How China’s debt trap diplomacy works and what it means

  • 13 Dec 2019

Beijing is accused of luring developing or underdeveloped countries to borrow money for infrastructure projects and later controlling them if they fail to pay off their loans in time, while a US-based study says asset seizure is a rare instance.

Containers are stacked on a vessel at the Port of Long Beach in Long Beach, California on July 6, 2018, including some from China Shipping, a conglomerate under the direct administration of China's State Council. - The twin ports of Long Beach and Los Angeles in Southern California are fearing a decline in trade could result in loss of jobs as President Trump's trade war has kicked off with tariffs on $34 billion worth of Chinese goods. ( FREDERIC J. BROWN/AFP/Getty Images / Getty Images )

Many describe China's economic goals in Africa and other parts of the world as a "Trojan horse," with some analysts voicing criticism toward the multi-billion dollar Belt and Road Initiative (BRI) and accusing Beijing of laying ‘debt traps’ with the help of the project. 

Africa expert Muhammed Tandogan, who's also holds a Phd in International Relations at Istanbul Medeniyet University, told TRT World that China’s impact in Africa has been increasing at an alarming rate.

"Apart from its approach to the continent in the previous century, China has been achieved to be Africa’s leading strategic partner in the first quarter of the 21th Century,” Tandogan said.

On the one hand, he said, Chinese administration gives loans and debts in order to sustain its ambitious BRI, which would pave the way for its global leadership in the future, while on the other hand it seizes assets of the countries that are unable to clear their debts. 

As the manufacturing hub of the global economy, China has a vested interest in promoting unfettered trade in manufactured goods, as well as trade-related infrastructure development. 

In this context, the massive BRI has become the backbone of China's global integration strategy on the basis of integrated energy, logistics, transport and communication linkages across the Eurasian axis reaching to the Middle East and Africa. 

Kenyans recently raised concerns over Beijing's plans to take over one of its strategic seaports since the African country is unable to clear its debts. Similar concerns have been raised elsewhere. In December 2017, Sri Lanka handed control of the newly-built port of Hambantota to a Chinese operator in order to satisfy part of its significant debt to Chinese lenders. 

Despite Sri Lanka’s Hambantota port being leased out to China, mainly due to the persistent balance of payment crises which resulted from the reduction of trade over the years, many Western and Chinese sources have been conflicting on whether it is a part of China’s debt trap strategy or not. 

According to Tandogan, the incident interrupted China’s soft-power based arguments in the international arena and also caused increasing concerns about China’s expansionist appetite.

While some Western sources claimed that China’s “debt book diplomacy” uses strategic debts to gain political leverage with economically vulnerable countries across the Asia-Pacific region and Africa, other China-inclined sources claim the opposite based on several cases taking place.

Some sources claimed that China owns 70 percent of Kenya’s external debt, while others say that it's just 21 percent.

Is the modest estimate of 21 percent of Kenya’s debt to China a matter of concern? 

Tandogan argues that Beijing’s debt diplomacy has caused both economic and political sovereignty problems that are now threatening some African countries.

But according to US-based Rhodium Group’s research, which examined 40 cases of China's external debt renegotiation between 2007 and this year,  Beijing "rarely" goes for occupying the assets of defaulting countries. 

China is Africa’s largest trade partner, mutual trade with Africa increased from one billion US dollars in the 1980s to 170 billion in 2018, which included Chinese imports from Africa. These imports mainly consisted of ores, crude oil and agricultural products which points to one of the main concerns against China’s footprint in the African continent. 

China takes raw materials from Africa, converts them into finished goods in China, and then sells them in African markets. For a long time Western states and nonstate actors were held responsible for the spread of neo-colonial activities in Africa. What many people on the continent perhaps did not imagine was the rise of China as a power centre with policies that remind many of British colonialism in Africa. 

After the death of Mao Zedong in 1976, China’s economy began to change. The country’s desire to become a regional power brought it to the shores of Africa. When Deng Xiaoping came to power as a market-friendly leader and placed greater emphasis on modernising the entire economy, putting the state's inward-looking political ideology on the backburner, this ushered in a period of unprecedented economic growth and foreign investment.

Kenya, as per many experts, is the newest victim of China's economic policy. The country is at the risk of losing control of the Port of Mombasa if it defaults on loans from China Exim Bank, according to a report from Kenya's auditor general. The terms of a $2.3 billion loan for Kenya Railways Corporation (KRC) specify that the port's assets are collateral, and they are not protected by Kenya's sovereign immunity due to a waiver in the contract. 

KRC accepted the multi-billion-dollar loan in order to build the Mombasa-Nairobi standard gauge railway (SGR), with construction services provided by China Roads and Bridges Corporation (CRBC), a division of state-owned conglomerate China Communications Construction Company (CCCC).

"The payment arrangement agreement substantively means that the Authority's revenue would be used to pay the Government of Kenya's debt to China Exim bank if the minimum volumes required for [rail] consignment are not met," auditor FT Kimani wrote. 

"The China Exim bank would become a principle over KPA if KRC defaults in its obligations."

In addition to these two particular cases, Tandogan mentioned other debt-ridden countries such as Djibouti, Tajikistan, Maldives, Madagascar, Pakistan, Montenegro and so on. He said almost all the debts are based on infrastructural credits sourced from China. 

Tandogan says 88 percent of Djibouti’s Gross Domestic Product (GDP), which corresponds to  $1.72 billion, is owned by China and stems from investments based on development and infrastructural loans. 

“The increasing debts of countries like South Africa and Kenya drive them into debt as Kenya’s debt to China increased from  $1 billion in 2013 to $5,2 billion in 2017. These kind of incidents consolidate concerns about China,” he explained.

Tandogan also argues that most of the experts, researchers and politicians describe China’s actions as neo-colonialism. 

“China’s ‘debt trap’ strategy is not in favour of African nations in the middle and long term while it will enable China to yield massive profit. While considering Sri Lanka, Kenya, Djibouti and several cases, it is anticipated that the same things will become unavoidable for other countries in the region and the continent,” he said.

Tandogan recommends African and other countries to discover alternatives which might allow them to stand on their own two legs as the reality of Western and Chinese economic strategies have revealed that their actions have not been in favour of the host countries.