Debt-Trap Diplomacy

Translated by Giulia Maffeis

China uses bribes, opaque agreements, and the strategic use of debt to keep African states prisoners of Beijing's desires and demands. [...] These rapacious actions are secondary components of broader Chinese strategic initiatives, including the “One Belt, One Road” - a plan to develop a series of trade routes to and from China with the ultimate goal of advancing Chinese global dominance.

Amb. John R. Bolton, U.S. National Security Advisor, December 13, 2018

If we take the first brave step towards each other, we can embark on a path leading to friendship, shared development, peace, harmony, and a better future.

Xi Jinping, President of the People's Republic of China, May 14, 2017

International attention has returned to the Chinese “New Silk Road” after Italy became the first Country to withdraw from it.

Better known internationally as the Belt and Road Initiative (BRI), the project is the flagship of Xi Jinping's Chinese foreign economic policy. Born during the presidency of the Helmsman of the People's Republic, the BRI has taken the form of a dense infrastructure and trade network extending from the Celestial Empire, with total estimatedinvestments exceeding one trillion dollars.

As highlighted in a previous article, the successes of what the current General Secretary of the Chinese Communist Party inaugurated as the “project of the century” have been significantly scaled down over time.

However, the most thunderous criticisms of the BRI have emerged from the beginning, finding fertile ground in the concept of “debt-trap diplomacy”.

Traps and White Elephants

The expression is traced back to a 2017 article by Indian Professor Brahma Chellaney. Its broad and rapid success in Western media has made it "a firmly held belief and accepted as profound historical truth" regardless of factual evidence, as denounced by Professor Deborah Brautigam.

In short, through the debt trap, a creditor country would offer projects or loans deliberately difficult for the debtor country to repay, forcing the latter to make political or economic concessions to the former.

In this perspective, grandiose infrastructures such as ports or airports financed by Beijing under the BRI that prove to be economically unsustainable would not be mere hiccups. On the contrary, these cathedrals in the desert - the so-called 'white elephants' - erected in small nations in Southeast Asia or Africa would aim to drown these nations in debt, forcing them to cede majority shares or management of such projects to Chinese companies. Thus, the Celestial Empire would effectively take control of numerous strategic assets along the Silk Road, benefiting its global influence and potentially the projection of its military strength.

Few boast the fame of an exemplary victim of Chinese debt-trap diplomacy more than Sri Lanka.

By the Book

As a commercial crossroads in the Pacific Ocean on the route taken by Gulf oil towards China, the small island State enjoys a strategic position from a geoeconomic perspective. Moreover, its proximity to India makes it a potential base for containing New Delhi.

For these reasons, when in 2017 the Chinese company CM Port obtained a 99-year lease contract for the Hambantota Port, alarm bells of debt-trap diplomacy rang again. Authoritative sources such as The New York Times have denounced Beijing's predatory policy toward Colombo, describing it as a debt capitalization - debt-to-equity swap - undermining the island's sovereignty. Soon the port was presented as a textbook example of the Chinese “pearl necklace” strategy,aimed at surrounding India through a series of maritime bases open to “dual use”, civil and military.

The default on sovereign debt to foreign creditors announced in April 2022 by Sri Lanka added further fuel to the fire of the Chinese debt-trap narrative.

On the Ground

Indeed, according to 2023 estimates, China still ranks as the top bilateral creditor to Sri Lanka, with a portion of foreign sovereign debt surpassing the World Bank and the so-called Paris Club - a group of Western creditor countries aimed at coordinating the debt restructuring of countries in difficulty.

Nevertheless, the BRI era (2013-19) has seen only a modest increase in Chinese infrastructure investments on the island compared to the previous period (2006-13). Furthermore, in the last two decades, Sri Lanka has preferred the more expensive private debt market to multilateral and bilateral loans, increasingly issuing sovereign bonds - International Sovereign Bonds (ISBs). As highlighted in The Diplomat, the immediate cause of the island's economic collapse lies in the country's debt structure, particularly its exposure to risky international financial markets, to the extent of calling it an “ISB Debt Trap”.

Finally, paraphrasing expert Nilanthi Samaranayake, one must resist the temptation to reduce Sri Lanka to mere regional dynamics and the will of great powers, given the forces and inefficiencies that characterize it. In this sense, China seems to be just one actor in a complicated plot that began before it arrived on the scene, in the context of local instability, economic stagnation, and political shortsightedness.

So What?

The complexity of the actual situation warns against simplistic and structural explanations like the one provided by rhetoric on the Chinese debt trap. The belief that the BRI would constitute a "monolithic strategy for global dominance" appears therefore inadvisable.

This does not mean that joining the Silk Road is always advantageous, nor that China is an uninterested creditor to be relied on without reservations.

China would have spent $240 billion between 2008 and 2021 to rescue countries crushed by debt incurred with the BRI. Furthermore, as demonstrated by the case of Sri Lanka, even adopting more lenient lending policies than Paris Clubmembers, the Celestial Empire proves more uncompromising towards debtor countries that fail to comply with repayment agreements. By refusing to coordinate with other creditors, Beijing is holding Colombo hostage, slowing down the island's debt restructuring process.

While suggesting caution may seem commonplace, a prudent but not prejudiced attitude appears preferable to demonizing or sanctifying China and its New Silk Road."