Exploiting financial obligations

Aggressively employing geo-economic tools to advance its geostrategic interests, Beijing has extended huge loans to smaller states, ensnaring a number of countries in a debt trap. Such debt traps greatly strengthen its leverage over them.

Beijing’s debt-trap diplomacy scored a major success in December when Sri Lanka formally handed over its strategically located Hambantota port to China under a 99-year lease valued at $1.12 billion. The deal followed the small island-nation’s inability to pay the onerous Chinese debt it had accumulated. But another important development in the Indian Ocean region has attracted little attention: China has quietly acquired several islets in the heavily indebted Maldives, an archipelago of 1,190 tiny coral islands, of which only 188 are inhabited.

Among the unpopulated Maldivian islands, China has acquired on lease Feydhoo Finolhu, previously used for police training, and the seven-kilometre-long Kalhufahalufushi with a magnificent reef. It paid just $4 million for Feydhoo Finolhu — close to the capital Malé, where two-fifths of the nation’s total population of 425,000 is concentrated — and even less for Kalhufahalufushi.

From Djibouti to Gwadar, port projects that China insisted were purely commercial, have acquired military dimensions. After lending billions of dollars to Djibouti, China last year established its first overseas military base in that tiny but strategic state, located on the northwestern edge of the Indian Ocean. Beijing has already pressed its warships into service for the security of the Chinese-built Gwadar port, which, like Hambantota, it has taken over on a long-term lease, and is planning to establish a military base next to it. After Sri Lanka’s $500-million, largely-Chinese-owned Colombo Port container terminal opened in 2014, Chinese submarines arrived quietly and docked there.

Beijing has shown interest in turning one of Maldives’ uninhabited islands into a naval base. The Maldivian archipelago, spread across 900 km, is critical to security in the Indian Ocean, which has become the new focus of China’s attention after its success in changing the status quo by force in the South China Sea without incurring any international costs. About six months ago, three Chinese frigates visited the Maldives, docking in Malé and Girifushi Island and imparting special training to Maldivian troops.

The Maldives’ authoritarian president, Abdulla Yameen, has facilitated China’s island acquisitions in his country by amending the Constitution in 2015 to legalise foreign ownership of land. The amendment appeared tailored for China; the new rules for foreign ownership require a minimal $1 billion construction project that reclaims at least 70 per cent of the desired land from the ocean. Chinese support, meanwhile, has aided Yameen’s increasingly autocratic rule.

However, by awarding Beijing major contracts to finance and build infrastructure projects, Yameen is saddling the Maldives with mounting debt that is likely to prove unserviceable in a couple of years. With Maldives’ economy largely reliant on foreign-tourist inflows, government revenue last year totalled barely $1.5 billion.

Several of the countries that have fallen into, or risk slipping into, debt servitude to China are India’s immediate neighbours, including Bangladesh, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka. This holds major foreign-policy implications for India, which is seeing its influence erode in its own strategic backyard. By establishing a Djibouti-type naval base in the Maldives, China could open an Indian Ocean front against India in the same quiet way that it opened the trans-Himalayan threat under Mao Zedong by gobbling up Tibet, the historical buffer.

China’s strategy in southern Asia and beyond is aimed at fashioning a Sinosphere of trade, communication, transportation and security links. By financially shackling smaller states through projects it funds and builds, it is crimping their decision-making autonomy in a way that helps brings them within its strategic orbit. It is even replicating some of the practices that were used against it during the European-colonial period. One such practice is imposing a 99-year port lease. Just like some of the foreign ports it has acquired, Beijing is seeking Myanmar’s Kyaukpyu port on a 99-year lease in exchange for debt reduction.

The Chinese loans, offered at rates as high as 7 per cent, are promoting, as the International Monetary Fund recently warned, unsustainable debt burdens. The price that a crushing debt exacts can extend to national sovereignty and self-respect. For example, the handover of Hambantota was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving away his daughter to the cruel money lender.

In Pakistan, Chinese state companies have secured energy contracts on terms that include ownership of the plants and 16 per cent guaranteed yearly return — very high by international standards. In fact, the “economic corridor” that China is supposedly building across Pakistan has become a vehicle for a deep Chinese penetration of the Pakistani state, with most of the investment going into energy, agricultural and security projects unrelated to a corridor. Add to the picture Pakistani media accounts about projects-related corruption and the alleged use of Chinese convicts as labourers.

Against this background, the word “predatory” is increasingly being used internationally about China’s practices. Beijing has been slammed for its “predatory financing” and market-distorting “predatory behaviours.” Indeed, US Secretary of State Rex Tillerson has called China a “new imperialist power” whose practices are “reminiscent of European colonialism.”

Mao said, “Political power grows out of the barrel of a gun.” China’s domestic and foreign policies still reflect that. But with China emerging as the first major power in modern history without real allies, an additional principle is guiding its policy: Friendship flows from opening a fat wallet and ensnaring states in a debt trap. China is co-opting states in its sphere of influence by burying them in debt.

The author is a geostrategist and the author of nine books, including the award-winning “Water, Peace, and War”