Infrastructure financing is essential for a state to overcome its growth bottleneck, upgrade its industries, and encourage sustainable development. Such initiatives, however, are typically distinguished by a long lead time, substantial funding, and a longer payback period. Additionally, finance is frequently more difficult to get in developing countries. China, the largest developing nation, has collaborated with other developing nations to assist in addressing their funding requirements and enhancing their capacity for sustainable development. However, these findings and loans are getting the nations into trouble. Since they don’t make enough money to operate the projects and repay the loans. Because of this, the world refers to it as debt-trap diplomacy.
What is China’s Debt Trap Policy?
It is necessary to conceptualize a new foreign policy phenomenon like debt trap diplomacy in broader terms to evaluate it properly. Given its characteristics, Debt Trap Diplomacy can be categorized as one of the economic instruments of foreign policy, alongside the military and diplomatic ones. Debt Trap Diplomacy is a novel idea in international relations. Indian scholar Brahma Chellaney, who is acknowledged for coining the word, suggests that:
Debt Trap Diplomacy is a tool for policymakers when the lending country (in this case, China) promotes infrastructure projects in strategically located the borrower country (typically a developing country), frequently by giving the borrowing government excessive loans As a result, the borrower state becomes heavily dependent on the lending state economically, further cementing the developed state’s power over the developing or under developing states. In other words, the developing state falls victim to the power of the developed state, after getting caught in a debt trap. As a result, the developing state is unable to pay back the loans; as a result, the developing state transfers some of its assets (such as infrastructure) to the developed to reduce its debt obligation to that state (this final phase is also known as debt-for-equity).
China has had phenomenal growth in both its internal economy and foreign development funding, and it currently holds the title of the largest official creditor in the world. The Chinese government and its state-owned banks have expanded their influence and financial backing on a global scale during the past couple of decades. The One Belt One Road (OBOR) plan, which is now known as the Belt and Road Initiative, was launched by the Xi Jinping administration in 2013. It is a huge collection of investment projects that span multiple continents. According to the U.S.-led Western bloc, the BRI is a geopolitical plan to create a new, Sinocentric world order.
What is BRI?
One of the largest infrastructure initiatives ever created is China’s Belt and Road Initiative (BRI), often known as the New Silk Road. The huge array of investment and development programs, introduced in 2013 by President Xi Jinping, was initially planned to build physical infrastructure that would connect East Asia and Europe. The Maritime Silk Road and the Overland Silk Road Economic Belt were the two pillars of the strategy. The BRI is driven mostly by three factors.
1) China-US Rivalry
The first and most often discussed is China’s conflict with the US. The Malacca Strait, which sits off the coast of Singapore, a significant ally of the US, is where the vast bulk of Chinese foreign trade travels. The goal of China is to establish its own safer trade lines which are entirely dependent on the initiative.
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2) Financial Crisis 2008
The legacy of the 2008 financial crisis is the initiative’s second primary justification. The Chinese government responded to the crisis with a trillion Yuan stimulus package, awarding contracts to construct railways, bridges, and airports. This had oversaturated the Chinese market. For China’s numerous state-owned businesses, the Belt and Road initiative offers a market outside of its boundaries.
3) Economical Development
Lastly, the Belt and Road initiative is regarded as a key component of the Chinese government to boost the economy of the nation’s core provinces, which have historically lagged behind wealthier coastal regions. The government makes substantial budgetary allocations and encourages companies to compete for Belt and Road contracts to promote and assist businesses in these central regions.
Is It a Debt Trap?
It may not be accurate to refer to China’s borrowing as a debt trap, but it did pick its lenders carefully. It intervened at the perfect time and offered its hand-selected targets the finest deals. The majority of nations have poor credit ratings, making them ineligible to receive aid from other potential sources of outside financing. China safeguarded its interests in such a scenario by keeping the project’s possessions as collateral. With its “Resource Guarantee Infrastructure Financing,” the Chinese Exim Bank primarily targeted mineral- and hydrocarbon-rich African states to offset loan defaults.
For instance, China took oil and gas from Sudan, gold via Tanzania, and copper from Zambia. China’s safety net, rather than its policy, can be described by this strategy. Additionally, China was beneficial in several situations, including helping numerous African nations to develop, assisting Pakistan with its ongoing power problems, boosting the communication and energy sectors, and creating transport routes throughout Asia and Africa. China may have aggravated the issue, but the economic inefficiency and political incapability of borrowing countries have let nations engage in debt trap diplomacy.
Countries That Would be Highly Affected by this Debt Trap
The countries that would be highly affected by this debt trap are as follows:
Kenya became one of the biggest creditors of China between 2010 and 2015 after taking up semi-concessional and commercial loans which are around 2/5 of the country’s GDP. As a result, several analysts already acknowledge that Debt Trap Diplomacy takes place in Kenya.
Some academics also viewed the Maldives scenario as having a high likelihood of running into problems with debt repayment. It was anticipated that if BRI loans were fully repaid, the Maldives islands might see their debt-to-GDP ratio rise to more than 50%, with at least 40% of the debt flowing to China.
Recent data do indicate that Laos has been granted a substantial amount of funding from China, placing it in a major financial bind. The IMF has cautioned Laos to put itself on an economically feasible debt path in light of its potential economic difficulties in repaying its debt.
