Nuseir Yassin, better known as Nas Daily, is among the world’s most popular creators of short, informative and often fun videos documenting Yassin’s personal travels around the world, as well as his unique take on major global issues. He recently released a video called The Chinese Money Trap which was a condensed version of almost every criticism and conspiracy theory regarding the Belt and Road initiative. Below is a point for point rebuttal of the theories put forward in the video, based on the real facts surrounding Belt and Road and China’s relationship with its partners in the developing world.
China did not invent the banking system and did not invent interest
Many of the criticisms that Yassin levels against China are actually criticisms of the modern banking system itself. In the modern banking system, a person, family, company or even country borrowing money from a lender, that cannot realistically repay the money on time and with the agreed upon rate of interest, will typically have the assets seized that were purchased through the loaned money. This phenomenon not only has nothing to do with China, but the very concepts at hand were invented long before the establishment of the People’s Republic of China in 1949.
The 2008 housing bubble in the United States which was a major factor in causing the Great Recession, came about due to American financial institutions offering customers unrealistic loans and mortgages on incredibly over-valued homes. Put simply, loans and payment plans were issued to American homeowners and to property speculators who had no realistic means of ever keeping up with the payments. As such, the banks repossessed the property purchased through these unrealistic loans and unsustainable mortgages. And yet because of this, the surplus of property on the market meant that the banks lost out on the gamble they took in loaning money to homeowners and speculators who had no realistic means of paying off the loans (+ interest) in a timely fashion. Banks were subsequently left holding onto assets whose value had lost millions in a few short years.
Similar crises of easy money (in the form of low-interest loans, credit or stimulus) leading to a major economic bubble and subsequent recession when the bubble bursts, have been witnessed throughout modern history. The Austrian School of Economics postulates that unless a nation or private bank operates on a sound money principle (typically a gold standard), almost all depressions or recessions are caused by unsound money flooding the market in times when interest rates are artificially low. Inevitably, when the market naturally corrects itself, these economic bubbles of prosperity created by the cheap flow of cash into the open market, will burst.
In other words, assets which become overvalued in times when loans and credit are being issued liberally, will inevitably lead to an eventual drop in the prices of these overvalued assets. This leads to just about every lender asking for their initial loans to be repaid. Because few people can pay back their initial loans during a time when the value of their assets has burst, devalued (and in some cases near worthless) assets will be repossessed, demand will fall throughout the market and an economic recession or depression begins.
This is what happened to Japan’s asset bubble in the late 1980s, it is what happened to the US with the 2008 housing bubble, it is what happened with the EU’s late 2000s credit crunch, it is what happened during the 1997 Asian financial crises, it is what happened in the 1980s US savings and loan crisis and it is even the underlying factor behind the Great Depression.
As such, the crises caused by unsound loans have nothing to do with China – but China has employed a unique solution to this age old problem.
The Chinese solution
Because China’s Belt and Road related megaprojects are major assets, as opposed to something comparatively small like a single family home or a car, the comparisons between a bad mortgage on a home and Chinese investment in ports, dams, airports, railways, highways, high rise dwellings for hundreds of people etc., are ultimately poor comparisons to make in the real world. This is true for the same reason that a minor debt to a payday lender is in the real world, very different from an unsound mortgage on a $3 million home.
It is true that China has often lent large sums of money to developing countries for the building of megaprojects, including those listed above. And yet at this point in the discussion, very few people point out the fact that whilst other country’s financial institutions would not take such risks in emerging markets, Chinese financial institutions do. In this sense, while non-Chinese financial institutions leave developing countries with no road to sustainable prosperity, Chinese loans offer developing countries a way to create prosperity generating infrastructure, because China is willing to take the kinds of financial risks that other country’s financial institutions are not.
Thus, whilst going to a non-Chinese bank would leave some developing countries with roads full of pot holes, decrepit airports from the 1950s, tiny old ports that prohibit a developing nation from trading its way into prosperity and shanty towns instead of modern high rise dwellings – Chinese money has made infrastructural modernisation possible in the developing world.
In this sense, before one returns to the money aspect, one ought to look at the human aspect. When Chinese money allows someone in a developing country who had drunk unclean water for most of his life, lived in a hut and had no job is able to move into a modern apartment, drink clean water, be gainfully employed in a modern industry and as such afford a better life – how can this possibly be a bad thing? In this sense, China should be thanked for taking the financial risks that make it possible for developing countries to….develop!
Not a debt trap but win-win opportunities
The “debt-trap” myth is flawed not only in terms of the fact that it is based on exceptions which prove the rule that most Chinese projects throughout Asia and Africa result in win-win outcomes for both parties, but the myth is also flawed in the sense that it fails to grasp real world realities beyond the ideological and purely theoretical. In life like in geopolitics there is no such thing as a free lunch. While China is more generous in terms of loans, investments and cash injections than most other wealthy nations, it is not in any nation’s interest to rebuild entire continents without getting anything in return.
Likewise, in accordance with modern business practices, a bank is not ultimately responsible for what someone asking for a loan wants to spend the money on. While banks will conduct due diligence before issuing a loan, beyond this, such institutions cannot police one’s fiscal habits 24/7 after the loan is agreed.
As such, Chinese financial institutions are not there to tell other countries what they can and cannot do with the money they have been lent. If China decided to micro-manage the internal affairs of the nations that Chinese financial institutions lend money to, that would be financial imperialism – it would be neo-mercantilism as opposed to capitalism. Instead, China allows developing countries to find their own way by spending money on projects they believe to be sound investments. Most these investments are in fact sound, but sometimes they are not. In other words, sometimes China’s partners overestimate how much of a capital return they can generate in order to gradually pay of the initial loan. Thus, China expects its partners to exercise their own responsibility throughout the course of a financial relationship. But even when mistakes are made, this is not the end of the story.
