Last week China’s foreign minister Wang Yi was obliged to come out in defence of Beijing’s practice of making hefty loans to developing countries, increasing their debt burdens. Unlike debts to Western countries, the developing world’s debts to China are benign, he insisted. Wang was speaking in Luanda, the capital of Angola, days after the African oil-exporter was forced to devalue its currency, the kwanza. Faced with dwindling foreign reserves and a mounting balance of payments crisis after its foreign debt – much of it to China – more than doubled in five years, the Angolan government had no option but to abandon the defence of the kwanza’s exchange rate and allow the currency to collapse.
Letting the currency sink won’t diminish the size of Angola’s foreign debt. But it will shrink the size of the government’s domestic liabilities relative to its oil revenues, freeing hard currency to service its external debt pile. In effect, the Angolan government is impoverishing its own people to pay its foreign creditors.
Clearly, Wang is sensitive to criticism over the role of Beijing’s loans in the crisis. In a statement the foreign ministry declared that “China had a painful experience of having its economy under the control of foreign countries … Therefore China will never do what the Western countries have done or impose its will on others.”
That is good to hear, because with its Belt and Road Initiative of lending to fund infrastructure development in countries across Asia to the Middle East and Africa, China shows every sign that it is doing in modern form just what the imperialist powers of Europe did in the 19th century. As history shows, debt-funded infrastructure projects have a nasty tendency to evolve into imperial debt servitude.
There is no shortage of examples, but perhaps the most striking is the modern history of Egypt. In the mid-19th century, the rulers of Egypt, the khedives – nominally viceroys of the Ottoman sultans, but in effect monarchs in their own right – looked towards Europe enviously. With abundant resources and human capital, Egypt should be just as wealthy and developed as the European powers, they decided. The key was modern infrastructure.
Successive khedives duly embarked on a massive programme of infrastructure development, including railways, roads, bridges, and most famously, the Suez Canal. That project was funded initially by a share issue in France. But when construction costs overran by double, the Egyptian government made up the shortfall, financing the canal and its other projects with loans from Europe.
The canal opened in 1869, and as with so many infrastructure projects, the revenues fell woefully short of expectations. By 1874, Egypt was in a full-blown foreign debt crisis. The forced sale of the khedive’s Suez Canal shares for £4 million to the British government in a debt-for-equity swap merely increased leverage exerted by London, whose banks had extended many of the loans. Anxious for a return on their capital, the British installed a new khedive, complete with a British finance minister, who proceeded to bleed the economy of revenues to service the government’s foreign debts.
Unsurprisingly, ordinary Egyptians took exception to this state of affairs, and in 1882 the Egyptian army revolted in an attempt to regain control of their country. Threatened with a default, the British sent a military force, which secured the canal and, after a couple of brisk battles, re-established the rule of the puppet khedive and his economic technocrats. It would be more than another 70 years before the Egyptians finally got rid of the British, asserting their independence by nationalising the Suez Canal.
This cycle of events – infrastructure projects funded with foreign loans, insufficient revenues to service the debt, financial crisis, a debt for equity swap and imperial economic servitude – might seem nothing more than a historical curiosity. But it is not difficult to detect evidence of the early phases of the sequence unfolding along China’s Belt and Road.
Consider Hambantota near the southern tip of Sri Lanka. Until a few years ago Hambantota was a sleepy fishing harbour. But former Sri Lankan president Mahinda Rajapaksa, who hailed from the neighbourhood, had a dream. He would build a giant port, complete with ancillary transport and industry, so that Hambantota would rival Singapore and Dubai as a transshipment centre.
He duly borrowed money from China to employ Chinese contractors to build his port, together with an attendant airport and connecting motorways. Altogether, in the space of a few years, Sri Lanka ran up debts to China of some US$8 billion.
The port opened in 2010, but cargo lines proved reluctant to switch from their existing transshipment hubs. With insufficient revenues to service its debts to its Chinese creditors, at the end of 2016 the Sri Lankan government concluded a US$1.2 billion debt-for-equity swap that saw a Chinese state company assume ownership of the port on a 99 year lease.
Of course, China hasn’t yet reached the stage of installing economic technocrats to dictate policy in debtor countries. Nor does it habitually deploy military “advisers” to ensure its investments are protected and its loans repaid. But it shows plenty of signs it is heading in that direction. For example, Beijing gave the nod to last year’s military coup in Zimbabwe, where it is the biggest investor. And Chinese security officers are increasingly reported to be advising the Pakistani military, which has been deployed in force to protect Chinese-funded infrastructure projects.
In short, China appears to be finding out what the imperial powers of Europe learned 150 years ago: anyone can build a road, but if you build a road in a tough neighbourhood, sooner or later you have to take responsibility for the traffic on that road, or risk losing your investment.
In that context, Wang’s protests last week that China will never do what the Western powers did begin to ring hollow. China insists that its loans always benefit the borrowers, and that its involvement in developing countries is entirely benevolent and in no way impinges on their sovereignty. But that is what the British always said about their presence in Egypt – no fewer than 66 times between 1882 and 1922. ■
Tom Holland is a former SCMP staffer who has been writing about Asian affairs for more than 20 years