Learning From China’s Debt-Trap Diplomacy
New colonialism or an unmissable opportunity?
When someone on the news mentions debt-trap diplomacy they are referring to the practice of offering unsustainable loans to developing countries to gain non-financial strategic interests (such as infrastructure, ports, etc.).
This term was coined for the first time by Indian analyst Brahma Chellaney in 2017. Even though skepticism about China’s lending motives predates this term, as evidenced in 2011 by Hillary Clinton, then US secretary of state, who warned African leaders of China’s new colonialism. Later on, at the US-African summit in 2014, Obama advised leaders to ensure Chinese firms were hiring African workers. Culminating with Mike Pompeo’s not so subtle view underlining that “China shows up with bribes to senior leaders in countries in exchange for infrastructure projects”.
The are many arguments labeling China as a “loan shark":
12 developing countries owe at least 20% of their annual GDP to China
Analysts that argue that China in fact engages in debt-trap diplomacy cite three main aspects:
1. China lends large amounts of money to developing countries;
2. China is notably opaque about lending practices;
3. China has a history of debt-trap diplomacy.
Regarding the first point, Beijing does in fact lend a conspicuous amount of money with this trend steadily increasing in the last years. Harvard Business Review revealed that in total China loaned about 1.5 trillion in direct loans and trade credits to more than 150 countries worldwide, resulting in the world’s biggest lender (larger than the world bank, the IMF, or all of the OECD creditor governments combined). The People’s Bank of China has agreed to swap deals with 40 National banks, providing these countries the right to exchange more than 550 billion USD of their own currencies for the Chinese renminbi. On top of these 40 countries, 12 developing countries owe at least 20% of their annual GDP to China (Cambodia, Djibouti, Kyrgyzstan, Laos, Maldives, Mongolia, Niger, the Republic of Congo, Samoa, Tonga, Vanuatu, and Zambia) considering also that this lending is only expected to increase, because of already planned new infrastructure projects as part of its Belt and Road initiative.
Proponents of the debt-trap diplomacy thesis argue that China is deliberately lending unsustainable amounts of money to developing countries in order to extract geo-strategic concessions from them later.
The second point often made is that China is suspiciously opaque when it comes to lending practices since it lacks centralized data on this aspect. The same Harvard business review estimates that as much as 50% of Chinese loans to developing countries go unreported. So proponents of the debt-trap thesis argue that this is essentially China hiding its dodgy loans from international scrutiny.
The third piece of evidence shows that there have been a couple of instances in the past, where China has used debt as leverage to secure non-financial strategic interests. The most infamous case that stirred up interest from around the globe is the Hambantota port in Sri Lanka. In 2017 a state-affiliated Chinese firm CM port bought a 70% majority stake in the strategically important Hambantota port with a 99-year lease for 1.1 billion USD. This happened while Sri Lanka had an unsustainable debt-to-GDP ratio of 75% and already owed China about 8 billion USD. As Sri Lanka could not pay back its loans, China assured its permanent ownership of the port, paying pennies on the dollar.
A second example of the debt trap in action can be found in Djibouti. China has provided nearly 1.4 billion USD worth of funding for major investment projects equivalent to 75% of Djibouti’s annual GDP, with future projects reportedly including two new airports, a new port in Ghoubet, an oil terminal, and a toll road. It is hard to know a precise figure but it is thought that Djibouti owes about 68% of all of its debt to China, the most by the percentage of any country in the world (Zambia owes 30% of its debt to China, followed by Cameroon with 29%). So, in 2015 when China opened its first overseas military facility in Djibouti, the hosting country could not oppose it.
The third case is Tajikistan, as for the small African nation, the biggest creditor is China. In 2017 the country owed 700 million USD to the Export-Import Bank of China which came to about 36% of the country’s total external debt. So, in 2011 when Tajikistan ceded 1158 km2 of disputed land to China ( slopes of Sarikol Range), overseers of the debt-trap strategy suspected that China used its debt as leverage in order to secure the concession.
There are some arguments against labeling China as a “loan shark”.
After these examples, China’s financial trap seems quite blatant. However, there are many opposing arguments that oppose the notion of a Chinese debt trap. The three main arguments to confute this notion are:
- China does not actually loan to nations at risk of debt distress;
2. the infrastructure projects are actually good investments;
3. the previous case studies are not as nefarious as they seem.
For the first point, while China does loan money to developing countries and some of these countries are at risk of debt distress, it might be less than we think. In 2018 a Jubilee Debt Campaign report found that China loaned money to 15 African countries at risk of debt distress (Burundi, Cabo Verde, Central African Republic, Chad, the Gambia, Ghana, Mauritania, Mozambique, Sao Tomé and Principe, South Sudan, Sudan, and Zimbabwe) but that it had not loaned dangerous amount of money to any of them. For these countries, the mean average owed to China was 15% of the government external debt and the median average was 8%. In fact, China has engaged in some sort of debt relief with its biggest debtors. In 2020 China joined the G20’s Coronavirus debt service suspension initiative which paused debt service payments from three countries ( Cameroon, Djibouti, and Zambia). China has written off about 260 million USD worth of Zambian debt and about 200 million USD worth of Cameroonian debt since 2001. To back all this up, the Rhodium Group analysis of 40 cases of Chinese debt distress found that the most common outcomes were debt forgiveness and restructuring. The John Hopkins school of advanced international studies, which has 1000 case database of Chinese loans concluded that quote: “ so far, in Africa, we have not seen any examples where we would say the Chinese deliberately entangled another country in debt, and then used that debt to extract unfair or strategic advantages of some kinds in Africa”.
The second argument is that China’s lending pattern makes more sense in context. Infrastructure projects are actually good investments for developing countries and currently, China is the only major player with industrial expertise offering these big infrastructure loans as part of their Belt and Road initiative, but they are not the only ones interested in doing this. An example is the 7 billion USD Power Africa initiative, fostered by Obama, that never really got off the ground. Thus, offering loans for infrastructure is not inherently bad by any means. Another reason that China might be more willing to take risks when lending to developing countries is that if enough countries need renminbi to pay off their loans, then renminbi might become the new reserve currency of Africa. Making it possible for China to print more money than it would otherwise be able to do. This would also explain China’s endless swap deals.
The third point is that the case studies we gave earlier do not quite add up, Sri Lanka only owed 10% of their external debt to China and the money from Hambantota port (1.1B USD) was not even spent paying off Chinese debt, as it was used to pay off Sri Lanka’s US sovereign bonds which were at higher interest rates. This port also made a loss of 300 million USD since it was built and when the new administration came into power in 2015 they conceded that it represented a waste of money, so all in all it makes sense that they might have been willing to get rid of it. In fact, the Sri Lankan ambassador to China (Karunasena Kodituwakku) said that the port was actually offered to China by Sri Lanka.
Regarding Djibouti, while they do have a lot of Chinese debt, Beijing has actually forgiven some of their debt. In addition, China is not the only country with a military base there, in fact, Italy, France, Japan, the US, and Saudi Arabia gained military access to the small African country. On the Tajikistan border, even if they did not have any debt, you would still expect China to win in a territory dispute.
Where’s the transparency?
The one thing those defending China have to admit though is that the country is not transparent about its lending, especially when you compare it to other lenders of their size. The IMF, the World Bank, and almost all developed countries keep meticulous lending records, making the financial system run smoothly, as everyone needs to know who owes money to who when evaluating risks.
This article was conceived in collaboration with EU&U
