This year has witnessed several nations grappling with chaotic economic crises. Many of them are heavily indebted, and most of them are part of China’s Belt and Road Initiative (BRI). Meanwhile, Minxin Pei, a professor of government at Claremont McKenna College said that Beijing is falling into a debt trap it dug for others.
On June 22, Sri Lanka’s prime minister said the economy has completely collapsed. On June 23, Pakistan’s Prime Minister said there might be tough times ahead as the country grapples with its current economic downturn. Laos, a Communist state, is under threat of a potential default on its international loans. Bloomberg said the country is facing similar strains as that of Sri Lanka.
These countries, and many others, received hundreds of billions of dollars in Chinese loans in the past 15 years. Now, they are facing a weakening currency, resource shortages, and public outrage.
Minxin suggested that it is pointless pressuring impoverished nations such as Sri Lanka to pay back loans while it is in the midst of an economic crisis. He said the economic woes these nations are undergoing might be worse than the 2008 global financial crisis.
Some have owed China more debts than they can see on the table. In 2018, economist Carmen Reinhart, now the chief economist of the World Bank, and her co-workers estimated that China’s undisclosed loans to developing countries account for at least 15% of their GDP.
Hopes for some income from the infrastructure projects may be low, also because the community is debt-ridden and cannot afford to pay for the services.
Furthermore, Minxin viewed that China cannot afford to forgo the debts to these nations. The balance sheets of China’s state-owned banks, which provided these loans, will be destroyed if the debts are completely written off. Beijing will ultimately be responsible for covering its losses.
Minxin commented, “China will not only lose its money but trash its reputation in the process.”
According to the American professor, in order to save its reputation and reduce losses, the best course of action for China is to take a multifaceted approach.
This includes restructuring its debt, lowering interest rates, suspending debt repayments, and extending loan terms to avoid the threat of debt default.
At the same time, Minxin believed China should cooperate with other international donors and creditors to help the countries. This would help China re-establish its leadership role on a global scale, spearheading an economic fracas. Although, ironically, the fracas was created by Beijing itself.