Exploring the Complex Realities Behind China’s Ambitious Global Project and Debunking ‘Debt-Trap Diplomacy’ Claims
The Belt and Road Initiative (BRI) is one of China’s most ambitious projects, which has sought to connect China with the rest of the globe through various trade routes. The enormous array of investment and development initiatives was inaugurated in 2013 by President Xi Jinping during his visit to Kazakhstan and it is in its tenth year. The speech at Nazarbayev University suggested that a “Silk Road Economic Belt” would begin from Beijing and go beyond Central Asia. President Xi outlined crucial steps to achieve regional cooperation, including road connectivity and fostering trade. In his subsequent second speech in the Indonesian parliament, President Xi discussed the “21st Century Maritime Silk Road” across Southeast Asia using physical infrastructure to connect East Asia and Europe. The initiative found an eager audience in developing nations seeking to fulfill their infrastructural needs through multilateral projects. Moreover, unlike initiatives funded by Western donors, BRI projects were not subject to good governance and regulatory requirements.
However, the BRI has been criticized by analysts, as they accuse China of taking over the vital assets of the countries it is involved with through “debt-trap diplomacy,” a term popularised by scholar Brahma Chellaney. As Chellaney noted in his article, “China is taking steps to ensure that countries will not be able to escape their debts. In exchange for rescheduling repayment, China requires countries to award it contracts for additional projects, thereby making their debt crises interminable.” He goes on to say that China’s intentions are “commercial penetration” and “strategic leverage” and recipient countries realize much later that they are in a “vicious circle.” Then-US Vice President Mike Pence had said in 2018 that China was using “‘debt diplomacy’ to expand its influence. He said China’s loans were opaque at best, and the benefits invariably flowed overwhelmingly to Beijing.”
The fears of the so-called debt trap were amplified after the coronavirus pandemic. The author of a Foreign Policy article says that because of the pandemic, “China was likely to squander its influence with its practice of weaponizing debt.” However, the allegations of these analysts are not necessarily true.
First, when the BRI was launched, President Xi had not revealed a strategy for the initiative. Here, what was projected as a government initiative was not entirely that. Chinese State-Owned Enterprises (SOEs), profit-seeking institutions, primarily produced bilateral, case-by-case development projects that outlined a project plan for the recipient countries. Although SOE heads are appointed by the Communist Party of China (CPC), they decide how to go about a project, and their performance is assessed mainly on their economic goals.
Secondly, requests for developmental projects have mostly been initiated by the recipient countries and not enforced by the Chinese side. This is a fact that advocates of the ‘debt-trap diplomacy’ fail to look at, undermining the recipient countries’ agency. Moreover, it is only when the recipient countries give the go-ahead on their projects that is only when the Chinese side can initiate a project. Developing nations desperately need infrastructure development to boost economic growth and raise living standards. In turn, governing elites must frequently ensure this happens to prevent civil unrest and retain domestic legitimacy.
We can see this in the most common case of Sri Lanka. Many analysts say China loaned money to Sri Lanka to develop a significant port at Hambantota, knowing that Sri Lanka would not be able to return the loan. This allowed China later to take the port in exchange for debt relief, allowing China to use it for its navy. As the news outlet Voice of America reported, a former Sri Lankan diplomat says, “China’s goal is to put the Hambantota port to dual use, commercial and military. It is trying to build the capability to move and maneuver ships at the port with a military purpose.”
However, one of the first misconceptions was that China initiated the project. In reality, Mahinda Rajapaksa, the then-Prime Minister of Sri Lanka, had proposed it. This report by Ship Technology emphasizes that the inviability of the port by feasibility studies was ignored, and says, “Nevertheless the port came to be thanks to a combination of former President Mahinda Rajapaksa’s egocentric agenda to revive his home region and main political base and China’s opportunistic strategies to gain power in the region.”
The project received approval from the Sri Lanka Port Authority in 2007, and the country started seeking international sponsors, to which China responded positively. The Chinese companies also sought to maximize their profits and proposed expanding the Hambantota port to a colossal project. Hence, the design of the port began. Phase one was finished in 2010. In addition, other grandiose infrastructural ventures became part of the port expansion. However, the projects were highly corrupt as the Sri Lankan state-appointed companies in charge of the ventures funneled funds. The port was still not fully serviceable. However, the Sri Lankan government refused to wait, and the second phase immediately started, which was to be finished in 2014.
By 2014, Rajapaksa’s plan of economic stimulus, fueled by debt, was crumbling under unmanageable debt. Rajapaksa lost the presidential election to Maithripala Sirisena in 2015 due to the regime’s poor administration and corruption. Contrary to popular notion, Sri Lanka had amassed debt not just from China but from around the world. By 2016, foreign borrowing accounted for 61 percent of the government’s ongoing budget deficit, when the overall amount of government debt had grown by 52 percent to $64.5 billion. 34.2 percent of this ($22 billion) was borrowed from foreign borrowing. Rajapaksa’s spending and borrowing spree was made possible by the low global interest rates brought on by the quantitative easing strategy embraced by several Western central banks. Private financial entities, not other countries’ governments, owed the majority of the external government debt. Even in 2022, the share of the Chinese government Sri Lanka’s total debt is only $14 million, whereas the development and private entities constitute most of the debt.
