China's “Debt Trap Diplomacy”

The narrative is popular not because it is true, but because it serves a useful purpose.

Written by Lipton Matthews.

“Debt trap diplomacy” has become a powerful narrative in international politics. According to its proponents, China deliberately lends money to poor countries knowing they will struggle to repay, allowing China to seize ports, railways and natural resources as compensation. The country does this, proponents claim, to expand its influence under the famous Belt and Road Initiative.

However, the narrative does not hold up under scrutiny. Chinese loans are not part of some hidden strategy to ensnare other countries. They are often requested by those countries themselves. China’s lending is driven more by commercial interests than political goals. And far from creating problems, it frequently benefits borrowers.

The term “debt trap diplomacy” first appeared in 2017 in an article by the Indian geostrategist Brahma Chellaney. It was based on the claim that China tricked Sri Lanka into taking out large loans it couldn’t repay, and then took control of Hambantota Port when Sri Lanka ran into financial trouble. The story quickly gained traction in the West. Top US officials like former Secretary of State Rex Tillerson and National Security Advisor John Bolton accused China of using debt to control other nations and called the Belt and Road Initiative a plan to achieve “global dominance.” These kinds of statements made the debt trap narrative very popular.

But just because a story spreads quickly doesn’t mean it’s true. As various scholars have shown, the situation in Sri Lanka and other borrowers is far more complex than those officials would have us believe. Many projects were initiated by borrowers, and financial problems often arose from corruption, mismanagement or borrowing from other international lenders like private bond markets, not from China.

China’s critics say the country has a clear strategy of lending money to poor countries so it can gain political influence. However, China’s development financing system is much too fragmented and disorganized for such a strategy to exist. There is no single Chinese authority that oversees all Belt and Road projects. Instead, Chinese state-owned enterprises, development banks and government agencies often act independently, competing with each other to win overseas contracts.

Most of China’s international loans are issued by the China Development Bank and the Export-Import Bank of China. These banks are not part of some nefarious plan to saddle foreign countries with unpayable debts. Their main function is to support Chinese companies abroad.

Such companies may approach a foreign government and offer to build a piece of infrastructure. If the government agrees, it can then apply for Chinese financing. Investment projects are hardly forced on developing nations. And many Chinese projects actually lose money. By 2014, Chinese enterprises held $6.4 trillion in overseas assets, but they were still incurring net losses. This reflects a general pattern in China, where unprofitable companies are sometimes propped up for the sake of jobs and economic stability. It is not evidence of a geopolitical masterplan.

The Hambantota Port in Sri Lanka is the original and most widely cited “example” of debt trap diplomacy. But a careful look at the facts doesn’t support this interpretation. First, Sri Lanka did not default on Chinese loans. It faced a general debt crisis after borrowing heavily from commercial markets. Interestingly, Sri Lanka’s debt exposure to China is quite limited, especially compared to countries like Dominica, Mozambique, Tonga and others that owe significantly more to Beijing.

Second, the port project was not a Chinese idea. It was proposed by the Sri Lankan government, which sought Chinese funding to build it. Although the port initially struggled to make money, Sri Lanka decided to lease it (not sell it) to a Chinese company as a way of raising foreign currency in the midst of a financial crisis. China did not seize the asset. The lease was a mutually agreed solution. And no evidence has emerged that China uses the port as a military base. This example actually demonstrates the very opposite of what cynics claim: Sri Lanka had agency, made decisions independently, and still owns the port. China, far from benefiting greatly, has seen its reputation damaged.

A major problem with the debt trap narrative is that it portrays developing countries as mere objects of outside forces. This is rather misleading. Most countries that have borrowed from China actively sought out loans. They were not forced to take them. These governments had their own political and economic goals, and they saw Chinese financing as a way to build infrastructure that Western lenders were not willing to fund.

The Kenyan government borrowed billions of dollars from China to build the Standard Gauge Railway between Mombasa and Nairobi. Feasibility studies had warned that the project would not be profitable, but the country’s leaders chose to move forward anyway. They had political goals in mind, such as winning support from certain interest groups and voting blocs. When the project failed to generate enough profits, this was not because China had tricked Kenya, but because the country’s leaders had ignored expert advice.

Malaysia’s East Coast Rail Link also received Chinese funding. Yet the project was suspended and renegotiated part way through. Malaysia managed to cut costs and revise the terms, showing that even after agreements are signed, borrowers are capable of defending their own interests. If China truly had control, such renegotiation would be impossible.

Critics say China is using infrastructure to build a global empire. The reality is more mundane. Belt and Road projects are largely a response to economic problems inside China. As Chinese growth has slowed, the government has looked for ways to keep its companies busy and its workers employed. Financing infrastructure bolsters China’s construction firms, creates demand for Chinese products, and puts unused capital to work.

This approach is not unique. Many rich countries use development aid to support their domestic industries. What makes China different is the scale of its investment and the willingness to take on risk. Naturally, such risk comes with costs—many Chinese projects fail and many loans are never fully repaid. That is not the behavior of a cunning geopolitical mastermind.

The debt trap narrative is popular not because it is true, but because it serves a useful purpose. Western governments have grown increasingly suspicious of Chinese influence, owing to the country’s rise. Negative stories about China travel faster than positive ones. So when China builds useful infrastructure, critics focus on the problems—a habit that is frequently encouraged by US officials. Meanwhile, African leaders have expressed appreciation for China’s willingness to invest in roads, schools, hospitals and commercial enterprises. Ironically, proponents of the debt trap narrative overlook the decisions of the very countries they claim to champion.

While Chinese lending has certainly contributed to debt in some developing countries, evidence shows that loans were typically requested by host governments, not imposed by Beijing as part of a calculated strategy. Indeed, China’s development financing system is overseen by a fragmented bureaucracy and is driven by the commercial interests of state-owned enterprises.

Moreover, many countries have benefited from their partnerships with China, gaining infrastructure that would never otherwise have been built. Borrowers’ financial troubles typically stem from local mismanagement. And rather than being gullible dupes of a foreign power, they exercise significant agency, including the ability to cancel or renegotiate deals. “Debt trap diplomacy” is a myth.

Lipton Matthews is a research professional and YouTuber. His work has been featured by the Mises Institute, The Epoch Times and Chronicles. He is the author of The Corporate Myth. You can reach him at: lo_matthews@yahoo.com

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