With its belt and road projects, China risks falling into the biggest debt trap of all – Yasheng Huang

MIT Sloan Professor Yasheng Huang

Yasheng Huang, Epoch Foundation Professor of International Management and Faculty Director of Action Learning, MIT Sloan School of Management

From South China Morning Post

Critics often claim China is using its massive Belt and Road Initiative as a form of coercive debt-trap diplomacy to exert control over the countries that join its transnational infrastructure investment scheme. This risk, as Deborah Brautigam of Johns Hopkins University recently noted, is often exaggerated by the media. In fact, the initiative may hold a different kind of risk — for China itself.
At the recent belt and road summit in Beijing, Chinese President Xi Jinping seemed to acknowledge the “debt trap” criticism. In his address, Xi said that “building high-quality, sustainable, risk-resistant, reasonably priced, and inclusive infrastructure will help countries to utilise fully their resource endowments”.

This is an encouraging signal, as it shows that China has become more aware of the debt implications of the initiative. A study by the Centre for Global Development concluded that eight of the 63 countries taking part are at risk of “debt distress”.

But, as John Maynard Keynes memorably put it: “If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has.” In the context of the belt and road, China may turn out to be the banker who is owed a million pounds.

In particular, China may fall victim to the “obsolescing bargain model”, under which a foreign investor starts to lose bargaining power over time as it invests more in a host country. Infrastructure projects are a classic example, because they are bulky, bolted to the ground and have zero economic value if left incomplete.

Read the full post at South China Morning Post.

Yasheng Huang is the Epoch Foundation Professor of International Management and Faculty Director of Action Learning at the MIT Sloan School of Management.