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Debt-trap diplomacy is a term used as criticism of foreign policy of the Chinese government. The criticism claims China intentionally extending excessive credit to another debtor country with the alleged intention of extracting economic or political concessions from the debtor country when it becomes unable to honor its debt obligations (often asset-based lending, with assets including infrastructure). The conditions of the loans are often not made public and the loaned money is typically used to pay contractors from the creditor country.
- 1 Description
- 2 International reaction
- 3 In Africa
- 4 In Latin America
- 5 In Asia
- 6 Other Chinese examples
- 7 See also
- 8 References
The term 'Debt-trap diplomacy' is coined after the rising foreign investment of China in other countries. Recently analysts in the English-language media often reference the term with respect to the foreign policy of China, especially under Xi Jinping, General Secretary of the Communist Party of China since 2012. Xi has expanded China's foreign aid, infrastructure investment, energy engagement and interconnectedness. China is a world leader in infrastructure development, having undergone rapid economic growth since its reform and opening under Deng Xiaoping due to its infrastructure-based development strategy. This policy is 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. 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. 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.
The term has been used to describe China's loan practices with some developing countries. 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. Critics in each of the Western, Indian, and African 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. The loans claimed 44 percent of Tonga's GDP.
Western analysts have suggested China's alleged debt-trap diplomacy may hide hegemonic intentions and challenges to states' sovereignty. The policy has also been accused of imposing unfair trade and financial deals as cash-strapped countries are unable to resist Beijing's money.
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. The rising debt of developing nations in the world from China has become a part of the economic growth history. The far-reaching approach of China in promoting its lending history is said to be dramatic. 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. Indian strategist Brahma Chellaney explains that “It’s clearly part of China’s geostrategic vision”.
Africa's loans to China 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. Most importantly, China was allowed to interfere with the country's economy and gain strategic advantage in Africa and other host countries. 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”.
Criticizing the termEdit
Analyst, Ambassador Chas W. Freeman, Jr. (USFS, Ret.) claims that "Debt-trap policy" is a "snappy phrase invented by an Indian polemicist" and that "Yet the only instance of a so-called a “debt trap” ever cited is the port of Hambantota, commissioned by the since-ousted autocratic president of Sri Lanka to glorify his hometown. [...] Hambantota is less an example of a “debt trap” than of a stranded asset."
In response to the negative responses from other Western powers, at the recent Forum on China-Africa Cooperation (FOCAC) in September 2018, there was overwhelming African political support of the continued relationship with China. South Africa's Cyril Ramaphosa stated that “In the values that it promotes, in the manner that it operates and in the impact that it has on African countries, FOCAC refutes the view that a new colonialism is taking hold in Africa, as our detractors would have us believe.” Kenya's president Uhuru Kenyatta spoke on his appreciation for the Chinese support in the infrastructure development and Botswana's president Mokgweetsi Masisi exclaimed, “To China, her president and citizens, we admire and hold you in very high regard!”
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. "
|Year||Billions of US$|
China is a major stakeholder in Africa's economy with a significant influence on many aspects of the continent's affairs. Recently, African countries have rapidly increased their borrowing from China. According to research conducted as part of the Jubilee Debt Campaign in October 2018, African countries owed China US$10 billion in 2010 increasing to over $30 billion by 2016. China's lending to African countries is part of a large-scale overseas investment boom forming part of the country's quest to become an economic superpower. The top five countries in Africa with the largest current Chinese debt, are Angola ($25 billion), Ethiopia ($13.5 billion), Kenya ($7.9 billion), the Republic of Congo ($7.3 billion), and North Sudan ($6.4 billion).
Growing debt to China positively affects Africa's economy via much-needed developments in infrastructure. The main types of infrastructure that these debts improve include roads, railways and ports. Improved infrastructure favors internal trade, healthcare and education systems. One such example of infrastructure development is the The Merowe Dam Project in Sudan. This is set to more than double the power development in Sudan, which is currently severely lacking.
According to the World Economic Forum, internal trade is the greatest opportunity for realizing Africa's economic growth potential. Furthermore, infant mortality rates in Africa have been reduced (falling from 740 to 410 deaths per 100,000 births) as a larger proportion of the population now has access to medical care as the result of infrastructure development. Liberia, Rwanda, Malawi, and Madagascar are four countries that experienced a some of the greatest decreases, over 60%, in infant mortality in a period of time from 1990-2011. Although, this pace of infant mortality progress is still very slow everywhere apart from Eritrea, according to UNICEF.
