China's lending transparent, rational

"Debt trap" has long been a misnomer used by the United States and the West to discredit China and its engagement with the Belt and Road Initiative. The administration of US President Joe Biden has rekindled the so-called "Chinese economic coercion" campaign with renewed eagerness.

The phrase "debt trap" is anti-China hype intended to malign China through toxic and fake propaganda. It is carefully coined to scare developing countries away from approaching China for developmental loans — which the US and the West are unwilling to provide for the uplifting of infrastructure in those countries.

The US-led narrative is that Beijing is providing high-interest loans to those countries with an objective of later using the debt burden as a coercive tool for geopolitical ends and to influence the policies of those countries.

Nothing is further from the truth. Let's take the example of Pakistan, where the existing economic crisis has nothing to do with the Chinese loans. In fact, China has been generously supporting Pakistan during this crisis.

Pakistan is struggling with inflationary pressure, a shortage of basic goods and COVID-19 pandemic-related economic recovery imbalances amid an extremely fragile exchange rate.

To tackle this crisis, Pakistan is hoping to secure International Monetary Fund support plus short-term refinancing and rollovers from friendly countries, particularly China and the Gulf states. However, traditional benefactors have come to diagnose that this short-term, Band-Aid approach is ineffectual and are now more strongly resolved than in previous crises to perform a rescue with a purpose. Pakistan's fiscal woes continue to mount, as its foreign debt has reached a staggering $100 billion, with nearly one-third ($30 billion) owed to China — the country's largest creditor.

But this Chinese debt has no direct or indirect linkage with the existing economic turmoil in the country. Years of domestic economic mismanagement, political instability and corruption have primarily contributed to Pakistan's ongoing crisis.

In addition, Pakistan has faced severe hardships in the past year — including devastating floods that resulted in an estimated $30 billion in damage and lost productivity. Further exacerbating the situation, the ongoing Ukraine conflict has caused food and fuel prices to skyrocket.

Currently, the nation's foreign reserves have plummeted. Inflation affecting essential commodities such as cooking oil, vegetables and fuel has surged to a whopping 38.4 percent. Pakistan faces a substantial external debt servicing obligation of $23 billion for the ongoing fiscal year, with around $13 billion unfunded.

Additionally, the country is obligated to repay the significant amount of $75 billion during the fiscal years 2024-26. This mounting debt puts immense pressure on Pakistan's already struggling economy, requiring the government to devise a comprehensive plan to address these liabilities and prevent further financial turmoil.

While the China-Pakistan Economic Corridor is the Belt and Road's flagship project, Beijing has a huge stake in the political and economic stability of the country. Economic corridor projects are beneficiaries of financing from Chinese banks, notably the China Development Bank and the Export-Import Bank of China.

In less than 10 years, China has emerged as Pakistan's largest creditor, mostly of long-term payments, and the principal source of foreign direct investment. This rapid shift in economic dynamics highlights the strengthening ties between the two nations and the critical role that China plays in supporting Pakistan's financial growth.

Similarly, China's economic footprint in Pakistan has greatly expanded since the inception of the China-Pakistan Economic Corridor. As China's economic involvement in Pakistan has amplified, so has its stake in its economic and political stability.

While Pakistan's economy has been in a downward spiral for months, political instability and a resurgence of violence have compounded its woes — although the World Bank has attributed the stunting of economic progress primarily to distortions introduced or unaddressed by policy decisions. Last year, the Pakistani rupee plunged nearly 30 percent compared with the US dollar, becoming one of the worst-performing currencies in Asia.

It's no secret that China is the biggest lender to other countries and a major creditor to low- and middle-income nations. However, what is less recognized is that China's own exposure to financially troubled borrowers has grown considerably.

As a result, China has transformed itself from being a loan provider to a debt collector, and is becoming a significant player in sovereign debt renegotiations. This situation has also caused China to change its strategy by providing balance-of-payments support to partners like Pakistan, instead of project lending to repay project debts.

Until now, China has dealt with debt distress mostly by rescheduling loans rather than writing them off, and offering emergency loans without requiring borrowers to implement economic policy reforms.

Despite such a transparent and rational approach by China, the US and its allies loudly chant the mantra of "debt trap", which reflects their myopic approach to China.

The author is an international affairs commentator based in Karachi, Pakistan.