My take: In the New Cold War, a “debt trap” label for Chinese loans

As China increases its loans to other developing countries, accusations that these loans are leading to a “debt trap” are growing rapidly. As it dramatically increases development funding as other sources continue to dwindle, condemnation of China’s loans is being weaponized in the new Cold War.

A diplomacy of the debt trap?

The catchy term “debt trap diplomacy” was coined by Indian geo-strategist Brahma Chellaney in 2017. According to him, China is ready to extract economic or political concessions when a debtor country is unable to to meet its payment obligations. Thus, it overwhelms poor countries with loans to eventually enslave them.

Unsurprisingly, his slogan has been popularized to demonize China. Harvard University’s Belfer Center complacently elaborated on the nefarious geostrategic interests of the rising Asian power. Meanwhile, in various areas, from foreign policy to trade, the Biden administration is pursuing related Trump policies.

But even western scholars generally wary of China dispute the new narrative. A London Chatham House study concluded that it’s just plain wrong – flawed – with little evidence to back it up.

Studying China’s loan deals for 13,427 projects in 165 countries over 18 years, AidData – from the US-based Global Research Institute – did not find a single instance of China seizing a foreign asset at the following a payment default.

China has been the “new kid on the block” in development finance for more than a decade. Its growing lending has helped fill the gaping void left by the decline and growing orientation to private enterprise of financing by the Global North.

Instead of tied aid that pushes exports, as before, it now shamelessly promotes foreign direct investment from donor countries. Unless disbursed through multilateral institutions, China’s increased lending to support businesses overseas has done little to help developing countries cope with renewed aid concessional “tied”.

The grand narratives of “debt trap diplomacy” are great propaganda, but obscure the real impacts of debt flows. Most Chinese loans are for infrastructure and productive investment projects, not donor-determined “strategic loans”. Some countries “overborrow”, but most do not. Offers can turn sour, but most apparently don’t.

While leaving less room for discretionary abuses in implementation, project loans generally disadvantage borrowers. This is largely due to the conditions of foreign investment and financing sought, whatever the source. Therefore, the results of most of these borrowings – not just from China – vary.

Sri Lanka

The port of Hambantota in Sri Lanka is the most frequently mentioned Chinese debt trap case. The typical media narrative assumes he lent money to build the port in the expectation that Sri Lanka would run into debt. China would then have seized it – in exchange for debt relief – allowing its navy to use it.

But independent studies have debunked this version. Last year, The Atlantic insisted: “The Chinese ‘debt trap’ is a myth.” The caption read: “The narrative misrepresents both Beijing and the developing countries it deals with.

He said: “Our research shows that Chinese banks are willing to restructure the terms of existing loans and have never seized an asset from any country, let alone Hambantota Port.”

The project was initiated by then President Mahindra Rajapaksa, not by China or its bankers. Feasibility studies by the Canadian International Development Agency and Danish engineering firm Rambol found it viable. Chinese construction firm Harbor Group only became involved after the United States and India turned down loan requests from Sri Lanka.

Sri Lanka’s subsequent debt crisis is due to its structural economic weaknesses and the composition of its external debt. The Chatham House report blamed excessive borrowing from Western-dominated capital markets – not Chinese banks.

Even the influential journal US Foreign Policy does not attribute Sri Lanka’s indisputable economic woes to Chinese debt traps. Instead, he says, “Sri Lanka has not successfully or responsibly updated its debt management strategies to reflect the loss of development assistance it has grown accustomed to since then. decades”.

As the US Federal Reserve tapered off its “quantitative easing”, borrowing costs – due to Sri Lanka’s ongoing balance of payments problems – rose, forcing it to seek help from the International Monetary Fund. Some argue that borrowing even more from China is the best option available to the island republic.

To set the record straight, there was no swapping of debt for assets after Sri Lanka could no longer service its external debt. Instead, a Chinese state-owned enterprise leased the port for US$1.1 billion. Sri Lanka has thus increased its foreign exchange reserves and repaid its debt to other creditors, mainly Western ones.

Additionally, Chinese navy ships cannot use the port – home to Sri Lanka’s own Southern Naval Command. “In short, the Port of Hambantota case shows little evidence of Chinese strategy, but plenty of evidence of poor governance on the recipient side, the Chatham House report said.

Malaysia

China has also been accused by the media of seeking to influence the Strait of Melaka, through which some 80% of its oil imports pass. Proponents of the debt trap claim Beijing has inflated loans for Malaysia’s controversial East Coast Rail Link (ECRL).

The Chatham House report notes: “The real problem here is not geopolitical, but rather – as in Sri Lanka – the recipient government’s efforts to harness Chinese investment and development finance to advance national policy agendas, reflecting both need and greed.

The ECRL was launched by convicted former Malaysian Prime Minister Datuk Seri Najib Razak. Seemingly to develop Peninsular Malaysia’s less-developed east coast under China’s Belt and Road Initiative, he rejected other cheaper but much-needed options.

Borrowing is much more than necessary – an issue that deserves an independent audit. The loan terms were structured to delay repayment – to Najib’s political advantage by “passing the buck” to future generations. But such abuse is the fault of the borrower – not the lender – unless there is official Chinese collusion.

Non-alignment for our time

There is undoubtedly a lot of room to improve financing for development, in particular to achieve more sustainable development. Instead of lending mainly to the United States, as before, the growing role of China can still be improved. To begin with, all parties involved must adhere to the UN Principles on Responsible Sovereign Lending and Borrowing.

After more than half a century of largely betrayed promises by Western donors, China’s development finance has dramatically improved “South-South cooperation”. Meanwhile, the needs for sustainable development financing – compounded by global warming, the pandemic and the war in Ukraine – have increased.

After decades of the West denying China a proportionate voice in decision-making, even under the rules it established, its role on the world stage has grown. But instead of working together for the good of all, the rich countries seem to want to demonize it. Unsurprisingly, most developing country governments do not seem discouraged.

As the New Cold War and the reach of economic sanctions expand, collateral damage is undermining financing for development and developing countries. To deal with the new situation, developing countries must consider building a new non-aligned movement for our dark times.


Anis Chowdhury, a former professor of economics at the University of Western Sydney, held senior UN positions from 2008 to 2015 in New York and Bangkok. Jomo Kwame Sundaram, a former professor of economics, was UN Under-Secretary-General for Economic Development. He is the recipient of the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

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