The Patriot Post® · China's Pawnshop Strategy to Takeover Africa Is Helped by COVID-19
By Dave Brat
During President Obama’s eight years in office, the world order changed for the worse. Russia snatched Crimea from Ukraine and expanded its sphere of influence into the Middle East. China claimed the entire South China Sea and took over strategic seaports, oil wells, and rare earth metal mining lands in Africa. In three years, President Trump has done a lot to roll back what had become President Obama’s new normal geopolitics.
One thing is clear for those who follow Africa’s economic and political ordeal: China is interested in Africa’s natural wealth, while showing utter contempt for its people. This is evident in the way it has been treating Africans residing in China since the onset of the Coronavirus pandemic.
An African was denied access to a department store by a security officer who told her, “Chinese government says black people are not welcome, because they are the cause of the coronavirus.” African students were kicked out of their apartments, denied service in restaurants, and attacked by angry mobs on the streets of major cities. Meanwhile, more than a million Chinese people are living in Africa in peace, and more than 10,000 Chinese-owned firms are siphoning off the continent’s resources, many of them using a pawn shop strategy.
Pawn shops make money from desperate individuals who turn over custody of their valued possessions, such as wedding rings and computers with valuable data, as collateral for a short-term, high-interest loan. China has adopted the same business model, except its borrowers are nations rather than individuals, and it takes collateral in the form of seaports, airports, oil fields, and strategic rare earth mining projects.
China’s predatory lending started to pick up pace in 2013, after President Xi announced the Chinese Belt and Road Initiative (BRI). This is equivalent to a beltway around the globe, meant signify China’s unsettling rise to global prominence.
The predatory lending focused on two groups of countries — those with strategic seaports located along the BRI’s path (Kenya, Djibouti), and those with oil reserves and rare earth mineral deposits (Nigeria, Angola, South Sudan, Sudan, and Zambia, among others).
China’s predatory lending is not unique to Africa, though. For example, Sri Lanka in Asia had to hand China a 99-year lease over the strategic port of Hambantota, along with 15,000 acres of land around it, after it failed to service its loan.
In November 2019, the headline “China to take over Kenya’s main port over unpaid huge Chinese loan” was heralded in many international newspapers. The Maritime Executive revealed "The terms of a $2.3 billion loan for Kenya Railways Corporation specify that the port’s assets are collateral, and they are not protected by Kenya’s sovereign immunity due to a waiver in the contract.“
What is common between Kenya’s and Sri Lanka’s experiences is that their respective China-financed projects were found infeasible from financial and economic standpoints by independent analysts. In both cases, China offered to conduct its own feasibility study free of charge, then deemed the projects sound and provided predatory loans to build them using Chinese state-owned construction companies without opening the bids to international competition. In the case of Kenya, the project ended up costing the African nation four times more than was budgeted.
Once it traps vulnerable nations, China takes advantage of Africa’s extensive economic woes, seeking new collaterals as a condition to restructure debts that are at risk of defaulting. When Zambia owed China over $6 billion and had difficulty servicing its payment, China wanted the nation’s mining assets as new collateral to restructure its loans. As The Financial Times noted, the Zambian government was "alleged to have diverted donor funds meant for social sector spending to make debt repayments.”
China’s debt-trap strategy has four signature schemes that make it different from other bilateral or multilateral loans that developing countries rely on.
First, China’s loans to developing countries are kept confidential. They are neither reported to nor recorded by international institutions such as the International Monetary Fund (IMF); the World Bank; or the Paris Club, an organization of creditor nations.
Second, China’s preferred clients are countries with rampant corruption. A study by the Brookings Institution shows that of the 50 most indebted countries to China, 25 are from Sub-Saharan Africa (SSA). A closer look at the data indicates, of the 25 SSA countries, 23 are listed in the top half of Transparency International’s corruption ranking, including South Sudan, the Republic of the Sudan and Angola — ranked second, fourth, and fifth most corrupt nations in the world, respectively.
Third, the limited data available from the IMF shows that China’s loans are geared toward countries that have historically been vulnerable to debt crises. Of the 50 countries in the Brookings’ above-noted list, a large majority of them were countries who suffered debt crises in the 1990s and received international debt forgiveness.
Fourth, Chinese loans are based on market rates with short repayment periods, leading to larger annual repayments and resultant defaults. By contrast, traditional loans by institutions such as the World Bank, IMF, and members of the Paris Club carry near-zero interest rates and are further buttressed with generous grace periods and long repayment plans of up to 30 years — all designed to make them easier for cash-strapped governments in developing countries to service.
China’s predatory lending is affecting not only the poor in Africa and elsewhere, but also Western taxpayers. Currently, the COVID-19 pandemic has put many SSA nations at risk, as their underdeveloped health care infrastructures leave them vulnerable to the ravages of the virus.
Adding insult to injury, plummeting oil and commodity prices coupled with sharp drops in exports have shrunk their foreign exchange revenues and weakened their currencies. Further, foreign investors are exiting SSA’s capital markets in droves. The consequences have proven dire both in terms of reducing their foreign exchange reserves and ramping up their external debt servicing costs.
Faced with existential health, financial, and economic threats, African leaders appealed to the IMF, the World Bank, and the Group of 20 (G-20) creditor nations (including China) to suspend interest payments on outstanding loans and provide them with badly needed financial support.
The IMF and the World Bank mobilized emergency funds to the tune of billions of dollars. The G-20 creditor nations agreed to suspend loan payment obligations until the end of 2020. Though China is a G-20 member, its offer came with an exception clause — Beijing will not suspend loan payments on its predatory infrastructure loans, such as Kenya’s $2.3 billion loan that is collateralized against the nation’s strategic Mombasa seaport.
One would hope that China would feel morally obliged to spend a small fraction of its trillions of dollars in surplus foreign reserves to help Africa — the most vulnerable continent — where China is both the top trading partner and lender. Instead, it has its eyes laser-focused on collateralized strategic seaports and rare earth metal mining operations; hence its exception clause.
China’s behavior has put American and European countries in a conundrum. They know that providing billions of dollars in debt relief to SSA countries is the right thing to do as part of the global campaign to arrest the coronavirus pandemic and help save millions of African lives. They also know that their generous financial support will end up indirectly supporting Chinese predators as desperate African countries divert such funds to service the payments they owe to China.
President Trump has been criticizing China as bad actor and an obstacle to the global order for years. The globalist criticism of his principled and unwavering stand against China has been proven misguided. China’s unsavory actions, from currency manipulation to bullying its neighbors in South Asia, are the source of global disorder. Its predatory loans that have made much of Africa into a natural resource colony, and its failure to do its fair share to help vulnerable nations that are ravaged by the coronavirus pandemic makes clear that it is not a responsible member of the global community.
The world is beckoning for a global leader to rein in China’s recklessness. That global leader is Donald J. Trump.
David Alan Brat is the dean of the Liberty University School of Business. He served as the U.S. Representative for Virginia’s 7th congressional district from 2014 to 2019.