Jakarta before the specter of the ‘debt trap’

The Indonesians risk losing control of a railway on the island of Java, a project financed by the Chinese. Construction delays have led to increased costs. Chinese investors demand public guarantees. The case of Sri Lanka is repeated. The Widodo government seeks to cut interest rates in half. Critics argue that the project should have been awarded to Japan.

Beijing () – Indonesia is at risk of falling into what many observers call the Chinese “debt trap”. The construction of the Jakarta-Bandung railway with Chinese capital has been considerably delayed, which has generated an additional cost of 468 million dollars, paid for with public money.

The project is part of the Belt and Road Initiative, launched by Xi Jinping in 2013 to strengthen Beijing’s commercial position and geopolitical influence globally. The Belt and Road partners have long discussed the danger of having to hand over their assets to China, especially infrastructure such as ports, airports and railways, in the event of default on loans and related interest.

The best known case is that of Sri Lanka. In 2017, Colombo leased the port of Hambantota to a Chinese company for a term of 99 years. The port in the south of the country was handed over for defaulting on the debt owed to Beijing.

As reported Nikkei Asia, the company responsible for the construction of the railway line on the island of Java requested to extend the exploitation concession of the work from 50 to 80 years. The problem is that Chinese shareholders own 40% of the shares of Kereta Cepat Indonesia China.

Within the Indonesian government, discontent with the situation is growing. In 2015, President Joko Widodo had awarded the project to China, and not to Japan, after the Chinese promise to finish the works in 2018, to start the transport a year later. In addition, Beijing offered lower costs than Tokyo: 5.5 billion dollars compared to 6.2 billion for the Japanese.

In addition to the delays and higher costs, critics of the China award also point out that Beijing lenders charge much higher interest rates than Japanese ones. The Widodo government has asked Chinese lenders for a cut from 4% to 2%, but the other party has agreed to a floor of 3.4% – the China Development Bank, however, requires a public guarantee on loans granted.

Many countries that receive Chinese investment under the Belt and Road are in a delicate financial situation. According to recent calculations, 60% of Chinese loans abroad have gone to states with debt problems. Several economists point out that this, along with fears of Beijing’s growing influence, makes China’s partners more wary of the Belt and Road.

It is no coincidence that from the run-up to the pandemic to date, the flow of Chinese funds for the “Belt and Road” has dropped sharply, from $46.2 billion in 2019 to $28.7 billion last year, according to the calculations of China Global Investment Tracker.