China falling into its own debt trap

China is falling into its own debt trap as the country's banks have sharply reduced lending to low-income countries under its flagship Belt and Road initiative (BRI) after the crumbled economies of borrowing countries have left the Asian giant with huge piled up loans, as per a report.

Under the BRI (Belt and Road initiative), China dumped over $1 trillion as loans to nearly 150 developed countries at high rates of interest, becoming the world’s largest official creditor for the first time. But the country is learning hard lessons as the borrowing countries are facing foreign exchange crises and cannot pay back the Chinese debts.

Nearly 60 percent of China's overseas loans are currently held by countries considered to be in financial distress, compared with just 5 per cent in 2010. Countries like Pakistan and Sri Lanka are recent examples of China's worrisome situation. Amid the continued political instability, the economy of Sri Lanka collapsed recently and Pakistan is also on the brink of an economic collapse. The two countries are failing to repay their loans, posing a threat to the Chinese economy, the European Times reported

According to a study, to secure these BRI projects Chinese agencies often pay large sums to politicians and military officials in the borrowing countries because of which the terms of these loans are kept a secret.

Going forward, the Chinese economy is going to have a severe impact on producing low-cost mobile phones. There is a law called the foreign direct product rule that was first introduced in 1959 to control trading of US technologies. It essentially says that if a product was made using American technology, the US government has the power to stop it from being sold-including products made in foreign countries.

Now, the US officials applied the rule to China’s advanced computing and supercomputer industry to stop it from obtaining advanced computing chips. With this China is going to be impacted badly.

However, the next game plan of China is neither announced nor leaked over the internet, as China has full threshold on its data privacy and Great firewall. With this no Individuals and entities are also prohibited from providing internet access, server hosting, technical support and dissemination of information on how to bypass cross-border data security gateways.

As a result, international credit rating agencies cannot assess the borrowing countries' credit-worthiness. Hence, when the economies of these borrowing countries started crashing, the Chinese agencies funding the BRI projects were the first to be taken by surprise, reported the European Times.

The COVID-19 pandemic, followed by the Russia-Ukraine conflict, has adversely affected emerging economies. As countries struggle to meet debt obligations, China is likely to face more problems, the report said.

Dr. Deepak Kumar Sahu, President & CEO, VARINDIA