As for the Hambantota port, it was said that Sri Lanka had surrendered the port to China in return for the debt remission. However, this was not true as well. Sri Lanka persuaded China to get the port leased. Denying ‘debt-trap’ allegations, the Sri Lankan ambassador to China had said, “The Chinese government (has) never asked to hand over the Port to the Chinese government or the Chinese venture.” When a Chinese SOE paid Sri Lanka to lease the port, Sri Lanka received funds to pay its debts. One more thing to be paid attention to is how it is made to look like the Chinese government itself was the one who implemented the plan. However, it was mostly the work of the Chinese SOE, in this case, the CMPort. Lastly, the port was not used for Chinese military purposes whatsoever.
In their path-breaking study, professors Deborah Brautigam and Meg Rithmire researched to dispel the myths of the Chinese debt trap in Sri Lanka. Their research proved how Chinese banks had never taken assets from any nation, much less the port of Hambantota, and they were ready to alter the terms of current loans. The report says that two feasibility studies, by Canada’s SNC-Lavalin and the Danish Ramboll, “confirmed that building the port at Hambantota was feasible.” Neither did China entrap Sri Lanka in any dubious loan schemes. The report says, “China Eximbank offered a $307 million, 15-year commercial loan with a four-year grace period, offering Sri Lanka a choice between a 6.3 percent fixed interest rate or one that would rise or fall depending on LIBOR, a floating rate. Colombo chose the former, conscious that global interest rates were trending higher during the negotiations and hoping to lock in what it thought would be favorable terms.”
It was the Sri Lankan government that fast-tracked the second phase of the project, which created deep-seated issues for the country’s finances. The article says “In Hambantota, instead of waiting for phase 1 of the port to generate revenue as the Ramboll team had recommended, Mahinda Rajapaksa pushed ahead with phase 2, transforming Hambantota into a container port.” Sri Lanka ended up taking more loans and started losing money. After the change in government in 2015, “When Sirisena took office, Sri Lanka owed more to Japan, the World Bank, and the Asian Development Bank than to China. Of the $4.5 billion in debt service Sri Lanka would pay in 2017, only 5 percent was because of Hambantota.”
In conclusion, they say, “The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment. After the construction of the port in Hambantota, for example, Chinese firms and banks learned that strongmen had fallen and that they’d better have strategies for dealing with political risk. They’re now developing these strategies, getting better at discerning business opportunities, and withdrawing where they know they can’t win. Still, American leaders and thinkers from both sides of the aisle give speeches about China’s ‘modern-day colonialism.’”
In the case of the Gwadar port in Pakistan or the Chinese-funded projects in Malaysia (specifically in the Malacca Strait), we see a similar trajectory. Both countries enthusiastically embraced the BRI, and the recipient countries initiated the infrastructure projects. However, the corrupt regime of the ruling parties, their desire for rapid economic growth and maintaining production credibility, and their inability to pay back the loans to the Chinese companies incited the ‘debt trap’ allegation on China.
China has also helped smaller nations in the Pacific region through its loans. Countries in the Pacific region face some unfavorable economic geography, including their distance from important international financial hubs, the uneven distribution of resources, and dependence on a small number of uncertain income sources, such as international aid or tourism. This Lowy Institute article also states, “Official financing flows to the Pacific have, however, been declining in importance and becoming less concessional. In this environment, China has emerged as a major lender in the Pacific.”
However, China is still one of many lenders to these countries. The projects stalled because of corruption, reckless planning, and inexperience of Chinese SOEs. Due to these concerns, President Xi announced changes, including cost-cutting and an enhanced local partners’ stake, unveiled during the Second Belt and Road Forum for International Cooperation in Beijing in April 2019.
BRI has been chiefly effective in the last ten years after it was initially rolled out in 2013. China has MOUs with 140 nations and 32 international organizations. The amount of foreign direct investment (FDI) that China sends abroad has also grown dramatically. China’s motivations to launch BRI marked the formalization of its foreign aid and sought to improve its relations with the West and the rest of the world. At the same time, BRI wanted to create a supportive climate for entrepreneurs and governmental agencies to engage in commercial activities. Nevertheless, there is neither broad nor unequivocal support for the BRI, and Western aid is still prevalent worldwide, contrary to the reporting by Western Media. Rather than focusing on spreading disinformation about the initiative, Western countries can take a leaf out of China’s BRI.
The thoughts and opinions expressed in this are those of the author and not necessarily WeThePress.