Debt-trap diplomacy

Western analyst warns that the money invested by China in Africa may help it close the gap for its infrastructure needs, but the practice is unethical.[11] The rising debt of developing nations in the world from China has become a part of the economic growth history.[12] The far-reaching approach of China in promoting its lending history is said to be dramatic.[12] Studies of economic experts in the practices of China found that the patterns of China's bank lending are purposefully done to trap governments and gather strategic opportunities for China.[12] Chellaney alleges that this is “clearly part of China’s geostrategic vision”.[13]

China's overseas development policy has been considered debt-trap diplomacy because once the indebted economies fail to service their loans, they are said to be pressured to support China's geostrategic interests.[14] Some commentators, for instance, maintain that China is buttressing repressive regimes in a neocolonialist manner through high-rate loans, with the goal of coercing these countries once they default so that they align with China on key strategic and military issues.[15][16] China has been accused of requiring secret negotiations leading to non-competitive pricing on projects where bidding must go to Chinese state-owned or linked companies that charge significantly higher prices than would be charged on the open market, and bidding must be closed.[15]

Critics of Chinese lending practices allege that many loans associated with China's Belt and Road Initiative to build infrastructure projects using Chinese contractors in strategically located developing countries are a type of debt-trap diplomacy.[1][17] Critics in each of the Western,[18][19] Indian,[20] and African[21][22] media have also criticised the secretive conditions of the loans as well as their high interest rates. An example was the 2006 loan awarded to Tonga, which sought to improve its infrastructure. From 2013 to 2014, the country suffered a debt crisis since the Ex-Im Bank of China, to whom the loans are owed, did not forgive them.[23] The loans claimed 44 percent of Tonga's GDP.[23] Western analysts have suggested China's alleged debt-trap diplomacy may hide hegemonic intentions and challenges to states' sovereignty.[24] The policy has also been accused of imposing unfair trade and financial deals as cash-strapped countries are unable to resist Beijing's money.[25]

China's loans to Africa are in exchange for long-term high value resources of the country that includes ports and minerals that most likely end at exploitation of the natural resources by the African government, and the Chinese government through giving them advantage of access to utilize the country's resources.[13] Most importantly, China was allowed to interfere with the country's economy and gain strategic advantage in Africa and other host countries.[26] Jonathan Hillman, director of the Reconnecting Asia project for the Center for Strategic and International Studies states “If it can carry goods, it can carry troops”.[12]

A SAIS-CARI report from August 2018 found that "Chinese loans are not currently a major contributor to debt distress in Africa. Yet many countries have borrowed heavily from China and others. Any new FOCAC loan pledges will likely take Africa’s growing debt burden into account. "[27]

Those who have disputed the criticisms include a report by the Lowy Institute,[28] Chinese state-owned tabloid Global Times[29], Rwandan President Paul Kagame”[30] and ANU academic Darren Lim.[31] American academic Deborah Brautigam has written, “The evidence so far, including the Sri Lankan case, shows that the drumbeat of alarm about Chinese banks’ funding of infrastructure across the BRI and beyond is overblown.” [32]

Researchers at Johns Hopkins University, warned that African countries might be unable to repay Chinese loans, however, Chinese loans are noted as not a major contributor to debt distress in Africa.[33]

A number of infrastructure projects funded by Chinese loans are thought to have had a positive impact on the economies of a number of African countries via much-needed developments in infrastructure.[38] The main types of infrastructure that these debts improve include roads, railways and ports.[38] Improved infrastructure favors internal trade, healthcare and education systems.[38] One such example of infrastructure development is the Merowe Dam Project in Sudan to produce hydroelectric power.[38]

In the 2015 and 2017 records of World Bank, a number of African countries have large debts not only with China but also with other creditor nations.[39] Higher interest rates of about 55% from the private sectors prompted Africa to go to China for loans, which is around only 17%.[39] Also, the debts owed of the African countries from China are allocated for investments on sectors needing critical development and growth and not just for consumption.[40] China in exchange demands payment in the form of jobs, and natural resources.[40] In economic theory and practice, any country can borrow from another country to finance its economic development.[40]  However, it is not always easy to find someone who will lend money. The global competition on which country is best to invest money in is in fact, a country's sign of financial strength, which is why a number of African countries do not consider the situation to be a debt-trap.[40]

Belt and Road Initiative (BRI) is a multi-billion-dollar expansion project of China, with the aim of expanding its power all around the world through lending countries to spur its economic growth.[41] BRI is also sometimes called “Chinese Marshall Plan”. The BRI project was launched in 2013 by paramount leader Xi Jinping with the goal of improving the infrastructure of countries around Europe, Africa, and Asia in exchange of gaining global trade opportunities and economic advantage.[41] The plan consists of spearheading and investing on 60 projects around the world.[42] The initial expected cost of the BRI is over $1tn, and actual costs are even higher.[42] The risks involved for countries are unexpectedly high. In recent news, many countries in the BRI project have started rethinking the perils of the projects and the fact that most have repayment issues.[42] Jonathan Hillman, director of the Reconnecting Asia project at the Center for Strategic and International Studies in Washington believes that there is more to these projects than just mere financial strategy, he stated “It’s also a vehicle for China to write new rules, establish institutions that reflect Chinese interests, and reshape ‘soft’ infrastructure.”[42]

