A Comprehensive Guide to the Chinese Debt Trap

The Communist Party of China, also known as the Chinese Communist Party, has a longstanding doctrine of making People’s Republic of China the superpower of the world. The pursuit of the founding and ruling political party of the most populous country on the planet is to become the sole superpower. It does not envision a world where multiple centers of power coexist or wherein other nations wield the same degree of influence in global affairs. While the government of China keeps its nation isolated from external influences and has numerous curbs on rights that are guaranteed in many other parts of the world, it does have the ambition to dictate terms to other nations using a myriad of tactics.

For many years, China had successfully and unsuccessfully used its military called the People’s Liberation Army in both covert and overt operations to expand its territory. It is still pursuing such objectives in certain regions, most notably in the case of disputed islands in the South China Sea, an operation that is being spearheaded by the Peoples Liberation Army Navy. In recent years, China has used economics and especially development projects for which the government provides loans that enable them to entice nations to fall into their debt trap. China has been accused of land grab in many parts of Africa and Asia using this debt trap. Ever since the roll out of the ambitious Belt and Road Initiative, also known as One Belt, One Road and Silk Road Economic Belt, China has been rather generous with its lending and this reflects a bullish attitude to trap nations in outright debts.

What is the Chinese Debt Trap?

China aims for absolute supremacy, militarily and financially. It believes in and strives for absolute power. The Community Party of China had realized several decades back that it cannot become a superpower on the basis of its military might or armed forces alone, which is why it has meticulously avoided getting into direct conflicts or full-blown wars in the recent past. It has been pursuing its expansionist agenda and the quest to become a superpower using various economic weapons. It has been working on various ambitious projects, not just within its territorial boundaries but also across countries in Asia, Africa and other parts of the world, that would serve its ulterior motive. It has been providing loans to many nations that would not be able to repay and hence would be indebted. This will allow China to seize control of major infrastructure and set up its strategic bases in regions crucial in geopolitics.

The Chinese debt trap is an amazing amalgamation of political authoritarianism, crony capitalism, infrastructure development, economic growth, trade & commerce, geopolitics and different types of appropriation. China is paving the way to a new kind of imperialism and all major powers of the world are well aware of the strides as some of the strategies are already reaping the expected results. China is helping developing countries, mostly in Asia and Africa, to develop infrastructure. These nations cannot fund these projects so China is offering loans. The countries do not have the ability to develop the planned infrastructure so China is getting Chinese companies to win the contracts and that is allowing Chinese citizens to work on these projects. Even if some nations have companies with the expertise to develop the conceived infrastructure, China is flexing its muscles as it is their loaned money being used to fund the projects.

The conceived infrastructure is helping Chinese companies to create wealth and employment, the Chinese citizens are getting jobs and the developments are fuelling trade and commerce with China which is another economic benefit. The Chinese government is setting up a new kind of geopolitical power and influence through the endeavors, completely at the cost of the nation that has agreed to accept its loan in the first place. Should such countries fail to repay these loans, China can acquire the developments, set up its presence there and stay put till such time those nations can repay the debt, which is unlikely in the near or even distant future.

Eight Nations are at Risk of Falling into the Chinese Debt Trap

The entire strategy may seem like a pipedream or a conspiracy theory to some but it is actually working on the ground. There are theories that the United States and Great Britain had tried a similar strategy but they were not as aggressive or effective as China. Today, eight nations are at risk of falling into the Chinese debt trap. One episode that has already unravelled itself is from Sri Lanka, a tiny nation just off the southern coast of India.

China provided a loan of $1.5 billion to Sri Lanka in 2010. The loan specifically financed the development of a massive port in Hambantota, a coastal town in southern Sri Lanka. Those unaware of the significance of the Indian Ocean in regards to maritime trade will not be surprised with the project. A quick glimpse of the map of Sri Lanka will show anyone how a port at Hambantota would be extremely viable and lucrative for the small nation and it made sense to China too if it can capitalize on its investment by being a stakeholder. However, those who are aware of trade and commerce across the Indian Ocean and particularly crisscrossing South Asia, Southeast Asia and the Middle East, subsequently Africa and the West would know that there are several major ports already serving the various needs of the shipping industries in the region and around the world. This port was more of geopolitical and strategic significance for China than economic development of Sri Lanka.

