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Actions Speak Louder Than Words
Why the so-called China "debt trap" allegation is anti-development and farcical
By Benard Ayieko  ·  2019-01-23  ·   Source: NO. 4 JANUARY 24, 2019

A worker readies shoes at a Chinese-invested factory in the Eastern Industry Zone in Addis Ababa, Ethiopia, on December 7, 2018 (XINHUA)

A few years ago, no one would have thought that China's role in the global economy would be what it is today. The architect of China's reform and opening-up policy, late Chinese leader Deng Xiaoping, shifted China from a centrally planned to a market-oriented economy, credited for the rapid economic and social development the country has experienced.

China's sustained growth has lifted more than 700 million citizens out of poverty in the past 40 years, providing key lessons to other developing countries. Better still, China has demonstrated its prowess in economic development by reaching all the Millennium Development Goals (MDGs) by the deadline of 2015, and making a major contribution to the achievement of the MDGs globally. With a population of nearly 1.4 billion, China is the second largest economy in the world and is increasingly playing an important and influential role in the global economy.

China has been the largest single contributor to world growth since the global financial crisis of 2008. Amid its growing influence on the international stage, China launched an ambitious program in 2013 dubbed the Belt and Road (Silk Road Economic Belt and 21st-Century Maritime Silk Road) Initiative. It aims to build a trade and infrastructure network that links China to other world economies. In its quest to promote economic growth around the world, through financial institutions such as Bank of China and the Export-Import Bank of China, China has offered partner countries a combination of grants, interest-free loans, concessional loans, credit lines and development loans for Belt and Road projects.

These projects involve huge financial loans to recipient countries to build or rebuild their infrastructure for promoting sustainable growth and development. They have also gained acceptance and currency worldwide, demonstrating a vote of confidence in China's new global development agenda. Sadly, critics of this strategy continue to pour cold water on it, choosing to rename the strategy "debt trap diplomacy" or "debt colonialism," accusing China of trying to colonize smaller countries by lending them huge amounts of money that they cannot repay with the sole purpose of dominating the world.

'Debt colonialism' fallacy

Claims that China is leveraging massive loans that it holds over small states to snatch up their assets and increase its military footprint either as a superpower or superpower-to-be are behind the "debt colonialism" fallacy. In supporting the Belt and Road Initiative, China has issued loans to countries such as Montenegro, Pakistan, the Maldives, Laos and Sri Lanka, according to data from the Center for Global Development.

In Africa, countries like Ethiopia, Uganda, Tanzania, Rwanda and Burundi also borrowed money from China. These loans have been largely used to build infrastructure in the transport, communications, manufacturing and energy sectors of the countries' economies.

Reports circulating in local and international press fueled by opponents of the Belt and Road Initiative, who are against infrastructure advancement in developing countries, indicate that at least eight countries are in danger of falling into China's so-called "debt trap." These countries include Sri Lanka, Zambia, Djibouti and Pakistan, among others. But what critics of the Belt and Road Initiative, which involves lending money for key infrastructure development, have failed to understand is that China offers the best loan terms, including an ample grace period for projects to be completed before the loans start accruing interests and repayments due.

Even former U.S. Secretary of State Rex Tillerson, while castigating the Chinese loan policy to developing countries, acknowledged that Chinese investment "does have the potential to address Africa's infrastructure gap." What this means is that Chinese loans are not supply-driven, but demand-driven, and go to countries that have identified key projects to drive their growth yet have cash shortages for such huge capital intensive projects.

Another misconception about Chinese loans is that it's the largest component in the debt matrix of borrowing countries. In Africa, Chinese loans still remain a small part of the total external debt owed by African countries. According to the China-Africa Research Initiative at John Hopkins' School of Advanced International Studies, Chinese loans to Africa were estimated at $114.4 billion between 2000 and 2016, representing 1.8 percent of Africa's total debt. This amount is insignificant and contrary to the impression created that China is choking developing countries with debt.

Loans for infrastructure

What Chinese loans have done is to diversify recipient countries' loan portfolios to avert any risks associated with overreliance on one borrower, while at the same time trying to reduce Africa's debt burden.

Another key benefit of Chinese loans is that they are purely earmarked for infrastructure development such as the construction of gas and oil pipelines, shipping lanes, railways, roads, ports and economic corridors, among others. This kind of infrastructure is a necessary prerequisite for development, especially in Africa. It's the foundation on which sustainable economic growth and development is built.

The African Economic Outlook 2018 report published by the African Development Bank Group indicated that for Africa to achieve the projected 4.1 percent GDP growth in 2019, it needs infrastructure investment in the range of $130 billion-$170 billion a year. This is one of the compelling reasons why Africa needs Chinese funding for its economic prosperity.

Another advantage of Chinese loans to developing countries is that they are mostly concessional loans that carry low interest rates and favorable repayment plans.

At the Johannesburg Summit of the Forum on China-Africa Cooperation (FOCAC) held in South Africa in December 2015, China pledged $60 billion to assist Africa in building its infrastructure, of which $35 billion were in concessional foreign aid loans, preferential loans and non-preferential export buyers' credits. Chinese loans offer other developing countries a good platform for technological transfer and promotion of efficiency. Chinese loans are GDP growth stimulants and Chinese-financed large projects are combined with industrial projects, which assist in translating each party's advantages into more tangible outcomes of cooperation, thereby offering solid ground to realize sustainable economic growth.

At the FOCAC Beijing Summit held in September 2018, China again extended $60 billion to support China-Africa cooperation. This includes $15 billion in grants, interest-free loans and concessional loans, $20 billion in credit lines, a special $10-billion fund for development financing, and a special $5-billion fund for financing imports from Africa.

As the blossoming China-Africa relationship continues to attract divergent global debates, mainly from Africa's old donors in the West, it should be noted that China has offered debt relief and grants to many developing countries worldwide.

Empirical evidence shows that China's financial investment has a positive impact on debt tolerance as it stimulates exports, expands infrastructure investment and increases recipient countries' gross national product. Developing countries, particularly those in Africa, must learn that China is a solid development partner with their interests at heart and that it's incumbent upon them to ensure that the loans are utilized transparently and accountably to promote prosperity in Africa and beyond.

The author is an economist, consultant and regional commentator on trade and investment based in Nairobi, Kenya

Copyedited by Rebeca Toledo

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