China’s initiative, known as the Belt and Road Initiative, started in 2013 and aims to connect Asian, European, and African countries. The main issue faced by these states is their lack of proper infrastructure. China has been helping out many of these states by providing them with loans that seem lucrative, but when these states are unable to repay the loan and default, China raises demands to be fulfilled in lieu of the repayment of the loan. This has created a situation that is controversially referred to as China’s ‘debt trap policy’. There is a severe lack of transparency surrounding China’s loan agreements, which has led to the question: is China’s ‘debt trap policy’ an intentional part of its foreign policy, or simply an inadvertent consequence of several loanee states defaulting in the repayment of their loan? This article focuses on both sides of the controversy and attempts to scrutinize the intentions behind China’s actions in the international arena, specifically in the Asian, Middle Eastern, and African regions.
China’s President Xi Jinping announced a new initiative in 2013, known as the One Belt One Road (OBOR), which was officially changed in 2016 to Belt and Road Initiative (BRI). BRI is a transcontinental project that seeks to connect Asian, European, and African countries through two different modes of transportation – land and maritime. The land routes are mapped out along the historical Silk Road, while the 21st century Maritime Silk Road connects China to the South Asian and Southeast Asian countries (Belt and Road Initiative 2021). The connectivity of these continents, however, is impeded due to the lack of proper infrastructure in a lot of Asian, African, and Middle Eastern countries, especially the developing ones. The development of this infrastructure along the trade routes requires massive funding, due to which a lot of countries have entered into loan agreements with China. The lack of transparency surrounding these agreements has sparked controversy: whether China is using these loans to further its geopolitical strategic power, or the debt trap policy assertion made by several critics of the BRI is an exaggeration.
This article will provide both sides of the argument, followed by an analysis of the loans provided to developing countries by China, the ambiguity of these agreements and their subsequent impact on the loanee nations, and the global perspective on China’s motivations. It will attempt to scrutinize China’s motives by looking at a couple of examples of loans provided to Sri Lanka and Montenegro and conclude by asserting that while there may be no concrete evidence that China is undoubtedly using developing countries’ financial instability and inability to repay loans to its advantage, the obscurity of these arrangements leads one to believe that the BRI is not an initiative meant solely for the purpose of furthering economic development and trade.
The research method for this topic was mainly through news articles and opinion pieces on the BRI. Information was also collated from official Chinese websites such as the Belt and Road Initiative information website, which explains the plan for the modern Silk Road. Certain official reports such as one by the World Bank, and “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, updated in February 2021, were instrumental in understanding the problems with the Belt and Road Initiative. One disadvantage faced while writing this essay was the lack of access to Chinese articles and reports on the topic. Most of the opinion pieces and reports used were written by Western journalists or Indian journalists, therefore there is not much insight into the opinion of Chinese Media, and by extension, the Chinese government. In a sense, this essay is written from an almost entirely outside perspective on the issue.
The concern regarding “China’s Debt Trap Diplomacy”
As part of the BRI, China has been doling out billion-dollar loans to many countries, mostly developing or low-income countries, to invest in the massive infrastructure projects required for the modern silk route. These loans are deceivingly lucrative because they provide many concessions and a lower interest rate than other lenders, so they seem like an attractive option for these countries, but most of the time, when they are unable to repay, China asks for an array of benefits in exchange for the loan repayment, something that will be examined in the case studies later on in the essay.
The issue regarding the transparency of these agreements is a big concern. The confidentiality clauses of these agreements are phrased and set up in a way that the details cannot be released by the borrowing countries to their own taxpayers, and sometimes they cannot even acknowledge that a loan has been taken.
A study by the Peterson Institute for International Economics, Kiel Institute for the World Economy, and the Centre for Global Development and Aid Data examined a hundred contracts signed in the last two decades. As such, three main insights that come to the fore from an analysis of the Chinese lending pattern are as follows: a) Chinese contracts contain unusual confidentiality clauses particularly since 2015 wherein the borrower is prevented from revealing the details. b) Secondly, Chinese lenders seek an advantage over other creditors including collateral arrangements like control over revenue accounts. c) Thirdly, cancellation, acceleration, and stabilization clauses in Chinese lending contracts are far more common allowing lenders to influence the debtors’ domestic and foreign policies (International Asian News 2021).