The negative effects of Chinese financial loans to Africa's economy include fear of losing local companies to those Chinese with strong buying powers.[41] Debt from China has also promoted illicit trade among China and African countries.[42] Such imports are cheap because of China's cheap labor and are thus preferred for locally manufactured goods. Examples of cheap imports from China include clothes and electronics. Trade between African countries and China has also affected ties between African countries and other continents, especially Europe and North America. According to Brautigam, Chinese loans are prone to misuses and have promoted the levels of corruption and fight for power in African countries.[41]

Over four fifths of China's investments are spent on infrastructure projects in underdeveloped and developing countries.[42] Forecasts of the International Monetary Fund (IMF) show that economic growth rate of China will fall to around 6.2%, which is around 0.4% from 2018 of 6.6%.[43] The reason for the possible decline is the increasing trade disputes of China and US. Another is the sudden increase of debts in the past decade, which was used to fuel infrastructure programs.[42] Africa fears the slow growth of China, as this may result to impending government infrastructure projects.

Debt-trap diplomacy refers to the strategy used by China to lure or trap developing or underdeveloped countries like in Africa to borrow money to be used for much needed infrastructure projects.[44] Some have that there is no debt-trap diplomacy but a simple tactic to financial strategies.[45] In the past, many countries have taken and tested innovative and new ways and concepts to increase financial gains from trading partners. The ability of the country to utilize its resources to increase its wealth is not at all bad. However, as many experts see it, the dependency of the developing countries like Africa to China in exchange of opportunistic loan offers is a sure way to deny the people of its sovereignty and self-sustaining growth in the longer-term scope.[45]

Between 2006 and 2017, Kenya has taken large loans of at least $9.8 billion (Sh1043.77 billion) from China.[46] Chinese debt accounts of 72% of overall foreign debt.[47]
China lent Kenya extensive loans to build a standard gauge railway between Mombasa and Nairobi and highways in Kenya[48][49] totaling over US$6.5 billion as of 2020.[3] It was reported in late December 2018 that Kenya may soon face default on Chinese loans to develop its largest and most lucrative port, the Port of Mombasa. This could force Kenya to relinquish control of the port to China.[50][51] The Kenyan media has debated whether Chinese loans are worth the risk of falling into debt traps, drawing analogies with § Sri Lanka, and some commentators have argued that these loans could jeopardize Kenyan sovereignty.[48][52]

South Africa is estimated to owe the equivalence of 4% of its annual GDP to China.[53] The country has received multiple tranches of Chinese loans some of which have raised concerns around their opaque conditions[54] and alleged links to corruption within South Africa. This includes a controversial US$2.5 billion loan from the Chinese Development Bank to state-owned South African electrical utility Eskom arranged during the Jacob Zuma government,[55] the conditions of which were not made public.[56] Another US$2.5 billion loan from a private Chinese company, Huarong Energy, to Eskom was found by the Zondo Commission of Inquiry into state corruption to be improper[57] prompting Eskom chairperson Jabu Mabuza to publicly state that Eskom would not be repaying the loan due to irregularities and corruption involved in the issuing of the loan.[58]

An additional R370 billion (US$25.8 billion) loan from the China Development Bank during the presidency of Cyril Ramaphosa was given to promote a 2018 economic stimulus package. The South African government initially described the loan as a "gift"[59] whilst the details of the loan were not made public thereby causing significant public controversy.[60][61] The government justified the loan by stating that the interest rate was not exorbitant.[62] The loan was criticized by the opposition Democratic Alliance political party for possibly pushing the country into a “debt trap”.[63][60]

• Nigeria: US$3.1 billion of the country's total US$27.6 billion foreign debt is owned by China raising concerns by the Nigerian financial publication Nairametrics of falling into a Chinese debt trap given the country's notable problems with corruption.[64]
• Zambia: US$7.4 billion of the country's total $US8.7 billion of debt is owned by China representing a large debt burden given the relatively small size of Zambia's economy.[65] In 2018, Zambian lawmakers debated whether Chinese loans, characterized as reckless and difficult to repay, put Zambian sovereignty at risk.[66] It was reported in late 2018 that the Zambian government is in talks with China that may result in the total surrender of the state electricity company ZESCO as a form of debt repayment since the country has defaulted on plethora of Chinese loans for Zambia's infrastructure projects.
• Djibouti: Loans to develop a strategic port.[67] Chinese loans total 77% of the country's total debt.[65] Djibouti owes over 80 per cent of its GDP to China and in 2017, became host to China's first overseas military base.[68]
• Republic of the Congo: An estimated $7.1-billion is owed to Chinese lenders. The exact number is unknown even to the Congolese government.[65]
• Egypt: China is financing the country's new capital of New Cairo.[69] In an interview, Gen. Ahmed Zaki Abdeen, who heads the Egyptian state-owned company overseeing the new capital, criticized American reluctance to invest in Egypt, saying: “Stop talking to us about human rights,” he says. “Come and do business with us. The Chinese are coming — they are seeking win-win situations. Welcome to the Chinese.”[69]

