The Perils of China’s “Debt-Trap Diplomacy”

September 10, 2018


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Malaysia-China Relations:The Perils of China’s “Debt-Trap Diplomacy”

Malaysia’s rethink of Chinese belt-and-road projects has lessons for other countries

 Print edition | Asia

IN AUGUST, three months after his opposition coalition trounced the Malaysian party that had ruled since independence, Mahathir Mohamad, the country’s 93-year-old new Prime Minister, travelled to Beijing. His aim was to tell President Xi Jinping that his country was now the Malaysia that can say no.

Dr Mahathir’s predecessor, Najib Razak, had hewed close to China. His loss at the polls resulted more than anything from the stench of corruption within his ruling United Malays National Organisation (UMNO). But his chumminess with China was also a factor. The two issues were entwined.

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Najib Razak–Malaysia’s Voleur

During Mr Najib’s rule, huge holes appeared in the finances of a state investment vehicle, 1MDB, which Mr Najib chaired. America’s Justice Department estimates that $4.5bn was stolen from the fund by insiders. (Around the same time, nearly $700m turned up in Mr Najib’s own bank accounts.) As 1MDB teetered, Chinese state entities stepped in, taking stakes in 1MDB ventures.

The relationship with China grew ever cosier. Chinese-funded projects in Malaysia were packaged as part of China’s Belt and Road Initiative, a global infrastructure-building scheme close to Mr Xi’s heart. Jack Ma of Alibaba, a Chinese tech giant, won the right to turn a site near Kuala Lumpur’s main airport into a Digital Free Trade Zone. Malaysia’s government tried to silence criticism of its state-to-state dealings. And China showed its gratitude. In the run-up to Malaysia’s general election in May, the Chinese ambassador appeared to lend open support to the ruling coalition. Many people were surprised that Dr Mahathir managed to win, despite UMNO’s gerrymandering. Mr Xi had reason to be aghast.

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China is not used to recipients of its largesse challenging the terms on which it is offered. Yet growing numbers of them are struggling with debts to Chinese entities taken on to fund Chinese-staffed projects. The Centre for Global Development in Washington reckons that eight belt-and-road countries are at “particular risk of debt distress”, among them ones that border on China: Laos, Mongolia and Pakistan. That is why Dr Mahathir’s progress in disentangling his country from Chinese-funded ventures is being closely watched.


In Beijing Dr Mahathir was plain-speaking and deft. He said that Malaysia was cancelling the $20bn East Coast Rail Link, a massive belt-and-road project, as well as two oil pipelines in Sabah province. His message, in essence, was: very sorry—lovely projects, but since coming to office we’ve discovered we can’t afford them. Implicit was another point: we can’t afford them because we now know how inflated the costs are, and how skewed the deals are in China’s favour—or plain fishy. It appears the Najib government paid nearly 90% of the $2bn price of the Sabah pipelines, although they were only 15% complete. Part of a Chinese loan for them appears to have plugged financing gaps at 1MDB.

Since Dr Mahathir’s return, he has gone further, taking aim at a large, Chinese-led housing scheme in Johor state intended for wealthy investors in China. This week the Prime Minister declared that foreigners would not be given visas to live there. Most Malaysians, he complained, could not afford to live in the new development. (The government in Johor makes more reassuring noises to foreigners who might be interested.)

China has a tendency to launch into tirades against countries that confront it. In this case the response from Beijing has been muted. That may be partly because of Dr Mahathir’s careful choice of words. But Malaysia is an influential country in South-East Asia, a region that China wants to draw closer into its orbit. And China does not want to make enemies among belt-and-road countries. One of the main points of the project is to boost China’s influence over them. For other countries badly needing to renegotiate their deals with China, that is a lesson worth learning.

Of these, Pakistan, which also has a new Prime Minister, Imran Khan, is by far the biggest debtor to China. The China-Pakistan Economic Corridor, a collection of energy and infrastructure projects supposedly worth $60bn, is the biggest plank of China’s belt-and-road strategy. Not for the first time, Pakistan faces a balance-of-payments crisis. It wants out of its debt.

