Introduction
China has an undeclared policy of “debt trap diplomacy”. Wherein, China seemingly assists underdeveloped/ developing nations through infrastructure investments and when that nation is unable to service the heavy loan repayments, it is forced to relinquish the control of the assets to China.
A few recent examples of China’s such take over are, 85% stake in a 99-year lease of Sri Lankan Port of Hambatota, Gwadar Port in Pakistan, Doraleh Port and naval base in Djibouti caught in the debt trap have been taken over by Chinese companies.
Across the globe from Central Asia to Africa and even up to South America, Chinese state-owned companies and Central Bank have become major international lenders by way of large scale infrastructure investments mostly in the guise of Belt and Road initiate propagated by President Xi Jingping.
The Corona virus pandemic is likely to accelerate the rate of takeovers by Chinese companies as the economy of these countries has been completely devastated.
Corona Pandemic Helping China to Gain Political Leverage and Global Economic Domination
The Pandemic, whether it is man-made or nature’s wrath, appears to be playing out in concert with China’s master-plan of taking over businesses and assets of nations stuck in economic doldrums.
A few examples to illustrate the same are enumerated in the succeeding paragraphs.
Djibouti is strategically located at the entrance of the Red Sea where 10% of the global oil exports and 20% of commercial goods pass through the narrow strait off Djibouti’s coast on their way to and from the Suez Canal. Beijing now holds 71% of Djibouti’s GDP in debt.
Ostensibly, Djibouti can be referred to as a node in China’s economic chain that stretches across the northern rim of the Indian Ocean, from ports in Cambodia to Sri Lanka to Pakistan. All these countries have ceded their ports to China or/and are under China’s heavy debt.
China is the world’s largest creditor in the highly resource rich and underdeveloped Africa. Beijing has advanced loans worth US$143 billion to African countries since 2000 at levels that some critics say are unsustainable for the borrowers.
Corona crisis and the crash of oil market will force countries which heavily depend on oil revenue, like the Republic of Congo and Nigeria to look towards China for funding to run the government.
Many poor countries like Ethiopia, Ghana, Zambia, etc will be asking for loan restructuring and financial assistance to tide over the economic crisis.
The biggest concern is that several African countries will be left with huge debts and grandiose infrastructure that they cannot maintain and run profitably. That is when Chinese investor companies will step-in to take over all such assets and provide People’s Republic of China with the leverage to be the ‘king-maker’ in all these nations.
Similarly, Italy a member of G-7 nations with its ailing economy had allowed for major investments by Chinese companies. Even at the time of the Pandemic, while its fellow EU members hesitated to help Italy, China responded almost immediately, sending 31 tons of much-needed medical equipment, pulmonary ventilators, face-masks and protective suits.
Now, COVID-19 has given China-Italy relations a major boost, it is likely that in the coming times Italy will be stuck in the vicious cycle of Chinese debt.
Moreover, China is gaining political leverage by comforting nations with supplies to fight COVID-19, as also utilize the recent heightened economic stress on them to amplify China’s clout and control over geo-political affairs. A few examples to illustrate the same are enumerated in the succeeding paragraphs.
Papua New Guinea has been traditionally an extension of Australia’s turf. However, the country has been taking unaffordable loans from China and can now serve as a strategic outpost for China in Asia-Pacific.
Similarly, China can enhance its diplomatic clout and literally earn a veto power in ASEAN, by keeping countries that are under its debt, like Cambodia, Laos and Philippines at a short leash.
Besides, China has been systematically increasing its influence through grants, loans, donations, gifts, scholarships, educational opportunities and China- sponsored regional forums offering investments and aid to the strategically located three states of Micronesia, Palau and the Marshall Islands in Pacific Ocean that have a free association with United States. The expiry of Compact of Free Association (CoFA) with US in 2023 will deny US basing access and help the Chinese navy to extend its reach past the first island chain into the Pacific.
India Revised Foreign Direct Investment (FDI) Policy
India has revised its FDI policy to curb “opportunistic takeovers/acquisitions of Indian companies due to the financial crisis created by COVID-19. With the view to keep China at bay, the policy states that government sanction will be required for FDI from entities or citizens of any country that shares land borders with India.
It is highlighted that even before the above revision came into effect, investments from Bangladesh and Pakistan, which share borders with India, had to undergo government scrutiny.
Chinese firms have been showing increasing interest in Indian Medium Small Micro Enterprises (MSMEs) for investments ever since retaliatory tariffs during the US-China trade war necessitated China to create an alternate supply sources to serve global locations outside China to evade the prohibitory tariffs.
Though China’s investments span across sectors, but major businesses of interest include, mobile and related technologies and products, automobiles, and financial technologies. Indian start up ecosystem is also seeing lot of Chinese investments.
The revised policy may further dampen the investor climate in India, especially during these trying economic times. However, it is considered to be a wise decision to create a firewall and prevent China from taking over these businesses eventually and making inroads into India as it has done in many other developing nations.
Conclusion
There has been a lot of talk post Corona pandemic that many foreign companies are planning to pull-out from China and India being viewed as one of the probable destinations. I personally feel that once the Corona dust settles down and the anger of countries holding China responsible for the pandemic abates, things will go back to square one. Firstly, it is extremely cumbersome and expensive proposition to relocate, especially after suffering economic losses during this period.
Secondly, it will be extremely difficult for any country, including India to match up to the competitive edge that China offers in terms of world-class infrastructure, skilled, disciplined and cheap labour and the ancillaries built to support international trade and commerce. Finally, the economic devastation being felt as a result of the COVID-19 leaves the world with no other option but to endure its mistake of putting all its eggs into the dragon’s nest.