China’s economic miracle, of the last 15-20 years, built on the back of debt and liquidity, and investing for an export driven economy have defined commodity prices, and global geopolitics. As per some estimates, China’s total debt in the 21st century tops 300% of its GDP, and at an estimated US$40 trillion accounts for 15% of all global debt.
But arguably, between the year 2006 and 2019, the export miracle never really materialized with net exports accounting for only about 2% of the total rise in Gross Domestic Product (GDP).
However, there is yet another aspect of the China story which is not as appreciated as one believes it should be – Chinese investments in other countries, a strategy that appears to be driven by foreign policy, than economic considerations. As per data compiled by the American Enterprise Institute and The Heritage Foundation, these have totaled a staggering US$ 2 trillion in the last 15 years. For perspective for the scale of this investment, note that US$ 2 trillion is roughly equal to the increase in the size of India’s total GDP between 2004 and 2019.
Of the total US$2 trillion investment, US$1.2 trillion was via investment in equity, and US$829bn was in the form of “construction contracts” to be executed in various countries. Generally speaking, equity investments were the primary mode of investment in developed countries, while construction contracts were more prevalent in developing nations.
Interestingly, the top 10 destination of construction contract led investment by the Chinese were all Islamic/ majority Islamic countries. And cumulatively, these countries accounted for 34% and US$ 282 billion of the investment mix.
The contracts are tilted in China’s favour as the contractor in almost all cases appears to be a Chinese company. These contracts are executed in the host country by Chinese companies, using Chinese equipment, and mostly Chinese manpower. It is also possible that the project finance is also provided by China to host countries to execute these projects. If this is to be believed, the profits, salaries, taxes and other gains are all recorded by China for these projects.
Payments for executing these projects can stress the host country’s external balance sheets. For example, the consolidated external debt of the top 10 countries rose by five times between 2004 and 2019, and has brought economically weaker countries like Pakistan to the brink of bankruptcy.
Also, the countries that are unable to service the debt associated with these projects tend to lose key national assets to China. For instance, Sri Lanka (total investment: US$13.8 billion, of which US$10.2 billion via construction contracts) reportedly had to cede control of its strategic Hambantota Port to China in 2017. In 2019, there were reports that Kenya may lose its prestigious Mombasa port to China as compensation for non-repayment of its loans.
Pakistan owes China some US$90 billion for the beltway projects being executed in its territory. Most of these repayments are scheduled to be made before 2037-38. Pakistan, which is already on the edge of economic ruin, seems unlikely to be able to make these payments, and it remains to be seen what strategic assets it loses to China by then.
Also, this vice like grip that China has on Islamic countries through its ‘debt-plomacy’ may explain why these countries are silent to the alleged Chinese excesses against its Muslim population.