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 market-led reforms, Deng Xiaoping, shifted the Chinese economy from a centrally-planned to a market-oriented economy, which is credited for the rapid economic and social development the country has experienced.
China’s sustained growth has lifted more than 800 million Chinese out of poverty in the past 40 years – providing key learning lessons to developing countries. World Bank reports show that China’s GDP growth has averaged 10 percent a year, making it the fastest sustained expansion by a major economy in history. With a population of 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.
Amid its growing influence on the international stage, China launched an ambitious programme in 2013 dubbed the Belt and Road Initiative (BRI); a massive trade and infrastructure project that aims to link China to the world’s economies.
In its quest to promote economic growth globally, China, through financial institutions such as the Bank of China and the Export-Import Bank of China has offered countries a combination of grants, interest-free loans and concessional loans, credit lines and development loans for the BRI projects.
These projects involve huge financial lending to countries to build or re-build their infrastructure to promote sustainable growth and development, receiving global acceptance and demonstrating a vote of confidence in China’s global development agenda. Critics of this Chinese agenda have poured cold water on it, renaming it “debt-trap diplomacy” or “debt colonialism” by China.
The “debt colonialism” fallacy has been backed by claims that China is leveraging massive loans it holds over small countries globally to snatch assets and increase its footprint, either as a superpower or superpower-to-be.
In supporting the BRI programme, China has issued loans to Montenegro, Djibouti, Kyrgyzstan, Papua New Guinea, Samoa, Pakistan, Maldives, Laos, Fiji, Sri Lanka, among others. In Africa, Ethiopia, Kenya, Uganda and Tanzania, among others, owe China. These loans have largely been used to build infrastructure in transport, communication, manufacturing and energy sectors.
Opponents of BRI have indicated that countries such as Sri Lanka, Zambia, Djibouti and Pakistan are in danger of falling into China’s “debt trap”. It is said that China plans to take control of key infrastructure either as a cover or a cushion for its loan repayments from the defaulting countries. But what critics of BRI have failed to understand is that China offers some of the best loan terms – including ample grace period and flexible repayment plans.
Another misconception about the Chinese loans is that it’s the largest component in the debt matrix of these borrowing countries. In Africa, Chinese loans still remain a small part of the total external debt owed.
According to China-Africa Research Initiative at John Hopkins’ School of Advanced International Studies, Chinese loans to Africa were estimated at Sh11.4 trillion between 2000-2016 representing 1.8 percent of Africa’s total debt. This debunks the impression that China is choking developing countries with debts.
What Chinese loans have done is to diversify these countries’ loan portfolios to avert any risk associated with over-reliance on one borrower. Another key benefit of Chinese loans is that they are purely earmarked for infrastructure development – a prerequisite for economic growth.
The African Economic Outlook 2018 Report published by the African Development Bank Group indicates that for Africa to achieve the projected 4.1 percent GDP growth in 2019, there is need for infrastructure investment in the range of Sh13 – 17 trillion a year. This is one of the compelling reasons Africa needs Chinese funding for its economic prosperity.
At the Johannesburg Summit of the Forum on China-Africa Cooperation (FOCAC) held in December 2015, China pledged Sh6 trillion to assist Africa build its infrastructure, of which Sh3.5 trillion was concessional foreign aid loans, preferential loans and non-preferential export buyer’s’ credits. Chinese loans offer developing countries a good platform for technological transfer and assist in building capacity for the locals.
At the Beijing FOCAC Summit in September 2018, China extended Sh6 trillion to support Sino-Africa cooperation. Empirical evidence reveals that China’s financial intervention has a positive impact on debt tolerance as it stimulates exports, expands infrastructure investment and increases countries’ Gross National Product.
Developing countries must learn that China is a solid development partner with their interest at heart and that it’s upon them to ensure loans advanced are utilised accountability.