The Complete Story of China’s Debt-Trap Diplomacy

Kinnary Nensee Kinnary Nensee
Jan 15, 2023 6 min read
The Complete Story of China’s Debt-Trap Diplomacy

Indian academic Brahma Chellaney coined the term ‘Debt-trap diplomacy’ in 2017. A term used in international finance, it describes a creditor country or institution extending debt to a borrowing nation, to increase the lender’s political leverage.

The conditions of the loan are not made public knowledge and, often, benefit the lender. The borrowed money commonly pays for the contractors and materials that are sourced from the creditor country. The creditor country will then extract political or economic concessions when the debtor country is unable to fulfill its repayment obligations.

Unsurprisingly, the allegations of ‘debt-trap diplomacy’ are commonly associated with China.

China's "debt-trap diplomacy" refers to the practice of providing large loans to developing countries, often for infrastructure projects, with the alleged intention of trapping those countries in a cycle of debt and dependency on China. The theory is that if a country is unable to repay the loans, China may use that as leverage to gain control over the country's resources, land, or strategic assets. This has been alleged to be the case in several countries, such as Sri Lanka, Pakistan, and the Maldives. However, the Chinese government denies that it engages in "debt-trap diplomacy" and argues that its lending practices are transparent and beneficial to both parties.

Allegations against China
China’s Development Plan
The Spider-Web of debts and How China Uses it
African Continent
The Outcome

Is China using debt-trap diplomacy to wield its influence around the world?

Allegations against China

China has been under a dark cloud of suspicion for almost a decade now. It’s the ambition to become a global power is not unknown on the international stage.

Brahma Chellaney coined the term ‘debt-trap diplomacy’ to describe China’s predatory lending practices. He alleged that China overwhelms poor countries with unsustainable loans and then forces them to cede strategic leverage to China. It is all a part of a geostrategic game on China’s part.

China’s Development Plan

In the year 2013, China launched one of the most ambitious projects ever conceived. It was the Belt and Road Initiative (BRI). President Xi Jinping launched the initiative as a vast collection of development and investment initiative. It would stretch from East Asia to Europe which would significantly expand China’s economic and political influence. Sometimes, referred to as the second Silk Route, it has been touted as a trojan horse to expand China’s military power.

The President’s vision for the BRI included creating a vast network of railways, energy pipelines, highways, and streamlined border crossings across two regions. One was through the mountainous former Soviet Republics and the other was southwards – to Pakistan, India, and the rest of South East Asia. According to him, such a network would “break the bottleneck in Asian connectivity”.

China also had plans to build 50 special economic zones in addition to the physical infrastructure. Continuing the benevolence, China will also invest in port development along the Indian Ocean from South East Asia all the way to East Africa and parts of Europe – all to accommodate the expanding Maritime trade traffic.

The staggering Chinese ambition and vision for BRI have seen almost 60 countries that have either signed on to projects or have expressed a keen interest in participating.

The Spider-Web of debts and How China Uses it

China has, under the guise of the trillion-dollar Belt and Road Initiative, provided large debts to nations wanting to create infrastructure projects. The catch is that China is eager to lend, without conducting creditworthiness due diligence. In fact, China has been blamed for specifically lending large loans to countries that are resource-rich or have geostrategic locations but low creditworthiness.

China is believed to keep the project negotiations a secret and charge non-competitive prices. Contracts are then awarded to the Chinese government or state-linked contractors that over-charge. All the while, allegations of bribing top leaders in return for infrastructure investments, continue.

1. Sri Lanka

The Sri Lankan Administration and China Merchant Port Holdings Company entered into a contract in July 2017. The contract specified a loan for 1.2 billion dollars in return for a long-term lease on the Hambantota Harbour and 15,000 acres of Sri Lankan territory.

The COVID-19 Pandemic hit the country’s economy hard and, to date, Sri Lanka is battling its worst economic downturn. It has defaulted on most of its foreign debt including China’s loan. China had, earlier, safeguarded its preferences by acquiring a large number of project assets. Hence, in view of Sri Lanka’s inability to pay off its debt, China has grabbed the assets.

2. Pakistan

Already a very weak economy, Pakistan has also borrowed heavily from China and awarded strategic projects to China’s BRI. In yet another setback, China has demanded repayment of approximately USD 55.6 million for the Lahore Orange Line Project. In addition to this, Pakistan owes approximately USD 1.3 billion to Chinese Power Producers.

China has been very stringent in recovering money from Pakistan. Pakistan faces a scenario, similar to Sri Lanka’s economic crisis and China is all set to take full strategic advantage in its bid to spread its power and influence.

Apart from these two countries, other Asian nations like Malaysia, Maldives, and Laos are all in debt to China. All these countries are either resource-rich or have geostrategic locations. They all form a part of the hidden political ambitions of China.

African Continent

Between 2000 and 2014, African countries increased their borrowing from China in a bid to end their dependence on IMF and World Bank. In 2016, African debt to China was to the tune of USD 30 million. The countries which owed the largest debt were Angola, Ethiopia, Zambia, the Republic of Congo, and Sudan.

The Outcome

In the years since BRI has been launched, China has offered loans to various countries, disguised as help. However, in each and every case it has gained tremendous leverage, either in terms of resources or political leverage. One report states that BRI participant countries owed approximately USD 385 billion to China in hidden debts.

Conclusion

China is neither new nor a novice at playing political games on the international stage. Its ambition to grow into a global power is well-known. The BRI initiative is one such addition to its ambition to steadily gain power.

However, the COVID-19 pandemic hit the Chinese hard. It led to a steep decline in China’s loan disbursement program. Coupled with growing skepticism and doubt over the seemingly benevolent Chinese government, many BRI projects are being scaled-down or scrapped by partner states. A lack of transparency in construction and financing, growing cases of corruption and malpractice, and a lack of financial viability have negatively affected the BRI’s image. It is also facing a growing challenge from a strategic security dialogue between India, Japan, Australia, and USA.

In any event, it looks unlikely that the BRI’s glory will return. However, the Chinese government is capable of launching a new initiative with the exact same hidden agenda. Countries and economies should remain vigilant of Communist Countries.

FAQs

What is China's debt trap?

The term was coined by Indian academic Brahma Chellaney to describe how the Chinese government leverages the debt burden of smaller countries for geopolitical ends.

How many countries are under Chinese debt?

According to Forbes, 97 countries across the globe are under Chinese debt.

Is China in a debt crisis?

China is facing a full-blown debt crisis with $8 trillion at risk as Xi Jinping eyes an unprecedented 3rd term.

Does the US have a debt to China?

China owns roughly $1.08 trillion worth of U.S. debt.

How does China's "debt-trap diplomacy" work?

The theory is that if a country is unable to repay the loans, China may use that as leverage to gain control over the country's resources, land, or strategic assets.

Does the Chinese government deny the existence of "debt-trap diplomacy"?

Yes, the Chinese government denies that it engages in "debt-trap diplomacy" and argues that its lending practices are transparent and beneficial to both parties.

What are the consequences of falling into a "debt-trap" with China?

The consequences of falling into a "debt-trap" with China may include losing control over resources, land, or strategic assets, as well as becoming dependent on China for financial support.

Is there any way to avoid falling into a "debt-trap" with China?

Countries can take steps to avoid falling into a "debt-trap" with China by being cautious and transparent when taking loans, and by ensuring that the terms of the loans are fair and sustainable.

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