A new study from the Harvard Kennedy school of policy analysis claims that China is using “debtbook diplomacy” to expand its strategic clout by providing exorbitant volumes of credit to developing economies in the Asia-Pacific.
The report prepared by graduate students from the Harvard Kennedy school said that the methods employed by China were “remarkably consistent,” usually commencing with infrastructure investments as part of the Belt and Road Initiative.
According to the report debt repayments for host countries would begin to become difficult, however, once development projects either ran over budget or proffered only meagre returns.
“The final phase is debt collection,” said the report. “When countries prove unable to pay back their debts, China has already and is likely to continue to offer debt forgiveness in exchange for both political influence and strategic equities.”
The report identified 16 countries that have received hundreds of billions of dollars in funds from China, yet are unlikely to be able to fully pay back their debts.
According to the report China could subsequently use the unsustainable debts owed by these countries to influence their strategic policies in a manner that would be contrary to the interests of the United States.
These countries include Sri Lanka and Pakistan, where the paper says the process is already “advanced,” as well as Cambodia, Laos, Papua New Guinea, the Philippines and Thailand.
In the case of Sri Lanka, the report points to concerns over the “opaque and contentious” granting of an 85% stake in the 99-year lease on a major port in Hambantota last year.
China first provided financing for the $361 million port in 2007, when Sri Lanka’s international credit standing had taken a hit due to human rights concerns.
China provided a further $1.9 billion for improvements as well as an airport, yet by 2017 the port had become a “debt trap,” owing Chinese companies at least $8 billion.
“Once Sri Lanka made the initial commitment, the sunk cost and need to generate profit to pay off the original loans drove it to take out addition loans, a cycle that repeated itself until it was finally cornered into giving up the port in a debt-for-equity swap,” said the report.
“This has sparked fears that Hambantota could one day become a Chinese naval hub, and sent a worrying signal to other debt-strapped developing nations.”
The report also claims that the influence China would wield over South-east Asian economies via credit extension could give it a “proxy veto” in ASEAN, while its influence upon Micronesia, Palau and the Marshall Islands could “threaten the unfettered basing access and right of strategic denial the US has enjoyed since World War Two, and help the Chinese navy extend its reach past the first island chain into the blue-water Pacific.”
This is far from the first time that overseas observers have expressed concern about the strategic implications of China’s foreign investment drive, with EU ambassadors in Beijing recently signing off on a report that was harshly critical of the Belt and Road Initiative, and an Indian academic accusing the project of being a form of “creditor imperialism” last year.