Bangkok It was about airports and motorways, ports and railway lines. Many already heavily indebted countries have fulfilled their expensive dreams with the help of China in the past – now they are suffering from a loss of control. The global economic crisis drives them into bankruptcy, but former wish-granters China often thwarts their debt relief efforts.
Sri Lanka, Kenya, Argentina and other countries have thus ended up in an ominous relationship of dependency: Beijing has long since decided on their future.
Take Laos, for example: the country is one of the poorest in Asia, but the Southeast Asian landlocked country does not have to do without expensive infrastructure. The most expensive construction project is about 20 kilometers outside of the capital Vientiane. The new main station of a high-speed line stretches between fallow fields – financed by extensive loans from China. Since December, an express train has been hissing from here every morning to the Chinese border, 400 kilometers away.
The construction cost around six billion dollars – and thus significantly increased the country’s already enormous mountain of debt to China. With the deal, the communist government in Vientiane has cemented a remarkable status.
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Measured in terms of economic output, no other country in the world is so dependent on loans from China. According to a study by the research institute Aid Data, Laos’ public debt to the People’s Republic accounts for around 65 percent of gross domestic product – a global high. But Laos can hardly cope with the huge mountain of debt.
The country of seven million people is in a deep economic crisis and is on the verge of insolvency. The country in Asia is not alone in this.
China’s other major debtors, such as Pakistan, are also having increasing problems servicing the billions in loans.
Sri Lanka must ask China for debt relief
Example Sri Lanka: The island state is already broke – and is now trying to get a debt relief. As in many other emerging countries, the readily available money from China has been very welcome to the Sri Lankan government for years.
Until now, most of China’s struggling business partners could rest assured that Asia’s superpower would not let them down. According to calculations by Aid Data, in the past five years China has granted around 33 billion dollars in emergency loans to Pakistan, Sri Lanka and Argentina alone. According to the organization, countries such as Laos, Ecuador and Kenya have also received further financial aid from Beijing.
But China’s will to keep the debtors afloat has its limits. In the case of Sri Lanka, the government in Beijing turned off the money supply this year after a series of additional cash injections.
Sri Lanka is insolvent, the country lacks everything.
(Photo: IMAGO/NurPhoto)
The result was the first sovereign default in Asia-Pacific in decades, leaving the country with acute fuel, food and medicine shortages. Mass protests ensued and the government was overthrown.
Laos also experienced massive bottlenecks in fuel supplies at times this year. Because the local currency, the kip, has depreciated by a third against the dollar since the beginning of the year and the currency reserves have melted away, the country could hardly afford any more imports.
Although the situation has calmed down somewhat in the meantime, the population is still suffering from an inflation rate of 34 percent. And the rating agency Moody’s warns: “The default risk will remain high in view of a very weak government, a very high debt burden and insufficient coverage of the foreign debt due by foreign exchange reserves.”
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However, observers consider it unlikely that China will allow further insolvency after Sri Lanka’s state bankruptcy. “China is unwilling to bear the financial and political consequences,” believes Toshiro Nishizawa, a professor of politics at the University of Tokyo. The willingness to accept loan defaults at Chinese banks is too low – and the concern about a further loss of reputation for China’s controversial “Belt and Road” initiative, under which the billions in loans for infrastructure projects were granted, is too great.
Laos is one of the poorest countries in Asia and particularly dependent on Chinese loans.
(Photo: imago images/Xinhua)
However, diplomats in Vientiane expect that further aid – such as an extension of the credit period – will also lead to a further growing influence of China. Two years ago, amid financial turmoil, Laos handed control of its power grid to a majority Chinese-owned company.
In addition, Chinese investors operate several so-called special economic zones in Laos, some of which operate like Chinese enclaves – with Chinese street names and the yuan as the official currency. Observers suspect that Laos could be forced to cede further areas in the future.
So far, China has not agreed to haircuts
Similar experiences have also been made in Sri Lanka. The country had to cede control of the strategically important port of Hambantota to a Chinese company for a period of 99 years after it could no longer service the debt for the construction project.
Now the government in Colombo is once again dependent on China: the International Monetary Fund (IMF) has in principle approved a $2.9 billion aid package for the bankrupt state. Before money can flow, however, the country must agree on debt relief with its most important creditors.
China’s Belt and Road loans to Sri Lanka total around $7 billion. So far, however, the country has not shown any willingness to agree to debt relief.
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Sovereign creditors from the so-called “Paris Club” — an informal coalition of largely Western nations — have approached both China and India with a desire to jointly coordinate debt restructuring negotiations. There hasn’t been an answer yet. “Talks about a debt restructuring become extremely difficult when the big creditors cannot even agree on how the negotiations should be set up,” commented Brad Setser, sovereign debt expert at the US think tank Council on Foreign Relations (CFR).
Sri Lanka’s government is nevertheless optimistic. “We are sure that China will help us in these difficult times,” Sri Lanka’s President Ranil Wickremesinghe told his country’s parliament earlier this month. “We now expect to come to a joint agreement as soon as possible.”
Sri Lanka’s Prime Minister has to ask China for debt relief because his country has defaulted.
(Photo: AP)
China is currently not only confronted with negotiations about bad loans in Asia: there are also similar problems in Africa and South America. In talks with Ecuador in September, China agreed to $1.4 billion worth of debt relief. In the case of Zambia, China is currently negotiating a solution with other creditors.
In addition, the government in Beijing announced in August that it would waive interest-free loans for 17 African countries – but this is only a small part of Chinese loans on the continent.
The US is putting the pressure on
Western countries call on China to do more: It is vital that all of the world’s major bilateral creditors participate meaningfully in debt relief to help low- and middle-income countries get back on their feet, US Secretary of State Janet Yellen said earlier this month.
This applies in particular to China. “So far, China has confronted debtors in an emergency situation with delays or offered solutions that are insufficient to restore the debtor’s debt sustainability.” China’s foreign ministry had previously rejected similar allegations from the United States and stressed the responsibility of Western creditors .
Meanwhile, China’s debtors are preparing for the fact that the investments financed by Beijing will remain a subsidy business for a long time to come. The Lao government hopes the bullet train can be profitable in 23 years.
The country paid for the high-speed line from the capital Vientiane to the Chinese border with Chinese loans.
(Photo: imago images/Xinhua)
But even this long period of time still seems ambitious. Ticket sales are sluggish, partly because there is no way to book tickets online.
They are also quite expensive by local standards: the price of a round-trip ticket to the Chinese border is almost 70 percent of the monthly income of a minimum-wage earner. The demand is therefore limited – and the huge departure hall in Vientiane with its around 1000 seats is regularly largely empty.
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