What the West got Wrong: Reflections on China’s ‘Debt Trap’ Diplomacy in South East Asia
Now, China is the world’s biggest debt collector, with one estimate suggesting that 80% of the state’s lending portfolio in developing countries is backing states in financial distress.
The accusation of the ‘predatory’ Belt and Road Initiative (BRI) loan schemes lies in the belief that it is part of a manipulative global strategy, where these unsustainable debts are then used to gain leverage over participating ASEAN governments.
Within the context of recent maritime disputes, such as the Philippines-China conflict, where they both accused each other of intentionally ramming coast guard vessels, the BRI can be seen, at best, as a disingenuous form of aid and at worst, a machiavellian tactic to settle trade/territorial/maritime disputes in their favour.
Participating ASEAN countries are more likely to yield to Chinese claims for territorial conflict with the reward of funded infrastructure projects and increased trade with China. This is especially true for low-income countries like Cambodia, Myanmar, and Laos, where they do not have as many trading options, unlike bigger economies such as Indonesia and Malaysia.
However ‘predatory’ the BRI may be seen by Western nations like the United States, many ASEAN countries have benefited from these projects. China-funded railways in Indonesia and Laos, a port in Timor-Leste, etc. Trading between China-ASEAN peaked in 2022 at $975 billion USD, which is a drastic improvement from only 40$ billion USD in the year 2000.
The notion that China has deliberately accepted debt that will, over time, benefit themselves can be dispelled when looking at the terms and data of the loan schemes. These loans have been quite concessional, offering below-market rates, especially when compared to debt-stressed countries where the loans coming from private lenders would be offered at much higher rates.
Despite this, overdue repayments are increasing in proportion of total overdue loan repayments to official creditors. The number of Chinese-funded and loan-financed projects with significant ESG risk exposure rapidly jumped from 17 projects worth $420 million in 2000 to 1,693 projects worth $470 billion in 2021.
Therefore, the BRI is not a monolith project seeking geo-political power but rather a set of decentralised projects with generous loan schemes for emerging risky markets, where the outcome has, more often than not, resulted in unfinished projects and defaulted loans.
In fact, China has taken measures and risk management guardrails in order to protect their overseas infrastructure investments. This is because being in the position of the world’s biggest lender puts China in a tricky position, and not just economically.
Beijing’s public approval rating in the developing world plunged from 56% in 2019 to 40% in 2021. This only adds to the increasing pressure to escalate regional conflict from the U.S. and its allies in ASEAN.
But, with China facing economic headwinds themselves, alongside the increasingly tense maritime disputes, this begs the question: is it viable to continue financing and investing in Southeast Asian countries?
Geopolitical and economic stakes mean that it is more crucial than ever for China to maintain their bilateral relations, even when financial losses are outnumbered by its gains.
The one future that every stakeholder looks forward to is to de-escalate the maritime disputes.
It is very unlikely that ASEAN as a collective would look forward to a regional war when it is only certain countries (Philippines, Malaysia, and Vietnam) who have explicitly expressed their resentment towards territorial disputes and Chinese financial dominance in the region. Smaller countries like Cambodia, Timor-Leste, and Laos have benefited and will continue to benefit from the BRI.
China seems to show no immediate interest in war or even want to prioritise gaining soft power in the region. The way forward appears to be, as President Xi stated, to invest in ‘small but beautiful’ projects - to reduce Chinese investments and gain more guaranteed returns as opposed to bigger projects, which may result in non-performing loans.
This will allow less global scrutiny on Chinese investments in emerging markets as non-performing loans would inevitably decrease, and China would no longer be seen solely as a manipulative force in the region.
Bibliography
https://www.cfr.org/global-conflict-tracker/conflict/territorial-disputes-south-china-sea
https://docs.aiddata.org/reports/belt-and-road-reboot/executive-summary.html
https://youtu.be/AYhPuHFirgA?si=E_AWYLwNwWAejNOq
https://www.pinsentmasons.com/out-law/analysis/china-new-phase-belt-and-road-infrastructure-initiative#:~:text=The%20term%20'Xiaoermei'%20(small,priority%20in%20China's%20overseas%20cooperation.