Why China’s debt trap diplomacy is a lie? Politicians in the United States and corporate media frequently spread the myth that, as part of its Belt and Road Initiative, China seduces poor nations into taking out predatory loans with exorbitant interest rates.
According to the legend, China assumes that the borrower nation would default on the loan, at which point it can grab the asset to increase its military or geostrategic power — proof of China’s allegedly invading the Global South.
The term “debt trap diplomacy” was first used in a 2017 academic study about China’s financing of Sri Lanka’s Hambantota Port that was published by a Northern Indian think tank. When two Harvard graduate students wrote a paper in 2018 accusing China of “debt book diplomacy,” and “leveraging accumulated debt to achieve its strategic aims.”
By now the “debt trap diplomacy” accusation has become a bipartisan one: Both the Trump and Biden administrations have peddled it, and it’s been further advanced by organizations such as the U.S. International Development Finance Corporation, and corporate media outlets like The New York Times, The Washington Post, and The Hill.
Issues with the ‘debt trap diplomacy’ myth
Generally, there are three to this “debt trap diplomacy” myth.
The first issue is the myth’s assumption that China unilaterally dictates Belt and Road Initiative projects to entice other nations into accepting these exploitative loans. In truth, bilateral exchanges and agreements are the main drivers of Chinese development financing. The recipient country, not China, chooses infrastructure projects based on its own economic and political objectives.
The narrative’s second issue is that it is based on the notion that China advances predatory loans with onerous terms and conditions to trap countries in debt. In actuality, China frequently offers loans with fairly low-interest rates and is prepared to renegotiate the conditions of current loans so that they are more advantageous to the borrower countries, or even to cancel loans entirely.
In reality, the Chinese government stated in August 2022 that it was cancelling 23 interest-free loans in 17 African nations. Before that, between 2000 and 2019, China had also forgiven $3.4 billion in loans it had made to African countries and restructured a total of $15 billion in debt.
And lastly, the third problem with this debt trap diplomacy narrative is that despite what it claims, China has never seized an asset because a country defaulted on a loan.
Sri Lanka’s Hambantota Port
One of the first examples of so-called Chinese “debt trap diplomacy” was at Sri Lanka’s Hambantota Port. According to the widely accepted narrative, as part of BRI, Sri Lanka sought to construct a port near the village of Hambantota on its southern coast.
Chinese banks then provided predatory loans to Sri Lanka for the construction of the port on the presumption that the government would default, enabling China to take the port in exchange for debt relief and establish a Chinese naval base there.
The port was offered by the Sri Lankan government, not by China, as Chinese development money is often recipient-driven, and the port was a plan that the country had for many years, well before BRI. In reality, the port’s financing had been sought after by the Sri Lankan government from both India and the US.
It went to China after both nations rejected it. The project was awarded to China Harbor Group, a Chinese construction company, and a Chinese bank agreed to finance it. Therefore, not only was the Hambantota Port never a Chinese idea in the first place, but all of this happened in 2007 – six years before the BRI was even started.
Another problem with characterising this as Chinese “debt trap diplomacy” is that Chinese loans were only a minor portion of Sri Lanka’s debt load. Only 9% of Sri Lanka’s $50 billion in external debt in 2017 was held by China. In actuality, the government of Sri Lanka owed more money to the World Bank and Japan than it did to China, with borrowing western loans accounting for the majority of its debt.
Additionally, the government organised a bailout through the International Monetary Fund as a result of Sri Lanka’s debt crisis. The Sri Lankan government also opted to lease the Hambantota Port to an experienced firm to use that money to pay off the Hambantota Port’s commercial failure.
The government of Mahinda Rajapaksa, president at that time, first approached Indian and Japanese firms, all of whom rejected the offer. It then negotiated with China Merchants Ports Holdings, a Chinese state-owned enterprise, to lease the port for 99 years in exchange for 1.12 billion dollars, which it used to pay off other debts.
In other words, there was no debt-for-asset swap here, as the story states — what happened to the port was not a “seizure” at all, but rather a fire sale to raise money, allowing Sri Lanka to pay off other debts and deal with other issues.
Lastly, many claims that China seized the Hambantota Port for military purposes. Then-Vice President Mike Pence even expressed fear that the port would “soon become a forward military base for China’s growing blue-water navy.”
This never happened. Sri Lankan diplomats and politicians have insisted that China using the port as a naval base was never featured in their talks with Beijing, with Karunasena Kodituwakku, the ambassador of Sri Lanka to China, even bluntly stating in an interview: “China never asked us. We never offered it.” Chinese naval ships are not permitted to use the port — it is for Sri Lanka’s naval command only.
Mass protests broke out in Sri Lanka more recently, beginning in March 2022, as people flocked to the streets out of frustration about fuel shortages and the rising cost of necessities. Once more, western media sources like The Washington Post, CNBC, and The Associated Press, among many others, seized the chance to attribute Sri Lanka’s economic crisis to Chinese credit.
The Wall Street Journal even referred to China as Sri Lanka’s “biggest creditor” and said that its lending practises “helped generate” the crisis to deflect attention from the IMF’s involvement. But once more, this is untrue. By 2021, western financial institutions and allies like Japan and India held 81% of Sri Lanka’s debt.
Beijing owns less than 10% of the company. The IMF alone had given loans to Sri Lanka 16 times at the time, always restructuring them to the benefit of its creditors during economic downturns. There is no Chinese “debt trap” in this situation; rather, the problem in Sri Lanka is the result of loans by western financial institutions, forced austerity measures, and neo-liberalization of the economy.
The Daily Monitor, the national newspaper of Uganda, published an article in November 2021 with the headline “Uganda surrenders key assets for China cash.” According to the story, if certain clauses in the agreement to develop Uganda’s Entebbe International Airport aren’t renegotiated, the country may be forced to hand it over if the loan isn’t paid back. The Export-Import Bank of China provided Uganda with a $207 million loan at 2% interest to expand the airport, which is a BRI project.
The Daily Show even aired a piece on the topic as the newest alleged illustration of China’s “debt trap diplomacy,” and The Wall Street Journal also reported on it when the headline went viral and India’s Economic Times, with the former claiming that “a clause in an agreement with the African nation has stirred a flap over whether the country signed away financial control of Entebbe International Airport.”
But according to an analysis by AidData, who obtained a copy of the contract, the airport was not even a source of collateral that the lender could seize in the first place! What the conditions of the agreement did require was that cash collateral is placed in a separate escrow account which could then be seized in the event of default — a fairly standard clause for international projects financing.
The viral story even led Vianney M. Luggya, spokesperson for the Uganda Civil Aviation Authority, to deny allegations of Chinese plans to seize the airport.
The real debt trap
It is obvious that the “debt trap diplomacy” of China is a story put forth by the United States to hide its own imperialist practices and to draw attention away from the IMF and World Bank’s own practise of forcing predatory loans with exorbitantly high-interest rates upon countries in the Global South.
Chinese loans, unlike those from the IMF and World Bank, which are attached to structural adjustment and privatisation programmes, are given for infrastructure projects, which are essential to a country’s development.
In fact, loans from the IMF and World Bank are given on the terms of privatising public services, slashing social safety programmes, and liberalising trade in order to advance western capitalist interests. The borrowing countries are kept in poverty and are trapped in a condition of debt because of the predatory interest rates, which make it impossible for them to repay the loans, to ensure further plunder and resource extraction at the hands of these same western capitalists. This is the real debt trap.
