Concern over ‘unfair’ loan practices by People’s Republic of China grows

Concern over ‘unfair’ loan practices by People’s Republic of China grows

FORUM Staff

In mid-August 2018, Malaysian Prime Minister Mahathir Mohamad canceled People’s Republic of China (PRC)-funded rail and natural gas pipeline projects totaling more than U.S. $20 billion, according to media reports.

“At the moment, the priority is for us to reduce our debt. With that debt, if we are not careful, we can become bankrupt. That is the work of Najib,” he said, referring to his predecessor Najib Razak, according to the Japanese news agency Kyodo News. Mahathir nixed the projects, which are at the core of PRC’s Belt and Road Initiative (BRI) effort in Malaysia, while on a trip to China. “It is all about borrowing too much money … which we cannot repay and also because we do not need those projects in Malaysia at this moment. Maybe later on, yes. But now we do not need it.”

The change may have an effect on Malaysia’s neighbors. “The cancellation of the railway and two energy pipelines certainly undercuts Beijing’s BRI ambitions in Malaysia. Furthermore, the halted projects will cause other nations in the region, such as Myanmar [Burma] and Indonesia, who are both seeking to renegotiate BRI-backed projects, to take heed,” Blake Berger, a regional analyst, explained in the August 27, 2018, issue of the online magazine The Diplomat.

Nations receiving loans from PRC infrastructure initiatives are learning often the hard way that the cash comes with costs, such as closed bidding processes, unfair competition from imported Chinese labor and loss of control of strategic properties to the PRC.

“We do not want a situation where there is a new version of colonialism happening because poor countries are unable to compete with rich countries,” Mahathir, pictured, told reporters during a news conference at the Great Hall of the People in Beijing after his August 20 meeting with Chinese Premier Li Keqiang.

The U.S. has long regarded PRC BRI projects as predatory economics. Under this model, the PRC funds infrastructure projects in other nations to leverage their economic dependence, claiming sovereignty over the assets when the cash-strapped nations can’t keep up with the debt payments. This is how the PRC came to control Sri Lanka’s Hambantota port earlier in 2018, as detailed in the Pentagon’s annual report to the U.S. Congress released August 16, 2018.

“The Chinese must have been thinking, ‘We can pick things up for cheap here,’” Khor Yu Leng, a Malaysian political economist who is studying China’s investments in Southeast Asia, told The New York Times newspaper. The PRC has invested in similar port deals in Piraeus, Greece, and Darwin, Australia, among other locations, the Pentagon report noted.

Before his August China trip, Mahathir said he planned to discuss “unfair” PRC infrastructure deals approved by Najib, who lost his re-election bid in May 2018 amid a huge financial scandal for which Najib will stand trial, Reuters reported. Mahathir had already suspended the projects in July 2018 over accusations of pricing and graft improprieties. Najib is alleged to have knowingly made the unfavorable deals with the PRC to bail out a fraud-ridden state investment fund and retain his power.

For example, Malaysian companies could have developed the 688-kilometer rail, planned to link ports on the South China Sea to west coast ports on the Malacca Strait, for half the U.S. $13.4 billion contract won by a state-owned Chinese firm, Mahathir told The New York Times. The Export-Import Bank of China financed roughly 85 percent of the project through a 20-year loan at 3.5 percent interest, Kyodo News reported.

On canceling the deals, Mahathir sought to diffuse tensions with the PRC, its largest trading partner, by placing much of the blame for the bad deals on Najib. “Such stupidity has never been seen in the history of Malaysia,” Mahathir told reporters in August 2018. “You cannot blame the Chinese for that.”

The PRC, however, has continued to make questionable loans to nations in the Indo-Pacific and beyond. “They know that when they lend big sums of money to a poor country, in the end they may have to take the project for themselves,” Mahathir acknowledged to The New York Times in an interview.

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