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China and its Debt Trap Diplomacy

The use of debt as an instrument of foreign policy is done with the sole objective of establishing Chinese hegemony across different part of the world, a practice which could impoverish further several of the underdeveloped regions of the world.

The entire world has shifted its focus to China as the SARS-Cov-19 pandemic spread across countries having a devastating impact on the global economic system. The focus so far has been on the rise of China as an important trading partner as it integrated itself into all major global value chains. There has been limited focus on China’s use of foreign policy as an instrument to further its economic interest and subsequently using its economic might as an instrument of its foreign policy.

One of the reasons why China has shifted to hard-ball diplomacy is because it has recognized its might and has started to exercise it with the intention of establishing its hegemony across important regions of the world. This has been a by-product of its excessive use of debt as an instrument of its foreign policy. This tendency has often been ignored even as we focused extensively on China’s meteoric rise in the global trade regime. Popular conception has been that China has used debt as an instrument of foreign policy, often purchasing key assets across the African continents, however, their policy has not been limited to just African countries as China has lent extensively to several other developing countries, including those in Latin America or in Asia.

As an outcome of decades of this process, data shows that China has outstanding claims over 5 per cent of the global GDP and with over $1.5 trillion in loans, China is the world’s largest lender. To put things in perspective, this figure is far greater than multilateral institutions such as the World Bank or the International Monetary Fund.

Such practices have been termed as debt trap diplomacy which has become the cornerstone of Beijing’s foreign policy for several years as it extends credit to countries. The extension of credit is done with the intention of extending it beyond the repayment capacity of the country and subsequently, allows the lender to extract either economic or political benefits once the borrower defaults.

China does not support any globally recognised sustainable transparent lending practices which are often driven by the International Monetary Fund and the World Bank or forums like the Paris Club.

A key example closer to India is of Sri Lanka which used a loan from China to build a new port in the city of Hambantota. In 2017, Sri Lanka had to sign over the port to China with a 99-year lease for its use. This illustrates the risks associated with these loans and is often in contrast with how the Paris Club Countries have addressed the issue of using debt as an instrument to assist developing countries.

The Paris Club is essentially a group of sovereign creditors comprised of 22 countries which includes the US and aims at providing support to poorer countries. For starters, several loan contracts by these countries and multilateral agencies are often transparent, which is in contrast with the Chinese model of lending. Moreover, Paris Club members are generally committed to debt sustainability and often restrain from excessive lending. Furthermore, there is a growing focus on appropriate repayment solutions during economic crisis while there’s also occasional debt relief contingent on economic reforms. The same however, cannot be said about China.

With the West receding and focusing upon its internal matters, China is on a rise to assert its influence, especially in the African continent. As the main trading partner since 2008, China is using debt to expand its footprint in the continent which allows the country to conduct business activities, at the same time ensure security of its citizens and companies. The Sri Lankan episode is still fresh in memory, therefore it is concerning if the Africa’s increasing reliance on China as a source of funding for the major infrastructure projects will lead African nations towards a similar fate, wherein they cede to China’s global strategic agenda.

For instance, the tiny nation of Djibouti positioned in East Africa on the map seems to be serving a major role in China’s long-term plans. Beijing enjoys considerable influence in the country through a multitude of infrastructure projects; a new port, two new airports, the Ethiopia-Djibouti Railway, to name a few. The fact that projects of such massive scale are concentrated in a small but strategically located country which is short on money, allows China to play a significant role in the region. The country has also witnessed the creation of the first Chinese overseas military base on its turf. It has been argued that this military base represents the first pearl in China’s ‘String of Pearls’ along the sea route which connects China to the Middle East. The pearls are representative of a theory regarding China’s ambitions in the Indian Ocean. The strategic similarities to the Sri Lankan experience are uncanny.

Western leaders have been quick in quoting examples to warn the African countries of China’s increasing economic might in the continent and cautioned them against getting lured by the cheap loans offered by China. Billions of dollars dispensed by Beijing in the form of concessional loans is offered with fewer strings attached as compared to loans offered by Western nations, making the Chinese loans more attractive in nature. Money lent by China is strategically collateralised, often in the form of resources in return for cash.

The recipient countries with a weak or underdeveloped financial market suffer from low credit ratings which makes it difficult for them to access and obtain funding from the international finance market. Unable to make repayments on time, China demands favourable access to natural resources, mineral assets or even strategically located ports. A good example is Angola, which is paying its debt to China with crude oil which has created major economic imbalances for the country. Alternatively, China interests in the continent are also represented by the country’s licensed access to fisheries and mines.

However, China does not support any globally recognised sustainable transparent lending practices which are often driven by the International Monetary Fund and the World Bank or forums like the Paris Club. Such a situation have given rise to concerns regarding issues of transparency, sustainability and commercial viability of concessional loans offered by China which have witnessed a tenfold growth in the past five years. Between 2000 and first quarter of 2019, approximately 85 instances have been noted wherein China either cancelled or restructured debt globally. Presently, with no contracts officially published, there is little information in the public domain about how Beijing responds to a loan default.

The Chinese debt trap diplomacy is clearly not in favour of the African nations, at the same time is enabling China to yield profits and grab more power and influence in the continent. We can safely describe China’s economic ambitions or goals in Africa as the ‘Trojan Horse’ and voice their criticism against China’s BRI initiative as it aids the process of laying debt traps along its course.

It is interesting to observe how Beijing leverages debt strategically to ensure political influence in primarily low-income or middle-low income countries which are vulnerable in nature, leading to problems of both economic and political sovereignty in the loan recipient nations.

In terms of economic gains, a major part of the Sino-African trade are the Chinese imports from Africa, including ores, crude oil and agricultural products which raise questions against China’s expanding foothold in the continent. Recycling the ways of East India Company during its time in India, China takes raw materials from African countries, converts them into finished products, only to be sold back into the African markets.

Overseas development assistance offered by China through loans to developing nations also creates more opportunities for Chinese citizens and companies. Terms of loan agreements mostly include, allotment of contracts for respective infra projects only to Chinese companies only along with Chinese workers taking charge of the sites. Therefore, less employment opportunities for natives and national firms of the loan receiving country.

The approach of debt diplomacy is also at the heart of the Belt and Road Initiative (BRI) which takes a more integrated view of the deepening the energy, logistics and communication networks across Asia, Europe, Middle East, and Africa. This provides them with the ability to obtain raw materials from Africa through the existing infrastructure, convert it into finished goods and sell them in the international markets. The entire infrastructure is geared mostly with the agenda of further global integration with the underlying intention of making China central to the global economic system.

This form of diplomacy is therefore an interesting case of leveraging its dominance in international trade to further dominate the international finance flows with the intent of protecting and furthering their dominance in international trade. Not surprisingly, this new form of diplomacy is unprecedented and has been termed as a form of neo-colonialism which is essentially the use of economic or other pressures to influence other countries.

The objective of China seems to be clear in establishing its hegemony and further integrating it with the global economic system. The objective is to create a new form of dependency to extract rents from the less developed parts of the world. Therefore, this debt-trap diplomacy seems to be an integral part of Beijing’s vision for the future of the 21st century.

(Jhoomar Mehta is a New Delhi-based public policy and development finance researcher while Karan Bhasin is a New Delhi-based economist. The views expressed in the column are their own).


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