In the 2015 and 2017 records of World Bank, Africa owes large sums of debt not only from China but also from other lenders. Africa's debts from multilateral lenders amount to 35%, 32% from private lenders, about 20% from China and around 13% from various other governments. Higher interest rates of about 55% from the private sectors prompted Africa to go to China for loans, which is around only 17%. 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. China in exchange just demands payment in the form of jobs, and natural resources. In economic theory and practice, any country can borrow from another country to finance its economic development. However, it is not always easy to find someone who will lend money even for logical reasons. 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 Africa does not consider the relationship as a debt-trap.
In the past decade, China has increased its investment relationship with African countries. In 2014, China created a program known as African Human Resources Development Fund (AHRDF), which has helped to train over 10,000 Africans in various professional fields. Improving the education of Africans has helped a large proportion of the African population acquire entrepreneurial skills and employ themselves, which in turn benefits the Chinese businesses that have been built in Africa.[relevant? ] China is able to ensure this educational training and decrease the unemployment rate by inviting Africans to Chinese Universities with scholarship options.[relevant? ] Unemployment in Sub-Saharan Africa has dropped from 7.88% in 2002 to 6.09% in 2018.[relevant? ] While this educational growth continues to incur debt for the African country, however, is balanced by the fact that people are able to work to produce goods to send back to China - thus lessening the debt.
Furthermore, China has made investments into African human resource development programs.[relevant? ] This can be seen in various programs that have been developed since 2010, including the China–Africa Science and Technology Partnership Plan, China–Africa joint research and exchange plan, and the China–Africa partnership to address climate change. Human resource development has also been seen in agriculture and technology, where teams from China continue to go into African countries each year to further their training in these ever-changing fields.[relevant? ] While these debts to China do increase with these human resource development exchanges, it has also helped reduce the rates of unemployment in African countries, because many on the continent who have been trained through these programs seek employment in infrastructural development projects in their countries.
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. 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. The plan consists of spearheading and investing on 60 projects around the world. The initial expected cost of the BRI is over $1tn, and actual costs are even higher. 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. 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.”
The negative effects of Chinese financial loans to Africa's economy include fear of losing local companies to those Chinese with strong buying powers. Debt from China has also promoted illicit trade among China and African countries. 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.
Over four fifths of China's investments are spent on infrastructure projects in underdeveloped and developing countries. 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%. 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. Africa fears the slow growth of China, as this may result to impending government infrastructure projects.
Evaluation from all walks of lifeEdit
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. Many said that there is no debt-trap diplomacy but a simple tactic to financial strategies. 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.
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.
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.
Rest of AfricaEdit
- US$2.5 billion to state-owned South African electrical utility Eskom arranged during the Jacob Zuma government. As well as a R370 billion (US$25.8 billion) loan during the presidency of Cyril Ramaphosa.
- US$6.4 billion of Zambia'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. In 2018, Zambian lawmakers debated whether Chinese loans, characterized as reckless and difficult to repay, put Zambian sovereignty at risk. 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.
- Loans to Djibouti to develop a strategic port. Chinese loans total 77% of the country's total debt.
- An estimated $7.1-billion in Chinese debt is held by the Republic of the Congo. The exact number is unknown even to the Congolese government.
- China is financing the new capital of Egypt, New Cairo. 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.”
In Latin AmericaEdit
An article in CNBC said that Chinese investment in Latin America have been burgeoning and that the project has been heavily criticized amid allegations of debt-trap diplomacy and neo-colonialism. These concerns have been pronounced especially in Venezuela and Ecuador.
An article published by Carnegie-Tsinghua Center for Global Policy said that China's loans in Venezuela are not debt trap diplomacy nor “creditor imperialism,” but simply “lose-lose” financial mistakes where both parties stand to lose. An article in Quartz summarized the Carnegie article accordingly: "counter to the dominant narrative about Chinese debt ensnaring other countries, the country that needs to fear excessive and unsustainable Chinese lending the most is China."
This section's representation of one or more viewpoints about a controversial issue may be unbalanced or inaccurate.October 2019)(
One of the most cited examples of alleged debt-trap diplomacy by China is a loan given to the Sri Lankan government by the Exim Bank of China to build the Magampura Mahinda Rajapaksa Port and Mattala Rajapaksa International Airport. 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%. 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. This caused concern in the United States, Japan, and India that the port might be used as a Chinese naval base 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.
