Debt diplomacy, a dampener for Dragon

Maneesh Pandeya
Published : May 23, 2020

https://www.sundayguardianlive.com/world/debt-diplomacy-dampener-dragon

New Delhi: Has China got trapped in its own “debt trap diplomacy”, which it has “strategically
planned” for many smaller nations over Asia, Central Asia and Africa? It’s no secret that the Asian
“economic giant” had doled out billions of dollars in the name of loans and infra-development
funds, in return for which it had kept “ports, mines and crown jewels as collateral”. This was to
realise China’s dream to be the world’s economic and political powerhouse, but that seems to
have backfired as countries are unable to pay, a new report in the New York Times points out.

From Kyrgyzstan to Sri Lanka to a number of African nations, including Ethiopia, requests are
pouring in for Beijing to restructure, delay repayments or forgive tens of billions of dollars of
loans due this year, the report says.
Diplomacy and strategic affairs experts see this to be more than a mere loan crisis for Beijing.
Many point to China’s “strategic missile—Border and Road Initiative (BRI)” becoming the biggest
casualty and this is also the time for a “country like India to make inroads into these Dragon-
troubled nations”.

As Aparna Pande, Director at the Hudson Institute, explains, the “Big Game” behind BRI/One
Border, One Road (OBOR): “BRI was meant to boost China’s image as the to be superpower that
built infrastructure around the world (even if at the cost of high interest loans). When Beijing
starts calling in its loans, and more and more countries have to hand over ports or highways (like
Sri Lanka) the image of China will take a hit. BRI /OBOR has had this inbuilt problem whereby
massive loans at high interest have been given to countries, most of which will be unable to repay
these loans. For China these loans were worth it because the money helped them buy leverage
within these countries. It also provided access to infrastructure (ports, highways) and energy
resources (oil, gas, minerals).” She added, “And if the countries were unable to pay back the loans,
then Beijing would in turn get complete access to a port or highway like Hambantota port in Sri
Lanka.”

Someone like Michael Kugelman, an expert on South Asian affairs at Woodrow Wilson Center in
Washington DC, says, “There’s good reason to believe that BRI could suffer a major short-term
blow in the post-pandemic world order….With China increasingly on the defensive amid a global
backlash against its activities, New Delhi has an opportunity to step in, which it would be wise
not to squander.”

A trade and global business expert, Mukesh Aghi, who is the CEO and President of US-India
Strategic Partnership Forum, echoes Kugelman and adds, “China is seen as a hard power, a threat.
While India is seen as a soft power, a friend. India needs to leverage this perception, image and
attitude.”
True, India doesn’t have the economic might of China, but a goodwill tag. And there is an urgency
for India to act fast as BRI is nothing but China’s strategic ploy to wield its economic influence
and showcase its military might to nearly 70 nations, almost 1/3rd of the world, it will pass
through. Aghi feels the time has come for India to pick partners and priorities to match their
current demands with “soft diplomacy” against China’s “debt trap diplomacy”.
Kugelman told The Sunday Guardian: “Not only will BRI countries be reeling economically and
hesitant to take on fresh loans, but China itself will be grappling with its own slowdown. Beijing
may itself be hesitant to commit to new high-risk BRI investments. While China typically is willing
to take on a lot of risk—both security and financial—for its BRI investments, the post-pandemic
new normal may give it pause because of its own financial constraints.”
Stressing India’s action at this moment, Kugelman said: “There is certainly an opportunity for
India to help those nations indebted to China, though New Delhi’s capacity to provide assistance
may be hampered by its own inevitable economic struggles–at least in the near term…Still, India
can leverage its regional heft and capital to appeal to countries looking for an economic partner
with less predatory and opaque investment tactics than China. India’s Act East policy, which seeks
to expand relations with many of the countries in East and Southeast Asia that have come into
Beijing’s orbit, is the ideal vehicle through which to implement this outreach.”

Now Beijing also faces a dilemma over the looming loan defaults, set to start a backlash from the
lenders back home and also for BRI projects largely becoming “non-performing assets”. Aghi says,
“Almost $520 billion has been lent through white elephant construction projects. The loans are
at high interest rates with national assets of nations as collateral. Rampant corruption is driving
some of these projects, for example, in Pakistan almost $2.3 billion worth of bribe has taken place
with the leadership for the power plant projects. Majority of the countries are unable to pay
these loans hence gradually they are becoming non-performing assets. More important, there is
a growing discontent within China about these lending while the local population quality of living
is still low and suffering. Since, the steel, cement and other material is used from China with
Chinese construction workers, these initiatives are not creat.ing local jobs while enhancing
corruption within the ruling elite. As time goes by, poor nations will default and non-performing
assets will not only damage its relations with these nations, but also upset back home Chinese
citizens, including money lenders and banks.”

Pande added, “The challenge President Xi and China face is: will the strategic benefits China gains
in some countries through BRI (e.g. Pakistan) mean that China continues to put money into BRI
projects or will the backlash China faces when it starts calling in its loans force Beijing to scale
back and limit itself to only certain countries and projects?”

Aghi picks up areas where India can help these nations against China. “Experiences and expertise
of Indian entrepreneurs in Africa show that locals prefer Indians rather than the Chinese. Indians
integrate well in African society, they create jobs and they become part of the local culture. Sindhi
community is a prime example,” says Aghi adding, “Chinese dictate, partner with corrupt leaders,
create their own ghettos, do not integrate with the society, hence alienating the population.”
Soft diplomacy will be counter to Dragon’s BRI, says Aghi. “India’s strength is not mega
infrastructure, its energy should be on health, education, IT services, building self-sustaining
societies and giving soft loans. First focus on providing world class higher education, partner in
the healthcare services. Focusing on treatment of local disease, cheap generic drugs and medical
tourism. Partner with African nations on building world class universities, IT companies,
entertainment industry etc.”

Will Beijing’s loss in “Great BRI Game” be New Delhi’s gain? Time will tell!