Loans given by the People's Republic of China to construct the Hambantota Port in Sri Lanka is given as an example of debt trap diplomacy by critics following Sri Lanka's failure to pay debt obligations and a subsequent 99-year lease given to China in place of payment.

Critics cite the example of a loan given to the Sri Lankan government by the Exim Bank of China to build the Magampura Mahinda Rajapaksa Port[74] and Mattala Rajapaksa International Airport as an example of debt-trap diplomacy by China is. The state-owned Chinese firms China Harbour Engineering Company and Sinohydro Corporation were hired to build the Magampura Port at a cost of US$361 million which was 85% funded by China's state-owned Export–Import Bank at an annual interest rate of 6.3%.[75] Due to Sri Lanka's inability to service the debt on the port, it was leased to the Chinese state-owned China Merchants Port Holdings Company Limited on a 99-year lease in 2017.[17] This caused concern in the United States, Japan,[76] and India that the port might be used as a Chinese naval base[77] to contain China's geopolitical rivals

In 2003, Suramadu Bridge was built by a consortium of Indonesian companies working with China Road and Bridge Corp. and China Harbor Engineering Co. Ltd. The total cost of the project, including connecting roads, has been estimated US$445 million.

In 2007 The coal-fired 990 MW Indramayu West Java 1 power plant was inaugurated in October 2011. Construction began in 2007 and was managed by a consortium of contractors: China National Machinery Industry Corporation, China National Electric Equipment Corporation, estimated cost: $870 million

In 2011, Sumatra coal railway, estimated cost US$1.5 billion

In 2015 Jakarta-Bandung high-speed rail, estimated cost: around US$5.5 billion

In 2015 Central Kalimantan Puruk Cahu-Bangkuang coal railway, estimated US$3.3 billion

In April 2018, Indonesia and China signed five contracts worth $23.3 billion contract consists of several infrastructure projects such as a hydropower plant development and a facility to convert coal into dimethyl ether, among other projects.

In March 2019 Indonesia and China will execute an investment plan worth US$91.1 billion for 28 national projects under the framework of the Belt and Road Initiative (BRI), according to the first meeting of the Joint Steering Committee for the Construction of Regional Comprehensive Economic Corridors for Cooperation between the countries in Bali.

An interview conducted with Indonesian locals revealed they had no knowledge these projects were funded by China.

China had financed $22 billion worth of projects in Malaysia during the leadership of former Prime Minister Najib Razak.[15] On 31 May 2014, then-Prime Minister Najib Razak made a state visit to China where he was welcomed by China's Premier Li Keqiang. China and Malaysia pledged to increase bilateral trade to US$160 billion by 2017. They also agreed to upgrade economic and financial co-operation, especially in the production of halal food, water processing, railway construction and ports.[78]

After his inauguration in 2018, current PM Mahathir Mohamad cancelled projects worth approximately $2.795 billion with China Petroleum Pipeline Bureau for oil and gas pipelines, saying Malaysia would not be able to repay its obligations.[15] 90% of the cost of several of the pipelines in Borneo and from Malacca to Johor had been paid, but only 13% of the construction had been completed.[79] Mohamad further stated that some of the funding from the Exim Bank of China had been misappropriated as part of the 1MDB scandal.[80]

Mohamad and his Finance Minister Lim Guan Eng criticized the projects,[79] saying they were expensive, unnecessary, not useful, uncompetitive as open bidding was not allowed, secretive, conducted with no public oversight and favored Chinese state-owned firms and those affiliated with Najib's United Malays National Organisation (UMNO) party at inflated prices.[15] Locals in the city of Malacca also complained that the port was unneeded and the small company that was awarded the contract had ties to the previously ruling UMNO political party.[15]

When confronted with the China's String of Pearls strategy in the Indian Ocean, and China's motives in Malaysia and the Strait of Malacca, Malaysian Deputy Minister of Defense Liew Chin Tong said:

“You look at a map and you can see the places where China is plotting ports and investments, from Myanmar to Pakistan to Sri Lanka, on toward Djibouti. What’s crucial to all that? Our little Malaysia, and the Malacca Strait. I say publicly that we do not want to see warships in the Strait of Malacca or the South China Sea.”[15]