In such instances when a partner defaults on a loan, China still has a win-win solution. In the event that certain countries or corporations cannot pay back a Chinese loan, a Chinese company will temporarily take charge of the asset. But far from being something horrific, this is actually a healthy thing for all parties involved.
Unlike an empty home in a market with falling house prices due to a lack of demand, the megaprojects that Chinese money helps to create will always ultimately generate long term revenue for the nation in which they are located. Some years might be better than others, but a major port, airport, highway, housing project, water refinery etc., will always bring added value into an economy in one way or another. This is the difference between a sustainable and non-sustainable investment.
Modern ports allow developing nations to trade with the wider world and receive much needed imported goods in an efficient and effective fashion. Modern roads and airports are prerequisite for the development of any nation and modern housing is also essential in developing a modern industrial or post-industrial work force in previously agrarian societies. These assets will always bring an intrinsic added value to any nation. This is especially true of a developing nation that requires baseline infrastructure in order to attract future investment in new commercial sectors.
As such, when a domestic company folds and a port, housing project, airport etc., is taken over by a Chinese company, these assets still generate added value for the local economy. This is true in respect of generating direct tax revenue as well as more importantly, generating the overall added value to an economy that modern infrastructure creates.
Consider these two examples: a developing country seeks to attract tourists from wealthy countries to stay at a new hotel built on an attractive beach. These tourists will generate income from the money they spend on lodging, clothes, food, drink, taxis and other services whilst on their holiday. But if the country is stuck with a 80 year old airport that cannot accommodate modern jets, how are the tourists going to get to their beach front hotel? The answer is that the Chinese built and now Chinese owned airport will help to facilitate this win-win revenue generating process.
Likewise, if someone went from living in a shanty to living in a modern apartment, does he actually care whether the company that owns the large plot of land on which the modern housing towers are built is Chinese or domestic? Logic would dictate that such a person would simply be glad to have his standard of living improved, no matter who or what owns the land below is apartment tower.
Transforming loans into FDI
In this sense, the process through which Chinese firms take temporary ownership of foreign assets originally paid for by Chinese loans to domestic companies, should not be considered a “money trap” or “China owning the world”. Instead, the process of Chinese companies temporarily taking over foreign assets should be classified as a transformation of a domestic project into a foreign direct investment (FDI). When China operates ports, hotels, airports etc., in foreign countries, it means that Chinese companies will continue to pour money into these assets to make sure that they remain economically viable. It is in no one’s interests (not China or a partner nation) to see any big project fail and as such, Chinese companies with their proven expertise in modern development, can help turn uneconomic projects into solvent ones that continue to create jobs and add revenue to the local economy.
Thus, whilst China remains the world’s largest recipient on FDI and indeed transformed its own national fortunes through FDI during the first decades of Reform and Opening Up after 1978, China today is also a leading contributor of FDI to foreign partners. In this sense, China isn’t “taking over” but is merely turning projects built with Chinese money in the first place, into medium term Chinese projects that represent FDI injections into developing economies.
Had China just built something in a foreign country with FDI in the first place, no one would be talking about “debt traps”, but because loan defaulters gave China no choice but to turn a locally owned project into one managed on the FDI model, conspiracy theories arise which paint a very distorted view of what in reality are win-win settlements to temporary financial setbacks.
Ironically, it is Chinese financial institutions offering loans for key developmental megaprojects, that help otherwise poor developing nations to get their proverbial foot on the ladder of long term sustainable development. China likewise does not only offer loans to help developing partner nations, but also offers gifts, aid, long term sustainable credit lines, FDI and joint investment projects in order to help and create an interconnected network of developing nations that can trade their way into prosperity through the formation of modern multilateral win-win trading partnerships.
By isolating the instances when a locally built but Chinese financed project becomes insolvent, criticisms such as those offered in the Nas Daily video miss several key points that can be summed up as follows:
1. Without these Chinese loans, projects which positively change the economic fate of developing nations would never be built at all and as such, no jobs would be created and no living standards would be elevated.
2. China is not “taking over” any foreign country. China rejects both traditional and economic imperialism. Instead, Chinese companies work with partner nations to make sure that meagaprojects are able to function properly, even if their original owner defaults on the initial loan used to build the projects. This helps a nation to still receive the benefit of a megaproject on its soil even when the domestic operator proved himself to be irresponsible.
3. When Chinese companies do manage such projects through direct ownership, these projects function as a foreign direct investment that continues to add value to the local economy through increased direct and indirect tax revenue. All the while, these projects create jobs and better living conditions in the process. These jobs and increased living standards likewise prepare the next generation in a developing nation to open their own solvent and productive businesses. This for example is how Singapore and China became major economic power centres.
4. While the United States and many European powers only offer loans or investment in exchange for changes to a “partner nation’s” government or political system, China respects the sovereignty of all of its partners which is why China does not second guess the decision making process of its partners, nor offer loans with any political strings attached.
5. Megaprojects have an intrinsic and sustainable long term value in an economy that individual homes and individual cars do not. Therefore, in spite of the nature of modern banking, it is a false dichotomy to compare China’s loans for Belt and Road related megaprojects to the practices of banks within major western economies that have historically perpetuated a boom and bust cycle through lending easy money that inevitably cannot be paid back.