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Mr Khan ought to do a Mahathir. And he is in an even better position. Far more than with Malaysia, there is a strategic dimension to China’s relations with Pakistan, says Husain Haqqani, a former Pakistani diplomat who is now at the Hudson Institute, an American think-tank. Officials in Beijing see Pakistan as a counterweight to India, China’s geostrategic rival. China needs Pakistan’s help in keeping Islamist extremism at bay. And it regards its neighbour as a vital route to the Arabian Sea. Unlike Dr Mahathir, Mr Khan himself seems not to grasp the problems of China’s debt embrace. But at least critics in Pakistan of the economic corridor are beginning to find their voice.

Debt divisions

China has more than its political ties with belt-and-road countries to consider. Chinese banks are getting worried about the safety of their lending. Commercial banks have sharply cut new belt-and-road financing since 2015. (So-called policy banks continue to lend.) And now the Belt and Road Initiative faces strong popular criticism at home. In part, the initiative is a victim of the Communist Party’s own propaganda: what debtors see as hard-to-service loans, state media paint as beneficent “aid”. That is a touchy word. At a summit in Beijing this week with African leaders, Mr Xi promised $60bn for the continent. Why, Chinese people asked on social media, is an indebted China spending so much abroad when it has pressing requirements at home? Censors rapidly shut down their criticisms of Mr Xi’s gesture.

China is right that many countries need more roads, railways and other infrastructure. But it is evident that the scheme it touts as a defining one of Mr Xi’s rule is losing its shine. Dr Mahathir’s trip may have taught some valuable lessons.

This article appeared in the Asia section of the print edition under the headline “Can’t pay”


8 thoughts on “The Perils of China’s “Debt-Trap Diplomacy”

  1. When you want to borrow money you pledge to repay with collateral as guarantee, pretty normal like any commercial loan. If you can’t pay the banks seize your property. It is that simple. Western countries, particularly America, have plenty of experience and they know how difficult it is in collection when their loans to the third world countries come maturity. They know China will face the same problems. Thus come their propaganda “debt trap” to taint China’s BRI.

    Perhaps Ken Moak of Asia Times, who taught economic theory, public policy and globalization at university level for 33 years, can better tell you something about “debt trap”:

  2. Doesn’t the country offering to “lend” to another have an obligation to properly examine the borrower’s need for the money and ability to repay?

    Bravo to our PM for pointing out to our giant neighbour that we stand to be crushed if we do not rethink their entire BRI programme towards Malaysia…

    • Alternative view point:
      Looks like Mahathir, like LGE, is taking every opportunity to demonize Najib. Sure most of the crimes are true – like stealing from GST refunds, 1MDB, etc. But projects that have signed agreements and contracts are different things – Malaysia entered into them with eyes wide open (or are you going to say eyes wide shut?). And without a gun pointed at you. If there is any unfairness in the terms, it is Najib’s desperation.

      What if maybe, just maybe, Mahathir wants to cancel these contracts because he and his cronies did not have their fingers in these pies. Maybe he wants to give it to the Japanese so that the gravvy flows to him and his cronies.

      Just speculating.

    • I agree with you, IM, and also with most others here. Lenders should also have some responsibility, but if that dictum had been followed, we wouldn’t have the riots in Suharto’s Indonesia, the many regime changes in Brazil and other parts of Latin America, etc. Should China be held at a higher moral standard than the Western controlled IMF/World Bank? I think it should, as that country had, at least a generation ago, prided itself as a supporter of formerly colonised nations. Since 1978, however, tens of thousands of young Chinese had gone to the West to be brainwashed by neoliberal ideology where the profit motive comes first. Many in this group are now advisors to the CPC and otherwise entrenched in many Chinese institutions.

