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Is Debt-for-Equity Chinese for “Debt Trap?”

Laotian Minister of Energy and Mines, Dr. Khammany inthirath and China's ambassador to Laos, Jiang Zaidong, sign a shareholders agreement that hands over control of Laos' electricity transmission to a Chinese state-owned company. Photo via XInhua.

Tucked away in a remote corner of Southeast Asia, an important experiment is now underway that could have profound implications for how China manages its vast loan portfolio in Africa and in other developing regions.

Last week, Laos’s state-owned electric power company, Électricité du Laos, signed a deal with a Chinese state-owned power company to create a new joint venture that would put the Chinese in control of electricity distribution in the country.

Laos, like many countries in Africa, found itself unable to repay the huge amounts of debt that it owed China. Fearing the consequences of a default, Vientiane worked with Beijing to come up with what is effectively a debt-for-equity swap.

In lieu of repaying the loans, China will now recoup its money through fees generated from this new joint venture with an option (but not necessarily a guarantee) that Laos can regain control of the asset in the future.

A lot of Chinese stakeholders will see this kind of deal simply as a market-driven approach to solve a financial problem. That’s it. It’s debt-for-equity. No politics. “Win-in” as the propagandists like to say.

But for others looking on from the outside, what’s happening in Laos is understandably very worrisome and very much political.

The fine print of the agreement might not reach citizens in countries like Kenya, Nigeria, and Zambia, where concern about their own countries’ vital infrastructure being handed over to the Chinese is frequently expressed. It doesn’t matter that the Laos deal may in fact be a truly equitable way to resolve, at least in part, the current crisis around Chinese debt in the global south. The optics are really bad.

China is leveraging its asymmetrical size to do something that it would never allow in its own country. Can you imagine the Chinese ever handing over control of Power China or State Grid to be run by Japanese, Korean or European creditors? Never in a million years!

But that is exactly what is going to happen in Laos and it would be safe to assume that similar talks are being held with sovereign borrowers in Africa, the Americas, and elsewhere in Asia.

So, is this the dreaded Chinese “debt trap” we’ve been hearing so much about? I don’t get that sense because implicit in the “debt trap” narrative/accusation is an underlying political motivation that’s not apparent in this deal (based on the little we know at present).

But if debt-for-equity swaps catch on and China supplements its loan portfolio with a suite of lucrative, strategically valuable infrastructure assets in countries around the world, the issue will no doubt become highly politicized – whether the Chinese like it or not.

Don’t be surprised if “debt-for-equity” soon becomes the new “debt trap.”

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