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 to describe a creditor country or an institution that grants debt to a borrowing nation in order to increase the lender’s political clout.

The terms of the loan are not made public and often benefit the lender. The money borrowed is typically used to pay contractors and materials sourced from the creditor country. The creditor country will then extort political or economic concessions if the debtor country cannot meet its repayment obligations.

Not surprisingly, accusations of “debt trap diplomacy” are commonly associated with China.

China’s “debt trap diplomacy” refers to the practice of making large loans to developing countries, often for infrastructure projects, with the ostensible intent of luring those countries into a cycle of indebtedness and dependence on China. The theory is that if a country fails to repay the loans, China could use it as a bargaining chip to gain control of the country’s resources, land, or strategic assets. This is said to have been 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,” arguing that its lending practices are transparent and mutually beneficial.

allegations against China
China’s development plan
The Spider Web of Debt and How China is Using It
African continent
The result

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

allegations against China

China has been under a dark cloud of suspicion for nearly a decade. The ambition to become a world power is no stranger to the international scene.

Brahma Chellaney coined the term “debt trap diplomacy” to describe China’s predatory lending practices. He claimed that China lavishes unsustainable loans on poor countries and then forces them to cede strategic influence to China. It’s all part of a geostrategic game on China’s part.

China’s development plan

In 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 comprehensive collection of development and investment initiatives. It would stretch from East Asia to Europe, greatly expanding China’s economic and political influence. Sometimes referred to as the second Silk Road, it is touted as a Trojan horse to expand China’s military might.

The President’s vision for the BRI included creating a vast network of railroads, power lines, highways and optimized border crossings in two regions. One led through the mountainous former Soviet republics and the other south – to Pakistan, India and the rest of Southeast Asia. According to him, such a network would “break the bottleneck in Asian connectivity”.

China also had plans to establish 50 special economic zones in addition to physical infrastructure. In continuation of the goodwill, China will also invest in port development along the Indian Ocean from Southeast Asia to East Africa and parts of Europe – all to handle growing maritime trade traffic.

Overwhelming Chinese ambition and vision for BRI has seen nearly 60 countries either sign projects or express keen interest in participating.

The Spider Web of Debt and How China is Using It

China, under the guise of the trillion-dollar Belt and Road Initiative, has borrowed heavily from nations looking to build infrastructure projects. The catch is that China likes to lend without conducting due diligence on creditworthiness. In fact, China has been accused of making large loans specifically to countries that are resource-rich or geostrategic but have poor credit ratings.

China is believed to be keeping project negotiations secret and charging uncompetitive prices. Contracts are then awarded to the Chinese government or government-affiliated contractors who charge inflated prices. Meanwhile, allegations of bribing top executives in exchange for infrastructure investments continue.

1. Sri Lanka

The Sri Lankan Administration and China Merchant Port Holdings Company entered into an agreement in July 2017. The deal provided for a $1.2 billion loan in exchange for a long-term lease of the port of Hambantota and 15,000 acres of Sri Lankan territory.

The COVID-19 pandemic has hit the country’s economy hard and Sri Lanka is grappling with its worst economic downturn to date. It has defaulted on most of its external debt, including China’s loans. China had previously secured its preferences by acquiring a large number of project plants. Faced with Sri Lanka’s inability to pay off its debt, China has seized the assets.

2.Pakistan

Pakistan is already a very weak economy, but it has also borrowed heavily from China and awarded strategic projects to China’s BRI. In another setback, China has demanded repayment of around US$55.6 million for the Lahore Orange Line project. In addition, Pakistan owes around $1.3 billion to Chinese power producers.

China has been very strict in recovering funds from Pakistan. Pakistan is facing a scenario similar to Sri Lanka’s economic crisis, and China is poised to make full use of its strategic advantage to expand its power and influence.

Aside from these two countries, other Asian nations like Malaysia, the Maldives and Laos all owe China. All of these countries are either rich in resources or have geostrategic locations. They are all part of China’s hidden political ambitions.

African continent

Between 2000 and 2014, African countries increased their borrowing from China to end their dependence on the IMF and World Bank. In 2016, Africa owed China $30 million. The countries with the highest debts were Angola, Ethiopia, Zambia, the Republic of Congo and Sudan.

The result

In the years since the introduction of BRI, China has offered loans to various countries disguised as aid. In every single case, however, she has gained enormous influence, either in terms of resources or political clout. A report said BRI participating countries owed China about $385 billion in hidden debt.

Conclusion

China is neither new nor new to playing political games on the international stage. His ambition to become a world power is well known. The BRI initiative is one such complement to their quest to steadily gain power.

However, the COVID-19 pandemic has hit the Chinese hard. This led to a decline in the Chinese loan disbursement program. In connection with growing skepticism and doubts about the seemingly benevolent Chinese government, many BRI projects are being shut down or canceled by partner countries. A lack of transparency in construction and financing, increasing cases of corruption and misconduct, and a lack of financing have negatively impacted the image of the BRI. It also faces a growing challenge from a strategic security dialogue between India, Japan, Australia and the US.

In any case, it looks unlikely that BRI glory will return. However, the Chinese government is poised to launch a new initiative with exactly the same hidden agenda. Countries and economies should remain vigilant towards communist countries.

frequently asked Questions

What is China’s debt trap?

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

How many countries are indebted to China?

According to Forbes, 97 countries worldwide are under Chinese debt.

Is China in a debt crisis?

China faces full-blown debt crisis at risk of $8 trillion as Xi Jinping targets an unprecedented third term.

Does the US owe China?

China has around $1.08 trillion in US debt.

How does China’s “debt trap diplomacy” work?

The theory is that if a country fails to repay the loans, China could use it as a bargaining chip to gain control of the country’s resources, land, or strategic assets.

Is the Chinese government denying the existence of “debt trap diplomacy”?

Yes, the Chinese government denies it engages in “debt trap diplomacy” and argues that its lending practices are transparent and mutually beneficial.

What are the consequences of falling into a “debt trap” with China?

The consequences of a “debt trap” with China can include loss of control over resources, land or strategic assets, and dependence on China for financial assistance.

Is there a way not to fall into a “debt trap” with China?

Countries can take steps to avoid falling into a “debt trap” with China by being careful and transparent about borrowing and ensuring that the terms of the loans are fair and sustainable.