Debt traps created by China through BRI would increase India's political cost to deal with such neighbouring states
Wary of a resurgent and assertive India, China is not just adding to its military power; it has found an innovative way to contain India which seeks bigger influence in the region. This new weapon is a financial ploy that helps China grab land in India's neighbouring countries so as it can effectively ring fence India. Chinese President Xi Jinping’s mega Belt and Road Initiative (BRI) is a plan to deploy this weapon which analysts call "debt trap".
Center for Global Development, a think-tank based in Washington, D.C., has warned in a recent report that debt traps created by China through BRI would increase India's political cost to deal with such neighbouring states. The report said that eight countries including Maldives, in India’s neighbourhood, and Djibouti, which hosts the lone Chinese military base overseas, are particularly at risk of debt distress based on an identified pipeline of project lending associated with BRI.
China's strategy to grab land in smaller, less-developed countries is simple: it gives them loans on high rates for infrastructural projects, acquires equity into projects, and when the country is unable to repay the loan, it gets ownership of the project and the land. It can put this land to strategic use against India.
Sri Lanka is an apt example. It has signed a $1.1 billion deal with China for control and development of the deep-sea port of Hambantota. A state-run Chinese company will have a 99-year lease on the port and about 15,000 acres for building an industrial zone. In the past few years, China gave Sri Lanka big loans to build infrastructure. Now, Sri Lanka is unable to repay those loans.
It is leasing out land to China to repay its loans. Part of the money it gets by leasing out the Hambantota port will go into repayment of Chinese loans. This is how China sneaks into a country on the back of costly loans.
A similar story is unfolding in Maldives too. Pakistan and Nepal, too, run the risk of falling into the Chinese debt trap.
The think tank says BRI debt traps would have larger impact too. BRI raises the risk of debt distress for 68 countries identified as potential borrowers if the programme follows Chinese practices for infrastructure financing, which often entail lending to sovereign borrowers, says the report.
BRI is planned to span at least 68 countries with an announced investment as high as $8 trillion for a vast network of transportation, energy and telecommunications infrastructure linking Europe, Africa and Asia, the report said. The program is an infrastructure financing initiative for a large part of the global economy that will also serve key economic, foreign policy and security objectives for the Chinese government, it said.
"Yet, important questions arise on sustainable financing of the initiative within BRI countries, and how the Chinese government will position itself on debt sustainability… And when the creditor itself is a sovereign, or has official ties to a sovereign as do China’s policy banks—China Development Bank (CDB), the Export-Import Bank of China (China Exim Bank), and the Agricultural Development Bank of China (ADBC)—these challenges often affect the bilateral relationship between the two governments,” the report said.
"It remains unclear the degree to which BRI, a Chinese-led bilateral initiative that seeks to employ some multilateral mechanisms to achieve its financing goals, will be guided by multilateral standards on debt sustainability," said the report.