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The ‘debt-trap diplomacy’ narrative: A look at the other side

The ‘debt trap diplomacy’ narrative has become a defining account of Chinese overseas financing since it was first uttered by the Trump administration. However, as with all ubiquitous narratives, it is worth probing and looking into this claim to understand its validity, what it means, and whom it serves.

Let us backtrack and take a look at what the debt trap narrative actually refers to. China’s Belt and Road Initiative (BRI), as well as its involvement in Africa, has become infamous on the international stage. A great number of actors, from scholars to politicians to journalists, have voiced concern over this new role for China. The allegation lodged against China usually goes something along the lines of that it is using its economic power to wield soft power over vulnerable nations. To this end, it finances infrastructure projects in strategically located and hand-picked developing countries. Taking the charge one step further, proponents of this narrative often avow that the intention is to “facilitate Chinese access to natural resources, or to open the market for its low-cost and shoddy export goods.” On the one hand, if projects go well, China has in effect secured itself the favor of a newly emerged strategic partner. On the other hand, if the project goes badly, recipient countries end up in the palm of China’s brawny hand, ensnared in debt and left with no choice other than to submit to its newfound leverage.

Certainly, there is some logic to this claim, and one can see why it has found so much backing in a West where China is increasingly seen as a strong adversary. One case that is often referenced is that of the Sri Lankan Hambantota Port. As financing started to become rocky and the port began running into losses, the Sri Lankan International Trade Minister Malik Samarawickrama declared that the government had struck a deal with Chinese Merchant’s Group (CMG). This 1.12 billion USD deal would come, famously, at the cost of a 99-year lease, along with a 70% stake of the port to CMG. Today, the commercial activities of the port are run jointly by CMG and the Sri Lanka Ports Authority (SLPA).

This scenario, as is true of much Chinese financial involvement in emerging markets, can be interpreted in one of two ways. One account, which is that propagated by the debt-trap narrative, would argue that the debt crisis in Sri Lanka presented an opportunity for Beijing. Expecting the project to struggle financially, the deal would later present an opportunity to use loans and aid to gain influence over the economically vulnerable. This description is frequently paired with accounts of the Belt and Road Initiative. Though the deal relieved Sri Lankans of a massive amount of debt and economic hardship (roughly one billion USD), it came at the expense of handing over a considerable deal of influence to a Chinese state-owned corporation. Brahma Chellaney, an Indian geopolitical intellectual, was quoted saying: “John Adams said infamously that a way to subjugate a country is through either the sword or debt. China has chosen the latter.”

However, this account only represents one side of a very complex coin. The China-Sri Lanka partnership is rooted in a history of mutual political support, however the revival of the Hambantota Port presented an important economic opportunity for Sri Lanka as well. Samarawickrama, in his announcement of the new agreement, explained how the influx of financing would allow for an economic evolution in the previously underdeveloped regions of Sri Lanka – Uva and the Southern Province. Before this point, 42% of the country’s GDP had largely been concentrated in and ‘enjoyed by’ the Western Province. The development of the Hambantota Port would in future allow these other areas to connect with international trade and attract new investors. He also noted that while there was a majority Chinese equity, that the two companies (Hambantota International Port Services and Hambantota International Port Group) which would become the recipients of this loan would still operate by Sri Lankan laws. The assets would also remain Sri Lankan.

Was this notorious case a manifestation of the Chinese debt trap? In the case of Sri Lanka’s sovereign debt, it is wise to unpack how Chinese financing factors in from a macro point of view. Sri Lanka has a total debt-to-GDP level of 77.6 percent. The World Bank’s official threshold for an undesirable debt ratio is 77 percent. What exactly is China’s contribution to this worrying level of debt (after the port deal)? As a percentage of total debt, the debt owed to China amounts to a mere five percent. As a large deal of Sri Lanka’s total debt is owed domestically, a look at the total external debt owed to the country reveals that China makes up 12 percent of this figure. Thus while its debt to China is significant, “its debt problems go far beyond any one country.”

