Can China takeover sovereign assets? Has it?

Debt trap Meme: Trading in fear

The idea that a sovereign country can lose its asset to another over unpaid debts is simply a Zombie idea. Zombie ideas are lies couched in economic jargon. They are believable but are false hypotheses.

Following the failure of similar ideas as “the trickle-down effect,” “High wages kill Job creation,” and “efficient market” hypotheses, “Debt trap diplomacy” is the fad.

However, beneath the veneer is the fear of China’s emergence as an economic powerhouse that challenges the West’s dominance. In just about 40 years, China’s GDP has grown from $245 billion in 1976 to $16 trillion in 2021, second only to the US whose GDP is estimated at $22 trillion in 2021.  It has drawn some 800 million people out of poverty and into the middle class over the same period.

China has leapfrogged entire Western Europe and Japan in 45 years. In the process, disrupting the West’s dominance over the world’s resources and markets. This is the source of anti-Chinese vitriol.

How did this happen? After the fall of the Berlin Wall, the West rested on its laurels assuming that everyone will adopt the liberal economic model championed by Prof. Milton Friedman. They marketed the “Market efficiency” thesis as the best vehicle for prosperity through the disastrous Structural Adjustment Programmes, SAPs.

China rejected the model despite pressure from the Bretton Woods institutions. It adopted its own form of Market socialism with outstanding results. It beats the West in several measures. China’s manufacturing sector is now the largest in the world standing at 27 percent of the GDP. In the US, the manufacturing sector contributes just 10.3 percent of GDP. In real terms, China’s manufacturing sector contributes US$4.32 trillion to the GDP compared to $2.27 trillion in the US.

 In Engineering, China is also way ahead of the West, having advanced from manufacturing under license a few years ago to owning inventions in heavy industry such as trains and Locomotives. It has just tested its fastest train in the world, the Maglev, an electric train that cruises at 431 KPH. In the last 12 years, China has built the largest network of high-speed railways, some 39,700Km, claiming the global Lion’s share (67%) of the high-speed railway network.

 Cheap Chinese electronic gadgets including Mobile Phones and IT technology dominate the world. It was the first to deploy 5G broadband. China is also the leading manufacturer of Semiconductors and APIs.

China’s entry into Africa as the top development partner was a second jolt to the West, which is still recovering from the financial meltdown of 2008, and incessant wars in the Middle East. The vitriol is thus the West’s attempt to at least contain if not stop Chinese expansion. Will it work?

It does not appear to be working. Africa particularly is still trooping to China with project proposals to get funding.  Hence the threat of re-colonization through debt-trap diplomacy. “China is deliberately saddling Africa with heavy debts,” so goes the thesis, “with a view to recolonizing it in the future.”

Is Africa falling prey to Chinese” brutal lending Practices?”  In his book, Confessions of an Economic Hitman, John Perkins says that saddling the developing world with unpayable debts is the West’s playbook. HEMs forced the developing world to accept projects with exaggerated outcomes and inflated costs in order to funnel money out of the World Bank to large corporations in the US through “tied aid,” says the book.

China on the other hand finances projects initiated by the borrower. In other words, African governments identify, evaluate, and select the projects they present for financing. African governments, therefore, have a good grasp of the need for, the benefits of the project, and the risks. That is why China now controls 42 percent of EPC projects in Africa.

 The Projects proposed by HEMs never produced the proposed outcomes because they were never meant to. Therefore, the developing world could not generate sufficient funds to pay off the loans. Is China doing the same? John Perkins disagrees.

So why is this thesis still coasting around? Appetitive elites in Africa latch on the narrative for political and financial gain. Corruption allegations and the perceived Chinese threat sell fast in Africa.  Devoid of any marketable political ideology, Opposition parties latch on to “political scandals” in a bid to gain power.

 In Kenya for instance, before China became a major development partner, the opposition told us of the huge theft of proceeds of a Sovereign bond issued in 2014. It never provided any evidence to back its claims. Then they turned on the rising debt. Now China has become the next red herring with tales spun about China’s threat to Africa’s independence.

Public Offices have been drawn into misinformation campaigns. For instance, the story of China taking over the Mombasa Port in Kenya in case of default was allegedly “leaked by the controller and Auditor General’s (CAG) office” in the run-up to the 2017 election. The auditor had earlier succumbed to opposition pressure to travel to the US to investigate how Kenya’s funds from a Eurobond sale ended up at the Federal Reserve.

Any public Servant, the CAG included, should know how. The Central Bank of Kenya, CBK, holds accounts with its counterparts in the world, among them the Federal Reserve in New York.  The Central Bank is also the Custodian of all foreign exchange in Kenya.  Therefore, it buys all forex in Kenya shillings. In this case, CBK simply bought the proceeds from the government of Kenya’s agent, JP Morgan. JP Morgan was the lead bank in the Eurobond sale.

In Uganda recently, newspaper headlines read “Uganda hands over Entebbe airport to the Chinese over unpaid debt.”  Really?  That China lent Uganda some US$200 million to expand and upgrade its international Airport at Entebbe back in 2015 is not in doubt. The loan came with a seven-year grace period that ends in April 2022.

Along the way, “some bureaucrats” got uncomfortable with some clauses in the loan agreement and raised the alarm. They sought to renegotiate those clauses but China’s Exim Bank declined.

However, there is no evidence that the Exim-Bank of China hinted at taking over the Airport at all. The story was inept. The grace period is not yet over, so loan servicing is yet to begin. Uganda for its part is not in default. China simply refused to renegotiate the deal meaning Uganda had to abide by the terms of the agreement, and when the loan falls due, pay.

This takes us back to the question; Can China take over the international Airport in Entebbe or any national asset anywhere over an unpaid debt? Are there any precedents? Has China taken over any national asset anywhere over unpaid debts?

Many a critic refer to Hambantota Port in Sri Lanka. The story of a Chinese company acquiring this Port in a debt swap is false. The government of Sri Lanka sold a 70% stake in the port to the China Merchants Port Holdings Company Limited (CM Port) in a 99-year lease for $1.12 billion. The port itself cost US$390 million to build.

The concession earned Sri Lanka badly needed forex to pay off debts that were unrelated to the Port, says Umesh Moramudali, a Sri Lankan Economist in an article in the Diplomat magazine. https://thediplomat.com/2020/01/the-hambantota-port-deal-myths-and-realities/  

Can a country take over the assets of another sovereign state over unpaid debts? Experts reject this thesis saying China’s chance of effecting such a feat is slim. The potential political backlash from such an action is scary, say experts. Further, such action would be a breach of a country’s sovereignty, a declaration of war. Does China have the nerve and military muscle to enforce debt collection?  Well….