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China debt trap: Fact vs. propaganda

Finance 2022-02-21, 4:31pm

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Anis Chowdhury



Anis Chowdhury

As China’s involvement in Bangladesh’s socio-economic progress deepens, one can

also hear the cry of “China debt trap”. Unfortunately, a good number of commentators and academics in Bangladesh are apprehensive. One common case of a so-called China debt trap everyone cites is Sri Lanka’s Hambantota Port, the case par excellence for China’s debt-trap diplomacy.

The conventional account is that China had lent money to build the port, knowing that Sri Lanka would experience debt distress, so China could then seize it in exchange for debt relief, permitting its use by China’s navy. However, independent studies have debunked the narrative, and exposed anti-China propaganda.

Debt-trap diplomacy

The term “debt-trap diplomacy” was coined by Indian academic Brahma Chellaney in

2017, claiming that China is extending excessive credit to countries with the intention

of extracting economic or political concessions when a debtor country becomes unable to meet its repayment obligations. According to him, such predatory lending practices of China overwhelm poor countries with unsustainable loans and force them to cede strategic leverage to China.

Unsurprisingly, the term spread like a bonfire through the Western media, intelligence circles and governments within a year. The Harvard Kennedy School’s Belfer Center for Science and International Affairs further defined the term in 2018 in the context of Chinese geostrategic interests.

The United States government documents began using term “debt-trap diplomacy” during the Trump administration. A number of US Government documents, such as the 2020 Department of State report “The Elements of the China Challenge”, refer to debt-trap diplomacy. Joe Biden’s administration continues the Trump administration’s accusation that China has been using loans to entice borrowing countries into a “debt trap” that gives Beijing sway over strategic assets and natural resources when governments cannot repay.

Responding to the US “dog-whistling”, Richard Moore, the head of Britain’s foreign intelligence agency MI6, said in an interview with the BBC that China uses “debt traps” to gain leverage over other countries.

But that accusation has failed to stand up under scrutiny, even by some Western institutes. There are no cases, among the hundreds of loan arrangements studied by AidData – a research lab at William and Mary’s Global Research Institute and some other researchers, of Chinese state-owned lenders actually seizing a major asset in the event of a loan default.

The Sri Lankan myth

The influential US magazine, The Atlantic, published an article on 6 February 2021, titled, “The Chinese ‘Debt Trap’ Is a Myth” with a sub-title, “The narrative wrongfully portrays both Beijing and the developing countries it deals with”. Based on their in-depth research, the authors of the article, Deborah Brautigam And Meg Rithmire say, “Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country, much less the port of Hambantota”.

Lee Jones and Shahar Hameiri in their report for the UK’s prestigious Chatham House derive almost the same conclusion that the narrative of China’s debt-trap diplomacy is simply incorrect.

Unlike most Western financing, China’s financing is demand-driven. That is, the projects are not pushed by China. For example, the Hambantota Port project was proposed by former Sri Lankan President Mahinda Rajapaksa, not Beijing.

Feasibility studies by the Canadian International Development Agency and the Danish engineering firm Rambol found the project viable. The Chinese construction firm Harbor Group got involved only after the US and India refused Sri Lanka’s request.

There was no debt-for-asset swap when Sri Lanka faced difficulties in servicing the Chinese loan. Rather, a Chinese state-owned enterprise leased the port for US$1.1 billion, which Sri Lanka used to paydown debts to other creditors – mainly Western – and boost its foreign reserves.

The Chatham House report also notes that Sri Lanka’s debt distress arose not from Chinese lending, but from excessive borrowing on Western-dominated capital markets. China is also not the main cause for other countries’ growing debt problem.

When the US Federal Reserve began tapering its quantitative easing programme, suddenly Sri Lanka’s cost of borrowing increased, forcing it to seek assistance from the International Monetary Fund (IMF).

It is the re-play of the Latin American debt crisis in the 1980s, caused by sudden interest rate hikes in the US, forcing countries to the IMF’s structural adjustment programme in exchange for financial support.

The Chatham House report found that China’s navy vessels cannot use the port; instead, it houses Sri Lanka’s own southern naval command. It concludes, “In short, the Hambantota Port case shows little evidence of Chinese strategy, but lots of evidence for poor governance on the recipient side”. The port quickly became a “white elephant” because of government’s corrupt and unsustainable development programmes.

The flawed Malaysian case

China is also accused by Western media of seeking military and strategic influence in the Straits of Malacca (Melaka), through which pass some 80% of Chinese oil imports. The debt-trap narrative was fuelled by claims that Beijing had inflated loans for the East Coast Rail Link and two gas pipeline projects in order to bail out the troubled sovereign wealth fund 1Malaysia Development Berhad (1MDB).

The authors of the Chatham House report notes, “The real issue here is not one of geopolitics, but rather – as in Sri Lanka – the recipient government’s efforts to harness Chinese investment and development financing to advance domestic political agendas, reflecting both need and greed”.

The debt-trap argument is flawed as evidence for Chinese strategic direction and coordination of projects is scant; the initiatives were clearly driven primarily by commercial, economic and political imperatives in Malaysia. Evidence of a debt trap is even weaker, as the IMF judged Malaysia’s public debt to be ‘manageable’ in late 2017 and predicted it would decline steadily relative to GDP in the period to 2022.

Not a loan shark

Interest rates on China’s loans are close to commercial market rates. China has joined the G20’s debt service suspension initiative and has contributed US $2.1 billion, the highest among the countries taking part in the plan. According to the World Bank, since May 2020, more than US$10.3 billion has been delivered in debt relief by G20 countries under this scheme.

(Anis Chowdhury, Adjunct Professor, Western Sydney University and former senior

United Nations official.)