4. Sri Lanka
The Sri Lankan case can be considered the foundation for the discussion of debt-trap diplomacy. The scenario surrounding the Hambantota port, which is located on the island nation’s southeast coast, has been cited in a significant number of publications, studies, and commentary as a prime example of Chinese debt-trap diplomacy.
Another nation frequently mentioned in association with debt trap diplomacy is Malaysia. The different remarks made by the top officials of the nation helped the story regarding Malaysia’s potential involvement in debt trap diplomacy gain attention.
The website Global Economy, reports that Djibouti’s external debt has sharply increased since 2013, which is also when the BRI began. The debt’s total amount accounted for about 39% of Gross National Income (GNI) in 2013. Six years later, the figure increased significantly to 79 percent. Additionally, Djibouti’s debt to China has grown to almost 75% of its GDP.
The Sri Lankan Catastrophe: Is China Responsible for this Disaster?
When the Covid pandemic started, Sri Lanka was already experiencing political and economic unrest, and then there was the ongoing crisis between Russia and Ukraine. In the international arena, the island nation appealed for help. The government of Sri Lanka turned to China and obtained large development loans. But, the government failed to generate enough revenue to support the economy and the budget deficit, and they were forced to deal with a further rise in debt and diminishing foreign reserves.
However, this choice ended up being Sri Lanka’s worst miscalculation. As a result, the Chinese business secured a 99-year lease for the Lankan port of Hambantota. However, this purchase of the port’s full ownership was more of a cautionary story than anything else, and we don’t often hear about it in the international sphere.
The African Nations Under Chinese Debt
Despite being a continent with abundant natural resources, Africa never had a stable economy and remained undeveloped for most of its history. The African countries faced a large “infrastructure gap,” and in these precarious times, China emerged with its plethora of loans and development initiatives. Between 2000 and 2018, China made over $145 billion in investments, working on roughly 70 projects a year since 2010. The transportation or energy sectors accounted for almost 66% of these initiatives, which helped the development of African countries.
It was a pleasant ride up until Africa had a positive trade balance, but over time these countries began to lose money as Chinese investments stopped bringing in additional capital. Slowly, imports took the place of exports, leaving many African nations with a terrible trade deficit.
Are Chinese Loans Hard to Repay?
China frequently offers loans at higher interest rates as compared to Western countries. These loans have interest rates close to the commercial market at around 4%, which is around four times as compared to the World Bank or a single nation like France or Germany. In comparison to other lenders’ concessional loans to poor nations, which typically have a repayment period of roughly 28 years, Chinese loans often have a repayment time of less than 10 years.
Additionally, Chinese state-owned lenders frequently demand that borrowers keep a certain amount of cash on hand in an account located abroad that the lender has access to. Western lenders don’t use this strategy when issuing loans. The G20 nations those with the biggest and fastest-growing economies are currently pushing for debt relief for less developed nations to assist them cope with the pandemic’s effects. China has joined this and claims to have made the largest debt repayment contribution of any participating nation.
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Debt Trap Diplomacy is one of the main subjects in the Chinese foreign policy debate at the moment. The debate encompasses a lot more than only the questions of “what is debt-trap diplomacy” and “how China exploits it.” In essence, it revolves around the topic of whether Debt Trap Diplomacy is real or not. There is a narrative among researchers that constructs Debt Trap Diplomacy as a myth, but most of them conclude that this trap does exist and it is already starting to affect the economies of developing states. However, the topic of its existence is still up for debate, as we indicated in the beginning.
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What is Debt Trap Diplomacy?
Debt Trap Diplomacy is based on the theory that China deliberately overextends lending to low-income indebted states that cannot pay back Chinese debt in the future. Thus, in a debt-for-equity swap, the borrowing state gives up part of its strategic resources to reduce its debt to China.
Is debt trap diplomacy a myth or reality?
China’s debt trap policy is a reality that can be seen in the case of Sri Lanka, Kenya, Maldives, Djibouti, and Laos.
What was China’s role in the Srilankan crisis?
According to the Western narrative, China funded the Hambantota port’s construction by lending money to Sri Lanka, knowing that Colombo would eventually run into financial trouble and Beijing could then seize the port in exchange for repayment of its debts and allowing Beijing to use it for its navy.
Would China be able to create its hegemony through a debt trap policy?
It is undeniable that China is becoming more involved in foreign affairs. China has been increasing its sphere of influence all over the world since the BRI was introduced in 2013. However, it is too soon to make a subtle prediction about the future of the world order.
Why does China owe the US money?
China owes the United States money in two different ways: by defaulting on historical debt and by holding US treasury securities. owe the US money. As a result, China has acquired Treasury securities from the United States, which are loans to the American government. China does this to keep the value of its currency compared to the dollar low, which benefits its exports.
What if China dumps U.S. debt?
If China was to start selling off US debt, this may lead to a sell-off on the bond market, raising US interest rates and possibly harming the US economy’s growth. A sharp sell-off, however, might also result in a decline in the value of the US dollar relative to the yuan, raising the cost of Chinese exports.
How much does Russia owe the US?
Russia owes foreign bonds worth USD 40 billion, with nearly half going to foreign investors. Before the beginning of the war in Ukraine, Russia had around USD 640 billion in gold and foreign currency reserves.