Land into capital: How indebted countries could pay up China debts
Chinese President Xi Jinping.
Just how does China deal with countries along the Belt and Road Initiative (BRI) that fail to pay up debts owed for infrastructure developments?
The question may have no direct answer, but it has hints on possible outcomes.
Last week, Laos, the Asian country that is listed among the BRI countries, was struggling with an acute shortage of basic commodities whose prices had hit the roof, a result of shortage of hard currency and huge debt obligations, most of which is owed to China.
According to Nikkei, people in Laos were lessening the pain by crossing into neighbouring Thailand, over the iconic Mekong River, to fetch fuel and basic commodities like soap and baking flour.
The BRI is an ambitious programme where China intends to build connecting infrastructure in Asia, Europe, Africa and the Americas’ to ease trade and interactions with Beijing, hence China’s political influence.
According to the official BRI website, some 147 countries have some sort of MoU with China to play a role in the programme.
In Africa, at least 43 countries had signed up by March this year, the highest of all the continents, probably a reflection of China’s desire to spread influence in Africa.
Infrastructure Funding
Although China finances most of the infrastructure projects, only Djibouti, Zambia and Congo-Brazzaville had reported distress in paying up.
Yet China’s infrastructure funding, based on its opacity, has not escaped debate on debt trap of the countries along the BRI.
So how could Beijing react to those unable to pay? Well, one way is to forgive some of the debts.
Earlier this year, China said it may erase debts owed by some 17 African countries considered Least Developed by the UN.
The other way could be to attach assets. In Nairobi, Chinese officials have denied this possibility even as Kenya is obligated to settle some $6 billion owed to China.
Yet that debt-for-equity swap happened in Asia. Sri Lanka’s Hambantota port was leased for 99 years to China for Beijing to forfeit a $8 billion debt.
Back to Laos, which is one of the 17 countries under the Least Developed category that originally signed on the BRI, China may have to alleviate the debt obligation with a catch for others to note.
Jeremy Zook, a lead analyst for Laos at Fitch, the ratings agency, told Nikkei that China had relieved some $800 million owed by Laos, allowing the country some room on external obligations.
“There are other discussions going on between Laos and China about the nature of future debt relief or debt restructuring to ease the near-term burden, but it is difficult to get an accurate read.”
That can also suggest indebted countries may easily be turned into vassal states; some kind of bonded territories.
Previously, China demanded swaps for relief on debts owed to Chinese creditors, including lending land and other natural resources in exchange for infrastructure funding.
For example, it offered land for a special economic zone to settle some $100 million China spent building a stadium for some regional games in 2009.
Laos also needs at least $1.3 billion per year to settle external debts, including a multi-billion-dollar railway project financed by the Chinese
"This is part of the idea of 'turning land into capital,' which was a key development slogan of Laos and implicit policy through the 2000s," Keith Barney, an academic at the Australian National University in Canberra told Nikkei last week.
Chinese officials often reject the idea of forcible swapping. But given the nature of their loans to countries in Africa may not be well explained, BRI countries may well prepare for a possibility of being held in a bond as long as they fail to pay.
Like Laos, most of these countries are also facing inflation, and a poor exchange rate with fuel prices rising as high as 100 percent.