      Those Chinese neoliberals should’ve learned from the 2008 US subprime crisis in which banks, many knowing full well their clients would default, deliberately provided the loans so that foreclosures could occur and they, the banks, could take over their victims’ property. Many such victims happened to be citizens of color, particularly blacks.

      Wall Street’s subprime robbery was an internal manifestation of what Western institutions like IMF had been doing to many Third Word nations. Some, like Argentina, are still reeling from the consequences of Western predatory practices. China, once a victim of Western imperialism, should never adopt the former oppressors’ tactics. To some extent, China is different in the sense that it would never advise debtor nations to undergo so-called “austerity” drives that threw millions of workers out of jobs, or insist those countries sell off their assets like Camdessus forced Suharto to. If Dr Mahathir had talked diplomatically to his Chinese hosts – and I think he did – I’m sure some solutions could’ve been worked out. I don’t believe Dr M told the Chinese they are like Neo-colonialists and whatnot.

  3. 养正气,育英才,固国本。
    I learned about the above nice sounding school motto from a former manager who started teaching quantitative investment. I guess finance is the new JingWu of today’s China. But, one thing kept lingering in my mind. Is lending responsibly also important? Lending to a Jho Low? Now the nation says it was Malaysia’s bad, we can’t afford paying back. So, we just we won’t pay back to debt pusher. Forgiving lot China is. So, they deserve to be known as “debt-pusher” 养正气,固国本。 Tun Dr and Azmin Ali probably said the same thing in Malay. Islamic financing. Sukuk bonds. DSAi would say the same thing. Addicted to debt we all are. We all deserve it. Debt is the new opium for this generation, just as skill in quant investment is the new JingWu. Reason for all of the debt? The next tallest building. We stopped the High Speed Rail to Singapore. But, we didn’t stop building the TRX. 1MDB.. 1Bandar.. TRX … Babel tower to feed our own ego.

    Jack Ma is resigning, while a Tun Dr wanted to create a Henry Ford to be backed by the nation’s wealth. Nationalize risk, privatize the gain. Easy way out. No wonder an ignorant Millennial generation and a generation of greedy wealthy would buy into a dystopian bitcoin fantasy.
    Where are we heading?
    One silver lining, imho, is that China has decided to open up her own economy and face the world, and not just depend on a past Zhenghe ideal which led to Haijin. For the very least, Zhenghe carries a mission to come up a way for an actual Mecca pilgrimage. Yes, Zhenghe is likely a Muslim. His last name is indeed Ma. Pilgrimage for the Son of Sky to the Messenger’s God is important. Building things for a Malaysia that doesn’t deserve such buildings?

  4. “Is lending responsibly also important” What an interesting question…
    It was not that long ago that cheap money was almost literally thrown to homeowners under the guise of increasing their personal wealth almost overnight…what the borrowers did not realise and were never told, was that just as property prices go up, they can also come down…they did…and we all witnessed the tragedy of repossession of people’s homes… Question : Is lending responsibly also important?
    The same was done to whole countries…with the tragedies we have become familiar with…Greece, Ireland etc. Question : Is lending responsibly also important?
    Now, we have the case of China’s OBOR…in danger of leaving the developing world littered with debt…with money and projects whose viability is questionable and to countries managed by corrupt establishments…Question : Is lending responsibly also important?
    Someone once asked…”Want to destroy a country? send in soldiers…or put it in debt…”

    • Following @isa’s question, I got a chance to ask myself if it is fair for to suggest a nation is not lending responsibly in my own mind. We are told that interest rates charged by China is higher than it should be. But, considering the political risk, I find myself I was the one who has been irresponsible. It is strange that I start to moralize for loan sharks. But, Jho Low is no sheep. Loan shark is not the right analogy. We just deserve it is only as much as my small mind could compute. Yet, some mind could compute better, especially Tun Dr’s.
      Second caste don’t compute. Tun Dr has placed that in his equation the day he has decided to continue keeping the Reid Commission hidden.

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