Pakistan and China's debt trap diplomacy

US President Donald Trump's tough new approach towards Pakistan and suspension of over US$1 billion (S$1.32 billion) worth of security assistance may or may not get it to move meaningfully against religious extremists but there is little doubt over who the real winner will be of this bilateral bust-up: China.

The estrangement in ties will inevitably push Pakistan into China's orbit, allowing Beijing even more leverage as it goes about practising what has been called "debt trap diplomacy" for strategic gains in the region.

China's swift public declaration of support for Pakistan as its "all-weather partner" is an implicit rebuke of the United States. It comes as China is pushing ahead with its Belt and Road Initiative (BRI), a grand Eurasian project of which Pakistan is considered a key entry point.

As outlined by Chinese President Xi Jinping, this ambitious modern-day Silk Road calls for the creation of a network of railways, roads, pipelines and ports that would link China with its neighbours in Asia and beyond. Besides putting in place infrastructure critical for development, the aim is to create a platform for greater trade flows, economic cooperation and social exchanges.

But critics say there is a dark side to this mega-infrastructural endeavour : the BRI also functions as a major vehicle for China's debt trap diplomacy, which, in South Asia, has already ensnared Sri Lanka.

They point to a disturbing formula: Beijing extends massive loans to cash-strapped states with terms disproportionately favourable to China, including access to lucrative national resources or market entry for cheap Chinese goods.

Once constructed by Chinese-run firms, the projects oftentimes bleed money. As a result, the borrowing country is saddled with onerous debts that it cannot repay on time, or at all, rendering it more vulnerable to China's influence and control. Critics assert that the ultimate cost of the loan is nothing short of the borrower's economic sovereignty.

By making foreign countries financially dependent on China, debt trap diplomacy has proven effective in allowing Beijing to achieve multiple objectives simultaneously through purely economic means. These include creating markets for its cheap exports, gaining access to invaluable natural resources, ensuring support for its geostrategic interests from borrower nations, and garnering a competitive advantage over its rivals, chief among them, India and the US.

Viewed against this backdrop, President Trump's tweets blasting Pakistan could not come at a more fortuitous time for China.

Beijing had been confronting unexpected resistance from Islamabad over its US$62 billion China-Pakistan Economic Corridor (CPEC) in recent weeks. Part of the BRI, the corridor runs from the deep-water Pakistani port of Gwadar to China's Xinjiang province over the Arabian Sea.

Just last month, Pakistan withdrew from a US$14 billion mega-dam project under CPEC citing the stringent financing conditions China attached to the proposal. Officials worried that the debt servicing terms lacked adequate transparency and risked making Pakistan too dependent upon Beijing's largesse.

But now, Pakistan's increasing diplomatic and financial isolation from the US makes the consummation of Chinese plans under CPEC more likely. In fact, shortly after the US announced the suspension of aid to Islamabad, Pakistan's central bank announced it would finally begin using Chinese yuan for bilateral trade and investment between the two countries. More significantly, China's ambassador to Pakistan proclaimed that the country would expedite the timetable of CPEC's construction.

In this way, Pakistan risks becoming the latest victim of what has also been labelled China's "creditor imperialism". Just last month, Sri Lanka was forced to turn over control of its Hambantota port to a Chinese state-owned company under a 99-year lease deal after it was unable to repay the crushing debt the country incurred from Beijing to have it built in the first place.

Hambantota's strategic value is difficult to overstate, sitting at the intersection of several Indian Ocean trading routes connecting Europe, Africa and the Middle East to South Asia. Even after the US$1.1 billion lease agreement with Beijing, Colombo still owes more than US$7 billion in debt to China.

But Sri Lanka's experience with China should not be construed as a state-sponsored conspiracy by Beijing. Rather, it is a cautionary tale for other countries such as Pakistan about the danger of being ensnared by debt trap diplomacy and the importance of evaluating the true cost of doing business with China.

Across South Asia, the debate over the real cost of Chinese foreign investment rages on. Last November, Nepal abruptly cancelled a US$2.5 billion deal with China for the construction of a sorely needed hydroelectric dam.

Critics point to a disturbing formula: Beijing extends massive loans to cash-strapped states with terms disproportionately favourable to China, including access to lucrative national resources or market entry for cheap Chinese goods.

Nepalese officials were worried that the deal would align the country too closely with Beijing. And yet, recent reports have suggested that China finalised an agreement for one of its state-owned companies to build a different dam in the Himalayan kingdom, but not before first securing a 75 per cent ownership stake upfront.

The recent turbulence in US-Pakistani relations poses a complex set of questions for New Delhi. On the one hand, it has enthusiastically welcomed Washington's tough line on Islamabad, hailing the suspension of aid as a long overdue step. On the other hand, Indian officials are certainly aware that Beijing will inevitably exploit the US-Pakistani rift. India will not support any policy that could potentially destabilise Pakistan, and there is little it can do to prevent Beijing and Islamabad from further consolidating ties.

At the same time, India finds itself woefully unprepared to meeting the formidable challenges China's debt trap diplomacy has created for New Delhi. It has yet to formulate an effective strategy of its own that effectively confronts Beijing's steadily expanding influence both in the region and in the Indian Ocean.


 •The writer is an Affiliate at the South Asia Institute at Harvard University and a Law & Security Fellow at the New America think-tank.

A version of this article appeared in the print edition of The Straits Times on January 19, 2018, with the headline 'Pakistan and China's debt trap diplomacy'. Print Edition | Subscribe