In the context of lagging exports and a widening trade deficit, FDI inflows were largely welcomed by Sri Lankan officials as a source of boosting foreign reserves and allowing the government to repay its loans and other debt. Where its recently attained status as a transitioning middle-income country means that concessional loans are harder to obtain and repayment schedules are shortened, development goals are harder to achieve due to less access to external financing. In this sense, the Hambantota port deal presented an opportunity to obtain liquidity to repay its Western creditors.

As was written in The Diplomat: “Leasing out Hambantota port is not evidence of the Chinese debt trap. Instead, it is more of a reflection of the external sector crisis Sri Lanka is facing. It is indeed more alarming and concerning than a Chinese debt trap and reflects a far bigger crisis.”

In keeping with the debt-trap narrative, there have been numerous cases made in the media of a ‘debt-for-equity’ arrangement, where Chinese companies cancel debt owed to them in exchange for an equity share in the companies concerned. Arrangements of this kind may reflect a desire to acquire stakes and control of key infrastructure in exchange for debt relief. The Sri Lankan port is often pointed to as an example of such an arrangement. However, a number of journalists have found this label to be faulty. The funds obtained for the lease were used to repay Western creditors. No debt to China was cancelled.

What the debt-trap narrative seemingly neglects to acknowledge is the advantages that can be reaped from an economic partnership of the same kind as between China and Sri Lanka. Samaranayake, in conducting research into China’s engagement with smaller South Asian countries for the U.S. Institute of Peace, explained that these countries have to a large extent benefitted from Chinese projects that increase connectivity and bolster international trading networks.

The above-mentioned potential advantages and pitfalls also extend to Chinese lending in Africa. China has in the last two decades increased its involvement in Africa on a massive scale. In 2009 already, China had eclipsed the US as Africa’s largest trading partner. Between 2000 and 2019, public sector lending to Africa amounted to around 153 billion USD. Over 80 percent of this funding has been channeled towards the development of sorely needed infrastructure in Africa – mainly transport, power, telecoms, and water. In the post-war era, Western countries and multilateral institutions built a great deal of infrastructure, however this effort began to stagnate as former colonies became independent. Colonial powers ceased to funnel big quantities of funding into the continent. China would become a crucial player in filling this vacuum, with its promise and delivery of producing large-scale infrastructure, fast and cheap.

Beyond this, China was also able to recognize the stage of development that many African countries were at, having been in the same position a mere thirty years prior. Eric Olander, Editor in Chief of the China Africa Project, lists three factors that led to this mutual understanding. An acute lack of infrastructure, a large and growing population, and a shared history of anti-colonial struggle would all become key elements in this future collaboration.

However, as Chinese influence and funding have escalated, Western critics have grown worried about the potential pitfalls of such a codependent relationship. Worries about Chinese soft power in Africa are warranted, to an extent. There has already been evidence of Chinese investments leading to an increase of influence in the ruling elite of some African countries. However, the question at hand, which is that of the ‘debt-trap narrative,’ seeks to investigate whether claims of China taking deliberate and calculated action to entrap vulnerable countries in insurmountable debt are justified.

Data analysis has shown that in over half of those countries in or at high risk of debt distress, China has accounted for less than 15% of debt stock. There are seven countries with significant debt problems in which China holds at least 25% of debt stock. Scholars however noted a decline in overall lending to Africa since the year the BRI was launched, most notably in those countries at risk of debt distress. Acker and Brautigam, scholars at the China Africa Research Initiative, suggest that this decline reflects a concern on the part of China for debt sustainability in the recipient countries. Alternately this reduction in financing could also be seen as prudent lending. In 2019, they found that lending was significantly concentrated in less risky countries, and amongst the top five borrowers, none had fallen into debt distress in previous years.

Of course, the issue of debt sustainability and Chinese lending in Africa is a highly nuanced and complex issue. Worries of a growing Chinese influence are certainly justified and warrant keeping a close watch on Chinese lending as a means to attain influence. However, viewing the question merely through the lens of the debt-trap narrative shrouds the entire subject in an oversimplified and even overly pessimistic light. Indeed, the propagation of the debt-trap narrative may detract attention away from more pressing issues, such as the overall external debt sustainability or developmental goals of vulnerable countries. As in the case of Sri Lanka, it is important to hold widely cited cases such as the Hambantota Port under scrutiny in order to assess their validity, if any hope of academic objectivity and mutual understanding is to be maintained.


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