From these trends, it is evident that the contracts are written in a way that somewhat sets up the borrower. Even though it may seem like the loans are being given at low-interest rates, they are still higher than other alternative lenders such as the IMF. Another big issue is that China is not a part of the Paris Club, a group of countries that work on debt relief for low-income countries. As a result, China does not build the clauses of its contracts to be geared towards relieving the fiscal troubles of its loanees, but rather traps them in a situation where they will be forced to agree to China’s demands in lieu of the loan repayment. An excellent example of this is the Sri Lankan port of Hambantota, which has been leased to China for 99 years. Sri Lanka borrowed money from China to build a port in Hambantota, which was built by a Chinese-owned enterprise. Once the port failed commercially, the Chinese government asked for the repayment of the loan, which the Sri Lankan government obviously could not manage, after which China coerced Sri Lanka to hand the port over to them.
“This was transparently the debt-trap-foreign-policy that has marked China’s world-girdling Belt and Road Initiative. Lend a country money to build infrastructure, get it constructed by Chinese companies, then, as per the not-so-fine print on the contract, take over the infrastructure built after the country fails to pay its Chinese debt (Deb 2021).”
As a New York Times article pointed out, this case very clearly showcases the mindset with which China has approached this initiative, and also provides significant evidence for the argument that China’s motives are a lot deeper than mere economic development of the entire region (Maria 2018).
Arguments against the hypothesis of a debt trap diplomacy
Critics of the debt trap policy argument state that China is judged far more harshly and incorrectly than it deserves. The motives of China, from this perspective, are considered to be purely economic, instead of geopolitical, when it comes to the BRI. They argue that it is not China’s fault if the borrowers have fiscal mismanagement and internal corruption, which are the main reasons for the non-repayment of loans, according to them. Another argument presented is China’s waiving of loans to many African countries, which contradicts the theory that China is a power-hungry nation, only looking to take advantage of low-income countries for its own benefit.
These arguments definitely make an observer take a step back and scrutinize the facts because there is no clear answer to this controversy. The inner workings of any country’s policies are always a lot more complicated than being attributed to any single motive. As mentioned earlier, it cannot be definitively stated that China is trying to trap countries, but it cannot be denied that there seems to be a larger pattern when one looks at China’s loan agreements. In addition to the Sri Lankan case, a similar situation is occurring between China and Montenegro, where China loaned 800 million Euros to Montenegro, and the agreement states that if Montenegro defaults on the payment, then the Montenegrin land can be accessed by China, in lieu of the repayment (Chaudhury 2021). The existence of several of these settlements safely suggests that BRI is not purely an economic initiative.
It is also important to note that while the fiscal mismanagement and corruption in a lot of the borrowing countries pose serious problems causing them to fall into debt, China does seem to be taking advantage of these countries and their bureaucratic failures as a larger strategic approach. As for the waiving of the debts of some African countries, it has been argued that China may be letting them off the hook because they are not of as much geopolitical importance to China as of yet. The validity of this argument can never be fully corroborated, but at the very least it is known that China’s policies seem unpredictable and mysterious from a myopic viewpoint, especially since a lot of the information about said policies is hidden, but when considered as a whole, there often appears to be a larger strategy at play: China will always put its national interests above everything else. These national interests often contradict themselves, but the essential theme of which remains that China aims to become a superpower.
It is possible that the claims of China having a debt trap policy were exaggerated earlier on, although we have seen considerable evidence that these situations are not a coincidence. However, the global recession brought about by the pandemic will definitely have a heavy impact on the countries that have borrowed money from China, causing more defaults to happen. China will rapidly gain more geopolitical access, and many countries will be at a disadvantage because of it.
Taking India as an example, while it has not taken a loan from China, the fact that many other South Asian countries are currently being financed by China might pose a problem for India in terms of dealing with its neighbors. It has also been one of the top borrowers of the Asian Infrastructure Investment Bank (AIIB), a multilateral bank wherein China is the largest shareholder, which gives China a considerable amount of power over the loans that India takes (Mehta 2020).
The US is especially critical of this initiative because it paves way for China to have a lot more power in the Eurasian region. To counter this, the US has also started an alternative financial institution, which, however, may not change the situation much (Dollar 2020a). While the US’s criticism may seem just a competitive and bitter move, there is some value to it. For example, the lack of transparency in the BRI is not just an issue in terms of loan repayments and the economic clarity for Eurasian countries, but the ambiguity about the number of infrastructural projects China is lending to also raises environmental and social concerns (such as displacement of locals in these regions, etc.) (Dollar 2020).
