China’s dept trap- A geo-strategy

American statesman John Adams famously said, “There are two ways to conquer and enslave a country: One is by the sword; the other is by debt.” China, choosing the second path, has embraced neo -colonial era practices and rapidly emerged as the world’s biggest official creditor. By extending huge loans with strings attached to financially vulnerable states, it has not only boosted its leverage over them but also ensnared some in sovereignty-eroding debt traps. Instead of first evaluating a borrower country’s creditworthiness, China is happy to lend, because the heavier the debt burden on the borrower, the greater China’s own leverage becomes.

Debt-trap diplomacy is a term in international finance which describes a creditor country or institution extending debt to a borrowing nation partially or solely for the lender to increase its political leverage. The term “Debt-trap diplomacy” was first coined by an Indian academic, Brahma Chellaney. He called China’s predatory or exploitative lending practices, which overwhelm poor countries with unsustainable loans and force them to cede strategic leverage to China. The term was first used in 2017; within 12 months it had quickly spread through the media, intelligence circles and Western governments.  It was further defined in a 2018 report by Harvard Kennedy School‘s Belfer Center for International Affairs, which described debt-trap diplomacy in the context of Chinese geostrategic interests.

The creditor country is said to extend excessive credit to a debtor country with the intention of extracting economic or political concessions once the debtor country becomes unable to meet its repayment obligations. The conditions of the loans are often not made public and often come with conditions that suit the lender. The term is most commonly associated with China, but has also been applied to the International Monetary Fund (IMF); both allegations are disputed. The term “debt-trap diplomacy” has been used in official documents by the United States government from the Trump administration onward. Multiple American government documents refer to it, such as “The Elements of the China Challenge” (2020).

China’s overseas development policy has been called debt-trap diplomacy because once an indebted country fails to service its loans; it becomes vulnerable to pressure from China to support its geostrategic interests. According to Brahma Chellaney, “it’s clearly part of China’s geostrategic vision”. The Chinese government has been accused of requiring secret negotiations and non-competitive pricing on projects in which bidding must be closed and contracts must go to Chinese state-owned or state-linked companies charging significantly above-market prices.

For example, a 2006 loan to an African country, Tonga sought to rebuild infrastructure. From 2013 to 2014, Tonga suffered a debt crisis when the Exim Bank of China, to which the loans were owed, didn’t write them off. The loans claimed 44 percent of Tonga’s gross domestic product (GDP). Some analysts have said such practices highlight the China’s hegemonic intentions and challenges to states’ sovereignty. S. K. Chatterji at Asia Times commented that China’s BRI-led debt-trap diplomacy is the economic aspect of China’s ‘salami’ slicing strategy.

Former US Secretary of State Mike Pompeo said that China’s loans are facilitated with bribes, adding “China shows up with bribes to senior leaders in countries, in exchange for infrastructure projects” in an October 2018 speech.

Analysts have posited three strategic goals behind China’s lending:

1) “Filling out a ‘String of Pearls‘ to solve its ‘Malacca Dilemma’ and project power across vital South Asian trading routes;

2) Undermining and fracturing the US-led regional coalition contesting Beijing’s South China Sea claims;

3) and enabling the People’s Liberation Army Navy to push through the ‘Second Island Chain’ into the blue-water Pacific”.

Misreporting

Research by AidData, an international development body at William & Mary University in the US, finds that half of China’s lending to developing countries is not reported in official debt statistics.

It is often kept off government balance sheets, directed to state-owned companies and banks, joint ventures or private institutions, rather than directly from government to government.

There are now more than 40 low and middle-income countries, according to AidData, whose debt exposure to Chinese lenders is more than 10% of the size of their annual economic output (GDP) as a result of this “hidden debt”.

Djibouti, Laos, Zambia and Kyrgyzstan have debts to China equivalent to at least 20% of their annual GDP.

Much of the debt owed to China relates to large infrastructure projects like roads, railways and ports, and also to the mining and energy industry, under President Xi Jinping’s Belt and Road Initiative.

National Assets Lost

Some borrowing states, when unable to repay Chinese loans, are compelled to surrender strategic assets to China. Water-rich Laos’s transfer of its national electric grid to Chinese majority control holds implications for its water resources too as hydropower makes up more than four-fifths of national electricity generation.

One of China’s earliest successes was in securing 1,158 square kilometers of strategic territory from Tajikistan in 2011 in exchange for debt forgiveness. Since then, as the Chinese military base in Badakhshan underscores, China has further consolidated its foothold in Tajikistan, due to a corrupt power elite there.

A more famous example is the Sri Lankan transfer of the Hambantota Port, along with more than 6,000 hectares of land around it, to Beijing on a 99-year lease. The transfer of the Indian Ocean region’s most strategically located port in late 2017 was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving away his daughter to the cruel money lender.

China’s debt-trap diplomacy has not spared even its close ally Pakistan. Saddled with huge Chinese debt, Pakistan has given China exclusive rights, coupled with a tax holiday, to run Gwadar Port for the next four decades, with Beijing also pocketing 91% of the port’s revenues. China also plans to build near Gwadar a Djibouti-style outpost for its navy. Gwadar has become the center of a massive, resolute protest against Chinese presence in the country.

The locals and even those not from the city have gathered in Gwadar to oppose Chinese presence in Balochistan, the province where Gwadar is located.

In small island nations, China has converted big loans into acquisition of entire islets through exclusive development rights. China took over a couple of islets in the Indian Ocean archipelago of the Maldives and one island in the South Pacific nation of the Solomon Islands. The European Union, meanwhile, has refused to bail out the tiny Balkan republic of Montenegro for mortgaging itself to China.

China often begins as an economic partner of a small, financially weak country, only to gradually become its economic master. The vast debts owed to China will not disappear simply because Beijing erects a curtain of silence. And the burden of repayment inevitably will be shouldered by the people who least can afford to make sacrifices. Although China may have waived off debts and negotiated loans in numerous African countries, the same cannot be said for other parts of the world. This difference may be attributed to the fact that presently, the African continent does not offer immediate geostrategic opportunities to Beijing compared to other parts of the world.