THE GROWING PROBLEM OF CHINESE DEBT-TRAP DIPLOMACY

By Tom Saunders and Hannah Suiter

Edited by Ellie Bouton, Aleksandra Dragan, and Rebekah Kaufman

---

Whilst the world is currently distracted with the horrors and tribulations of coronavirus the threat of Chinese debt trapping continues to go under the radar. As the world becomes more globalised and developing countries become eager to expand and improve their infrastructure, less developed nations reach out for a financial helping hand, currently 20% of all African debt is rooted back to China[1]. Whilst China provides initial short-term economic assistance through loans and investment, the high interest rates and little tax leaves may nations in a so called ‘debt trap’.

China’s status as a global economic powerhouse has been heavily driven by infrastructure investment, with 1.87$ trillion of construction and investment spent between 2005-2018 compared to $548.69billion from 2005-2011[2]. One of the most controversial but also ‘successful’ investment projects is the BRI-(Belt and Road Initiative). An initiative which seeks to facilitate trade and stimulate economic activity, through improved transport infrastructure, often between China and its loan accepting nations, particularly in Africa and South East Asia. However, the development of infrastructure is ambitious and build of the projects often leaves countries drowning in unaffordable debt. It is the controversial nature of China’s ‘concessions’ where resources critical to the borrowing nation’s economy are taken as repayment for debt. This inevitably stirs discontent and trap some countries in a Chinese debt cycle.

The handover of the Hanbanota port to Chinese control in Sri lanka and the increasing military control of Pakistan are just a couple of examples of China exerting a worrying level of power and diplomatic influence over debt trapped nations[3]. However, there is arguably further complexity to the repayment of Chinese loans as the political conflict between India and Pakistan often alleviates some of the blame of China. India’s disapproving stance on the Belt and Road Initiative arguably encouraged Pakistan more to accept Chinese loans so to politically frustrate India, regardless of the tax breaks China may get, as seen in the CPEC-(Chinese Pakistan Economic Corridor) negotiations.

Whilst China’s debt trapping in South East Asia is complicated by political relations the nature of the Chinese African relationship is much more one sided. China’s strategic interest in Africa is to gain access to the rich amounts of oil and gas and supposedly adherence to the South-South solidarity motto of sharing and increasing levels of knowledge and expertise. Countries worse affected include Zambia, whose debt of $8.7bn consists of 6.4billion debt to China, and Djibouti where 77% of its debt is from Chinese lenders[4]. Such significant debt in Africa has been generated because the extremely poor levels of infrastructure development has lead to more manufacturing input costs which China provide at a cheaper rate, increasing the cost of manufacturing as much as 200%![5] Therefore Chinese loans and investment effectively act as a Trojan horse to many poorly governed or corrupt African nations like Zambia and Zimbabwe, trapping these African nations in an endless cycle of loan repayments.

The mineral resource dominated nature of these African nations further exacerbates the economic destruction these Chinese loans can inflict, with 40% of Sub Saharan African countries now in a debt crisis[6]. The heavy over reliance on minerals mean when African nations provide repayment in the form of access to minerals and allow Chinese control of quarries, many African economies are crippled. Moreover, China has flooded the African market with low cost manufactured goods, which not only means profits made within Africa are sent back to company headquarters in China, but many African factories are driven out of business. Unfortunately change in attitude to receiving Chinese loans is unlikely to change given the mutual benefits both governments receive. In Senegal, for example, the ‘Emerging Senegal’ plan to develop new commuter links and further stimulate the economy provides hope and economic promise, ideas which are likely to get current president Sall of Senegal re-elected[7]. Meanwhile China benefits by locating manufacturing to Senegal and using the nation as base for mineral exports. Political motifs and corruption further undermine many Sub-Saharan economies, as political instability further allows more favourable negotiations for China and not for the African work force.

There is no easy resolution to these financial fears, some may even say there is no problem to resolve and that China’s intentions are pure and not to cripple or trap financially limited nations. What is clear is that there is an unsustainable and now potentially insurmountable amount of debt which a number of African and South East Asian economies possess. Whilst intervention of Western loans that are less crippling to the African economy would reduce the rate of their rising debt it is ultimately not their responsibility, nor would it do any good to Western-Chinese relations. It is the world governing bodies like the IMF and World Bank however have a responsibility to intervene, the World Bank should provide more financial assistance and the IMF could potentially place caps on the amount any Chinese loan can provide.

---

References:

Cover Photo: 'Global debt levels cause by direct loans from China (as percentage of GDP) in 2017' courtesy of Statista https://www.statista.com/chart/19642/external-loan-debt-to-china-by-country/

[1] T.Niambi, Nathanaël. (2019). China in Africa: Debtbook Diplomacy?. Open Journal of Political Science. 09. 220-242. 10.4236/ojps.2019.91012. [2] Jain. R. (2018) China’s Economic Expansion in South Asia: Strengths, Challenges and Opportunities. Indian Journal of Asian Affairs Vol. 31, No. 1/2 (June - December 2018), pp. 21-36 (16 pages) [3] Wignaraja, G., Panditaratne, D., Kannangara, P., and Hundlani, D. (2020) Chinese Investment and the BRI in Sri Lanka. Asia-Pacific Programme. Chatham House. Pages 27-38. [4] BBC News (2018) Reality Check: Is China burdening Africa with debt?. (https://www.bbc.co.uk/news/world-africa-45916060) Accessed (21/06/20) [5] United Nations Conference on Trade and Development, Economic Development in Africa Report 2013 —Intra- African Trade: Unlocking Private Sector Dynamism, p. 84. Also, Foster and Briceño-Garmendia, [6] Selassie, A. (2018) IMF: The Debt Challenge to African Growth. (https://www.imf.org/en/News/Articles/2018/07/31/vc052318-the-debt-challenge-to-african-growth). Accessed (22/06/20) [7] Barry, J., Searcey, D. 2018. One African Nation Put the Brakes on Chinese Debt. But Not for Long. (https://www.nytimes.com/2018/11/23/world/africa/one-african-nation-put-the-brakes-on-chinese-debt-but-not-for-long.html) Accessed (23/06/20)