Despite all these reasons and the backlash that the BRI is facing, countries cannot fully turn away from this initiative because it will further economic development quite a bit for these developing countries. China can follow the recommendations given by the report “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective,” written and updated in February 2021, and a lot of these recommendations are being implemented, there is still a huge gap between what China is doing and what more needs to be done in order to ease the pressure on the debt-ridden countries. The question still remains whether China intends to ease the pressure or not. This controversy cannot be resolved, as was earlier discussed, because China’s motives have always been somewhat shrouded in mystery, but one can conclude that to say China had no ulterior motives at all would be a gross understatement.
Brahma Chellaney, an analyst who often advises the Indian government and is affiliated with the Center for Policy Research, a think tank in New Delhi, said, “John Adams said infamously that a way to subjugate a country is through either the sword or debt. China has chosen the latter.” (Maria 2018)
Anika Vijapur is pursuing an undergraduate program in International Relations (Research) from Shiv Nadar University, National Capital Region (NCR)-Delhi, India. She can be reached at: [email protected]
References & Further Readings
Jain, Jinit (2021).“China’s Debt Trap: Bri Countries Owe China Close to 385 Billion USD in Hidden Debt, Reveals Report.” OpIndia, September 29. https://www.opindia.com/2021/09/chinas-debt-trap-diplomacy-bri-participant-countries-owe-over-385-billion-usd-to-china-in-hidden-debt-study-reveals/
Belt and road initiative. Accessed November 12, 2021. https://www.beltroad-initiative.com/belt-and-road/ .
Chatzky, Andrew, and James McBride (2020). “China’s Massive Belt and Road Initiative.” Council on Foreign Relations. Council on Foreign Relations, January 28. https://www.cfr.org/backgrounder/chinas-massive-belt-and-road-initiative
Chaudhury, Shantanu Roy (2021). “How China Is Expanding Global Influence via Debt Trap Diplomacy.” The Wire, March 7. https://thewire.in/world/china-debt-trap-diplomacy-south-asia-europe
Deb, Sandipan (2021). “China’s Sri Lankan Port Grab Adds a Pearl to Its String.” Mint, May 30. https://www.livemint.com/opinion/columns/chinas-sri-lankan-port-grab-adds-a-pearl-to-its-string-11622393656645.html
Deborah Brautigam, Meg Rithmire (2021). “The Chinese ‘Debt Trap’ Is a Myth.” The Atlantic. Atlantic Media Company, April 12. https://www.theatlantic.com/international/archive/2021/02/china-debt-trap-diplomacy/617953/
Dollar, David (2020). “China and the West Competing over Infrastructure in Southeast Asia.” Brookings. Brookings, April 29. https://www.brookings.edu/research/china-and-the-west-competing-over-infrastructure-in-southeast-asia/
Dollar, David (2020a). “Seven Years into China’s Belt and Road.” Brookings. Brookings, October 1. https://www.brookings.edu/blog/order-from-chaos/2020/10/01/seven-years-into-chinas-belt-and-road/
Hameiri, Shahar (2021). “Debunking the Myth of China’s ‘Debt-Trap Diplomacy.” The Interpreter, May 17. https://www.lowyinstitute.org/the-interpreter/debunking-myth-china-s-debt-trap-diplomacy
Hurley, John, Scott Morris, and Gailyn Portelance (2021). “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective,” February. https://cgdev.org/sites/default/files/examining-debt-implications-belt-and-road-initiative-policy-perspective.pdf?sid=mktsOD
International, Asian News (2021). “China Debt-Traps Nations with Confidentiality Clauses: Report.” NDTV.com, August 25. https://www.ndtv.com/world-news/china-debt-traps-nations-with-confidentiality-clauses-report-2518196 .
Maria, Abi-habib (2018). “How China Got Sri Lanka to Cough up a Port.” The New York Times. June 25. https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html
Mehta, Jhoomar (2020). “China’s Growing Threat via Debt Trap Diplomacy.” Mint, June 17. https://www.livemint.com/news/india/china-s-growing-threat-via-debt-trap-diplomacy-11592410677912.html
Rahman, Shaikh Abdur (2021). “The BRI in Bangladesh: ‘Win-Win’ or a ‘Debt Trap’?” – The Diplomat. for The Diplomat, November 9. https://thediplomat.com/2021/11/the-bri-in-bangladesh-win-win-or-a-debt-trap/ .
World Bank Group (2019). “Belt and Road Economics: Opportunities and Risks of Transport Corridors.” World Bank. December 13. https://www.worldbank.org/en/topic/regional-integration/publication/belt-and-road-economics-opportunities-and-risks-of-transport-corridors .