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China and the Debt Trap
The 93-year-old Malaysian Prime Minister Mahathir Mohamad appears to have done something that legions of critics have been largely unable to do and that is to awaken suspicion of China’s Belt and Road Initiative, which is leading a long list of nations into what has been called a debt trap.
Mahathir, speaking in Beijing during an August state visit, delivered what the Manila-based Pacific Strategies & Assessments risk firm called “the most significant rebuke yet with respect to China’s foreign investments and its Belt and Road Initiative (BRI). The Prime Minister cautioned against creating “a situation where there’s a new version of colonialism happening because poor countries are unable to compete with rich countries in terms of just open, free trade…It must also be fair trade.”
Mahathir is quoted in other venues as saying “I believe China itself does not want to see Malaysia become a bankrupt country” while putting a list of expensive projects signed up for by Mahathir’s predecessor Najib Razak on the back burner.
“The projects will not go on,” Mahathir said. “At the moment, the priority is reducing our debt. It will be deferred until such time when we can afford, then maybe we will reduce the cost...If we have to pay compensation, we have to pay. This is the stupidity of the negotiations before. We must find a way to exit these projects. This is our own people's stupidity."
The remarks carry special weight, PSA said, because Mahathir “first made a name for himself boldly lambasting ‘Western colonialism,’ and because up until very recently, Malaysia had been on a Chinese-funded spending boom. Now, the second time the Prime Minister is asking tough questions about the value such investments have had in his country, and around the world.”
Mahathir has since announced the cancelation of several Belt and Road projects initiated under the previous government, including the US$20 billion East Coast Rail Link project and the US$2 billion Sabah pipeline project, both of which were subjects of Asia Sentinel stories.
As PSA points out, “Mahathir’s concerns over a possible ‘new colonialism’ are supported by cautionary tales from multiple parts of the world, including Pakistan, Venezuela, The Maldives and Zambia. Of particular concern has been China’s acquisition of geopolitical and resource concessions from countries that found themselves unable to service their debts.
In Greece, China gained operating rights over the strategic Port of Piraeus in 2008 amidst Greek economic woes and has recently increased its ownership stake. In Sir Lanka, as Asia Sentinel reported, China secured a 99-year lease over the Hambantota port after that nation found itself unable to service the debt for the port’s development. China has seemingly leveraged its position in heavily-indebted, and strategically-located Djibouti to secure rights to a military base – which is located alongside a vital US installation also in that country. Asia Sentinel has also highlighted how China’s new Silk Road will entail the forward deployment of security assets to safeguard those trade routes.
The Philippines, according to PSA, has largely escaped these economic misfortunes, with the likelihood that the country would fall into a debt trap appearing be quite low – particularly if the last two years are any indication for the prospects of future Chinese infrastructure loans.
But “While the likelihood of the Philippines falling into a debt-trap is low, the experience of other nations along the Belt and Road highlight the need to carefully consider the implications of development financing, particularly in light of the ongoing territorial dispute in South China Sea. According to political commentator Richard Heydarian, ‘more than the risk of falling into a debt-trap,’ the real issue is that the administration has ‘forward deployed all manner of geopolitical concessions,’ in response to Chinese pledges which have not materialized.
While the Philippines is unlikely to see levels of Chinese capital influxes that would cause a debt-trap, PSA says, such capital may pose risks nonetheless. “Corrosive capital,” a term coined by the Center for International Private Enterprise (CIPE), is a catch-all that denotes the types of investments that corrode the local economy, which that organization has linked to Chinese and Russian development projects, particularly in authoritarian-leaning countries. The Full CIPE Report is here.
Many Chinese investments in the Philippines have been geared heavily towards gambling and real estate, partially at least, because capital has been fleeing Macau because of ever-increasing regulation.
“These real estate investments may have a crowding out effect on local buyers,” PSA says. According to Lester Yupingkun, managing director of Strongbond Products Philippines: “[Now] there are condos populated entirely by mainland Chinese. The share of the Filipino middle class on the other hand has been shrinking.” China’s Impact on the Real Estate Market can be found here.
Threat from organized crime
Aside from driving up real estate prices, the heavily concentrated investment in gambling operations may bring unwelcome externalities – namely organized crime. “This area of industry (gambling),” one economist PSA Consultancy spoke to said, “obviously carries an undercurrent of criminality, including money laundering and drugs.”
The line between illegal activities and the legalized gaming industry in the Philippines often blurs, PSA said, One feature of this has been the emergence of the niche trade of ‘Casino financier’ – the presence of high-stakes gaming operations invites some opportunists to engage in loan sharking, money laundering, or other related illegal trades.
Another of the potentially corrosive effects is the emergence of a parallel economy to satisfy the needs of an ever-increasing Chinese national workforce in the Philippines. The Department of Labor and Employment (DOLE) record only 40,000 Alien Employment Permits (25,000 for Chinese nationals). However, Liberal Party Senator Frank Drilon recently stated he believed there were closer to “400,000” foreign workers in the country. There is a growing consensus among informed sources that a figure of 100,000 to 200,000 undocumented Chinese workers in Metro Manila was “highly credible.”
Calls for Transparency
Several lawmakers have raised concerns over the lack of transparency with respect to ‘Build, Build, Build,’ and with a particular focus on Chinese financing, especially as a growing number of academics, pundits, and foreign leaders have drawn attention to China’s so-called “debt-trap diplomacy.” Indeed, a number of lawmakers have made direct reference to national security concerns.
Xi Jinping’s Coming State Visit
According to Budget Secretary Benjamin Diokno, “at least” 10 additional loans, relating to projects that will cost PHP265 billion (US$4.9 billion) are expected to be penned.
Political commentator Heydarian believes that the under-delivery of Chinese financing, as well as the opaque nature of what has been delivered, may very well become midterm campaign issues. In addition to concern over dealings with China, Heydarian points to the recent rice issue, ongoing inflation woes, as well as the arrest of opposition Senator Antonio Trillanes, as a set of issues around which both “opposition, and maybe even some independents,” could become very vocal about. “The Administration here, as well as Beijing,” Heydarian added, “are aware of the fact that the strategic pivot to China cannot be sustained for much longer without something to show for it.”
Other analysts are more skeptical of significant political pushback in the current political climate. “The issue of Chinese financing of infrastructure loans is too important for the administration for the matter to become a serious issue to be tackled by political independents or administration allies” another analyst told PSA.