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China had financed $22 billion worth of projects in Malaysia during the leadership of former Prime Minister Najib Razak. 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.
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. 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. Mohamad further stated that some of the funding from the Exim Bank of China had been misappropriated as part of the 1MDB scandal.
Mohamad and his Finance Minister Lim Guan Eng criticized the projects, 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. 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.
“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.”
Other Chinese examplesEdit
Other accusations of debt-trap diplomacy by China are as follows:
- Chinese loans to the Venezuelan governments of Nicolás Maduro and Hugo Chávez
- Chinese loans to the Malaysia government of Najib Razak
- Loans to Kyrgyzstan, as part of the Belt and Road Initiative
- Loans to Laos, as part of the Belt and Road Initiative
- The Maldives, as part of the Belt and Road Initiative
- Mongolia, as part of the Belt and Road Initiative
- Loans to build a national highway in Montenegro, as part of the Belt and Road Initiative
- US$19 billion worth of loans to Pakistan, part of the China–Pakistan Economic Corridor (CPEC) and other projects. A New York Times investigative report from December 2018 reported on emerging military dimensions of the investments, which it termed a debt-trap and stated are under poor governance and transparency.
- Chinese loans to Tajikistan, as part of the Belt and Road Initiative
- A US$115 million loan to Tonga to redevelop infrastructure.
- US$2 billion in loans to Papua New Guinea totalling almost a quarter of its total debt.
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- Diplomat, Sam Parker and Gabrielle Chefitz, The (30 May 2018). "China's Debtbook Diplomacy: How China is Turning Bad Loans into Strategic Investments". The Diplomat. Retrieved 2018-09-15.
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- Wu, Annie (2018-09-12). "South African Lawmakers Latest to Call Out China for 'Debt-Trap Diplomacy'". www.theepochtimes.com. Retrieved 2018-09-15.
- "DA demands details of R370bn Chinese loan, warns of debt trap". Fin24. Retrieved 2018-09-16.
- Donnelly, Lynley. "Africa's debt to China is complicated". The M&G Online. Retrieved 2018-10-09.
- "'China Must Be Stopped': Zambia Debates the Threat of 'Debt-Trap' Diplomacy". www.worldpoliticsreview.com. Retrieved 2018-12-31.
- Fernholz, Tim (7 March 2018). "China Debt Trap: These eight countries are in danger of debt overloads from China's Belt and Road plans — Quartz". qz.com. Retrieved 2018-09-15.
- "Money and Muscle Pave China's Way to Global Power". The New York Times. 2018-11-25. ISSN 0362-4331. Retrieved 2018-12-25.
- Huileng Tan (22 October 2018). "China state media lash out at Pompeo's advice to Latin America". CNBC. Retrieved 19 December 2018.
The project has been heavily criticized amid allegations of debt-trap diplomacy and neo-colonialism.
- Kraul, Chris (December 10, 2018). "Ecuador faces a huge budget deficit because of loans it received from China". Los Angeles Times. Retrieved October 12, 2019.
- MATT FERCHEN (16 August 2018). "China, Venezuela, and the Illusion of Debt-Trap Diplomacy". Carnegie–Tsinghua Center for Global Policy. Retrieved 19 December 2018.
CHINA AND VENEZUELA: LOSE-LOSE It is perhaps no coincidence, then, that those most keen to highlight and warn of China’s debt-trap diplomacy, or of similar threats such as “creditor imperialism,” fail to mention the country with arguably the most unsustainable debt-based relationship with China: Venezuela.
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Lim Guan Eng, Malaysian finance minister, said the cancelled projects were two oil and gas pipelines in mainland Malaysia and the island of Borneo that cost more than $1bn apiece, and a $795m pipeline linking the state of Malacca to a Petronas refinery and petrochemical plant in the state of Johor [...] Only an average of 13 per cent of the pipelines’ construction has been completed, while almost 90 per cent of the projects’ value has been paid to contractor China Petroleum Pipeline Bureau, according to the finance ministry.
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Lim Guan Eng, Malaysian finance minister, said the cancelled projects were two oil and gas pipelines in mainland Malaysia and the island of Borneo that cost more than $1bn apiece, and a $795m pipeline linking the state of Malacca to a Petronas refinery and petrochemical plant in the state of Johor.
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