Silk Road Headlines_10th May, 2019

The second Belt and Road Forum held last month in Beijing brought renewed attention to the role of debt in regard to BRI. Since last year’s surge in international media and think tank reports that concluded that BRI is being built on ‘debt-trap diplomacy’, a modern version of what used to be called financial imperialism, new research has been done on this issue. The China Africa Research Initiative at Johns Hopkins University found that in most African countries that are experiencing difficulties in repaying debts, lending from non-Chinese sources accounts for a majority of their public debt. This study concludes that ‘fears that the Chinese government is deliberately preying on countries in need are unfounded’ [Is China the World’s Loan Shark?].

Rhodium Group, too, published results from a study on this issue [New Data on the ‘Debt Trap’ question]. According to Rhodium’s investigation, debt renegotiations between China and BRI countries are common. While this points to borrowing countries experiencing distress, asset seizures are rarely the outcome of these renegotiations: ‘Debt renegotiations usually involve a more balanced outcome between lender and borrower, ranging from extensions of loan terms and repayment deadlines to explicit refinancing, or partial or even total debt forgiveness (the most common outcome)’. Another notable finding is that borrowing countries are often able to obtain a favourable outcome and that China’s bargaining position is often quite limited. Two of the factors that Rhodium identified as giving borrowing countries more leverage are access to alternative financing sources and a change in political leadership.

The implications of these findings are important. Debt is a major element in BRI, but there are significant limitations to China’s ability to use debt as a tool for geopolitical influence. Borrowing countries are learning from each other’s failures and successes in negotiating with China.

By Clingendael