour cost to China, it would still be no less than $0.5/Km. Thus, the cost
of shipping the container by road through the 5,000 Km long CPEC route is unlikely to be
less than $ 2,500, add to that the toll of $ 250 which Pakistan hopes to recover and the
cost of shipping the container to the final destination, the overall cost would be upward of
$3000. So why would China spend over a $1000 extra per container for millions of
containers? In all likelihood it wouldn’t.

The CPEC is primarily useful for China for transportation of Oil and Gas where it can make
substantial savings. The Road and rail network, it seems have been constructed primarily just
to provide good business to the Chinese firms and is unlikely to be used by China for
transportation of goods. It may be pertinent to mention that China, which is the world’s
largest exporter is exporting approximately $356 billion or about 18+ million
containers to the Middle East and Africa, but has given Pakistan no assurance of the
minimum traffic or utilisation of the CPEC road and rail network. Here we can draw a
comparison from the Hambantota Port of Sri Lanka which was constructed by China for Sri
Lanka on loan but with no assurance of utilisation of the port, despite being the largest
exporter of the world. The result was that in 2012, the port saw only 34 ships and could not
generate adequate revenue to repay debts. Finally, in December 2017, the port was handed
over to China, who now owns a strategically located port in the busiest shipping lane of the
world, thousands of kilometres away from its land. In fact, free access to the port may reduce
the cost of shipping containers to the Middle East and Africa even further.

The Silk route was abandoned centuries ago because it became apparent to mankind that it
was far more economical and convenient to undertake trade by sea and this logic has stood
the test of time and is relevant despite the developments in technology. It is only the pipelines
that have proved to be economical for transportation of Oil and Gas. Though China is
vehemently promoting OBOR, it hasn’t provided a realistic financial analysis to prove its
viability.

The recent rise in cases where several countries are facing debt trapping by China shows a
disturbing trend. It is essential to note that none of these countries are wealthy, but have had
the potential to provide some sort of strategic or financial advantage to China. It is apparent
that China has identified such vulnerable nations and funded financially unviable projects,
only to promote its own industry. The countries are now laden with heavy debts and
struggling to repay China and in some cases have had to sacrifice their sovereign
land or strategic assets.
Whether Pakistan needs the CPEC or not is akin to asking someone whether they need a
bigger and better house. Of course, they do, but at what cost? It is beyond doubt that Pakistan
will benefit from the CPEC, but to what extent? Rail and road networks employ relatively
simpler technologies. The CPEC network could have been constructed by Pakistan using
domestic firms and limited participation from foreign players. Though it would have been a
slower and tedious process, it would have surely precluded the current economic crisis. The
money would have gone back into the economy and provided a much-needed boost. Instead,
most of the money has now gone into the already burgeoning Chinese economy.

Akin to road and rail network, the Power Plants set up by the Chinese would also prove to be
an expensive proposition. The electricity generated by these plants is likely to be sold at
around 8.3 cents per unit, whereas in neighbouring India NTPC sells power at Rs 3.2 per
unit which translates to about 4.5 cents per unit.

Whether Pakistan will be able to effectively use the assets of CPEC and emerge from its
current economic crisis only time will tell, but what is evidently apparent is the methodology
being adopted by the Chinese to identify vulnerable nations and exploit their economic
situation to its own advantage. It is disturbing to see that nations which are already struggling
to provide a decent quality of life to their citizens, being exploited by China with no regard to
the consequences which they may face. It is time the world took notice of these hideous
practices being adopted by China and made an attempt to stop this economic massacre. China
today is the second largest economy and is a force to reckon with. How this juggernaut can
be stopped and financially weaker nations be protected, is not a question which can be
answered in the near future.
Vikram Moorjani

Disclaimer: The author has compiled the article based on various sources from the
open domain. Certain details may be speculative but a sincere attempt has been
made to keep the calculations and assumptions as realistic as possible.