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China’s Debt Diplomacy – The Game of Loans

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A decade ago, China unveiled its ambitious Belt and Road Initiative (BRI) to the world, painting a rosy picture of infrastructural development and mutual benefits. Fast forward to today, and beneath the surface of booming trade and infrastructural advancements lie stories of failed loans and growing concerns of China’s ever-expanding control.

The BRI, envisioned by President Xi Jinping, aimed to connect China and Europe through a modern Silk Road, thereby weaving a web of interconnected trade routes on both land and sea. These trade routes, spanning the Indian Ocean to the South China Sea, quickly attracted over 150 countries that saw an opportunity to prosper. Memorandums were signed, and agreements were reached.

Initially, things looked promising. By 2022, China’s trade with the BRI countries had skyrocketed by 76%, outpacing its global trade growth. This wasn’t just a feather in China’s cap; it shifted global dynamics. Economically, China found its grip strengthening with emerging nations. This, in turn, empowered China diplomatically, preventing it from becoming isolated, especially in platforms like the United Nations.

However, all that glitters isn’t gold.

Countries that once eagerly borrowed from China now find themselves ensnared in a web of debt. Unable to repay their loans, these nations have no choice but to grant China significant control and influence over their assets. One of the most glaring examples of this is Sri Lanka, which had to lease the Hambantota port to China for a staggering 99 years. Such instances have sent alarm bells ringing across the globe, leading to fears of falling into what’s often referred to as China’s “debt trap”.

The ripple effect of the COVID-19 pandemic further exacerbated the situation. Emerging economies, which were already teetering on the brink, were severely impacted. In just two years, from 2020 to 2022, loans amounting to a whopping $76.8 billion involving Chinese lenders turned sour. This was a catastrophic increase from the preceding years.

These debt failures, coupled with China’s own economic slowdown, put a damper on new investments. The numbers are stark: where China once invested around $100 billion annually through the BRI until 2019, it’s now dropped to a range of $60 to $70 billion.

But it’s not just external factors at play. Internally, China is feeling the heat. After the announcement of debt forgiveness for African countries in 2022, there was an outcry from the Chinese public. Questions were raised: Why not forgive debts for their own citizens struggling with medical expenses and mortgages?

Faced with these challenges, President Xi is looking at redefining the BRI’s approach, or at least the public face of it. He’s emphasized the importance of profitability and is mulling cooperation with development banks. The upcoming Belt and Road Forum is eagerly anticipated for insights into China’s evolving strategy.

However, as Junya Sano of the Japan Research Institute points out, China’s influence will inevitably wane if its external loans and assistance don’t bounce back to their peak levels. The question remains: Will the Belt and Road Initiative continue as a beacon of mutual growth as that have extolled to the world? Or will it morph into a tool for sinister control as we skeptics seem to see? Only time will tell.

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