The port had no traffic and there was no spike in shipping activities. The government of Sri Lanka realized, too late for their own sake, that it cannot repay the money loaned by China. Sri Lanka could not generate the revenues necessary to repay the loan and there was obviously an interest. Sri Lanka asked for a waiver and China presented an option of taking control of the port for a period of ninety nine years. Technically, it is a lease but in reality China now owns the port. China signed a bilateral agreement with Sri Lanka. The latter got the loan waived. China got a base in South Asia, one that is strategic in terms of security and peace in the region. China may be able to churn a profit from the port by rerouting its own shipments via Hambantota instead of using the usual routes and docking at neighboring countries such as Myanmar, Thailand, Malaysia, Singapore or India. However, the primary objective of the Chinese government was to set up an exclusive base in the Indian Ocean. China does not have direct access to Indian Ocean. It needs other Southeast Asian countries to offer their territories or allow unhindered passage to access the largest ocean on the planet.

Sri Lanka was not the first to fall for the Chinese debt trap. Djibouti fell for a similar deal. The tiny country at the Horn of Africa and right along the western shores of the Gulf of Aden where it meets the Red Sea accepted a loan that it could not repay and China has set up a naval base in this strategically important part of not just Africa but the world. It is not difficult to see a pattern here. Sri Lanka and Djibouti are among the smallest nations on the planet and they are not as mighty as some of the tiny countries in Europe. These are largely underdeveloped and undeveloped countries without the financial power or the technical expertise to execute state of the art infrastructure and development projects. China is handpicking countries that are likely to fall prey to its debt trap. Another such example is Pakistan.

China has been a vocal supporter of Pakistan on many issues and this is partly to irk India and partly to fuel its own ambitions. China is already a major power but it has some geographical challenges. It does not have instant access to any of the largest trading routes of the world. Russia to the north, Japan to the east and India to the southwest limit its prospects of growing influence and all three are great powers themselves. Pakistan is one of the major players in the Belt and Road Initiative, the ambitious restoration of the ancient Silk Route which is also a personal pursuit of Xi Jinping, the current President of China. Pakistan has been offered a line of credit of as much as $40 billion. This is only for the small section of the Belt and Road Initiative or One Belt, One Road that traverses Pakistan. This stretch is being called the China Pakistan Economic Corridor.

Pakistan is an underdeveloped country with a failing economy. It is already on the verge of economic collapse and is expected to ask for a bailout from the International Monetary Fund anytime now. Pakistan has a serious problem of homegrown terror and is also one of the leading exporters of terrorism in the region and the world. Although a democracy, it is the armed forces and intelligence agencies that wield actual power in Pakistan. The country already owes more than $6 billion that China has loaned over the years. The China Pakistan Economic Corridor is more significant than the port in Sri Lanka because there is already a stated objective of providing port access to the military and navy of People’s Republic of China. The China Pakistan Economic Corridor would be partly managed by the dragon and the security is its responsibility. This allows China to have direct access to the Gwadar port in Pakistan. It is a commercial port but can easily be militarized and serve as a naval base for China.

Pakistan is extremely unlikely to repay the loan, especially since it is going to ask for a bailout which would have to be partly funded by the United States and the eagle is already pushing the country to stop borrowing from the dragon if it wants to continue getting financial aid. If the China Pakistan Economic Corridor is completed and China gets to set up a joint base for its air force, navy and military near Gwadar port, then it could trigger a tectonic shift in the geopolitics across Asia and the aftershocks would be felt worldwide. China is unlikely to stop doling out more money to Pakistan, knowing well that the country is at brink of falling into the debt trap. Pakistan will find it increasingly difficult to repay the loan for the Economic Corridor and it may become near impossible, thereby asking for a waiver and that would repeat a similar story as was played out in case of Sri Lanka.

Backlash

Djibouti, Sri Lanka and Pakistan are joined by the Maldives, Laos, Kyrgyzstan, Mongolia, Tajikistan and Montenegro. Since Djibouti has already paid for its debt by handing over a base to China, the other eight nations are poised to witness the tremors and the eventual fallout. All these countries have debts above the average that are usually deemed as safe in bilateral engagements. In August, 2018, the Prime Minister of Malaysia, Mahathir Mohamad, said in Beijing that the debt traps of China are a trademark of its imperialist ambitions. Malaysia has cancelled two Chinese projects, collectively accounting for several billions. The Malaysian Prime Minister candidly said that it cannot repay the debts and is unwilling to get into a situation where a new type of colonialism will be thrust upon Malaysians.

Many other countries in Southeast Asia, East Asia and Africa are now wary of dealing with China, especially when there are ambitious projects that would require borrowing from the Communist Party of China government and the underdeveloped or developing nations would face insurmountable odds to repay the loans. For China, it is business, power, geopolitics and expansionism. Essentially, it is about China becoming the only superpower in the world, at the cost of the sovereignty and prosperity of all other smaller and poorer nations that do not matter in its grander vision.