Magazine

English Hindi

Index

Prelims Capsule

International Relations

China Debt Trap Diplomacy – How China is colonizing developing nations by giving hidden loans?

China Debt Trap Diplomacy – How China is colonizing developing nations by giving hidden loans?

Relevance

  • GS 2 || International Relations || India & its Neighbours || China

What is Debt trap diplomacy?

  • Debt-trap diplomacy is a theory to describe a powerful lending country or institution seeking to saddle a borrowing nation with enormous debt to increase its leverage over it.
  • The term ‘debt-trap diplomacy’ was introduced by Indian academic Brahma Chellaneyin early 2017 and has been widely used in recent years to allege China’s lending policies.

China Debt Trap Diplomacy

  • China has used debt as a financial tool to gain global influence and significant power in India’s neighboring countries, increasing the country’s exposure to political and security threats.

How does China’s debt-trap diplomacy work?

  • To achieve rapid political and economic dominance around the world, China disburses billions of dollars in concessional loans to developing countries, primarily for large-scale infrastructure projects.
  • These developing countries, which are mostly low- or middle-income, are unable to keep up with the repayments, allowing China to demand concessions or benefits in exchange for debt relief.

Concessional loans provided by China

  • These loans are generally extended to low- and middle-income countries on terms that are significantly more generous than market loans.
  • The ‘concessionality’ factor is achieved either by offering interest rates that are below the market rates or leniency in the grace period, and often with a combination of both.
  • Also, these loans generally have a long grace period.
  • There are several advantages or concessions that China asks for in exchange for debt relief.
    • Hambantota port
      • After incurring massive debts to China, Sri Lanka was forced to hand over control of the Hambantota port project to China for 99 years.
      • This gave China control of a key port on the doorstep of its regional rival India, as well as a strategic foothold along a vital commercial and military waterway.
    • Port in Djibouti
      • In exchange for humanitarian assistance, China built its first military base in Djibouti.
      • Angola, on the other hand, is using crude oil to repay multibillion-dollar debts owed to China, causing major problems for the country’s economy.

India’s neighbhour falling prey to Debt diplomacy

  • Most of India’s neighbors have fallen prey to China’s debt trap and ceded to China’s $8 tn project –One Belt One Road Initiative (OBOR).
  • The initiative seeks to improve connectivity among countries in Asia, Africa, and Europe.
  • China through OBOR can hence increase India’s political cost of dealing with its neighbors.
  • One Belt One Road
    • It is a global development strategy adopted by the Chinese government involving infrastructure development and investments in 152 countries and international organizations in Asia, Europe, Africa, and the Middle East.
    • The project is often described as a 21st-century silk road, made up of a “belt” of overland corridors and a maritime “road” of shipping lanes.
    • Pakistan
    • The China-Pakistan Economic Corridor (CPEC) is said to be the first project of BRI. Four years ago, the then Prime minister of Pakistan had said that CPEC would prove to be a “game-changer” for Pakistan and South Asia.
    • With the worsening economic condition of Pakistan, nobody in that nation is now calling CPEC a ‘game changer’.
    • As part of the China-Pakistan Economic Corridor (CPEC) project, China established a naval base in Gwadar, Pakistan.
    • China has also made US$19 billion worth of loans to Pakistan as part of the China–Pakistan Economic Corridor (CPEC) and other projects.
  • Sri Lanka
    • China intends to take over the Sri Lanka Hambantota port to strengthen its naval operations in the Indian Ocean.
    • China is also providing technical and financial assistance to this country so that it can allow its territory to be used against India if necessary.
  • Nepal
    • Nepal is delaying signing an agreement worth $56 billion to establish a Trans-Himalayan Multi-dimensional Connectivity Network under the BRI, which also includes a cross-border railway.
    • Nepal is apprehensive of signing the commercial agreement because of concerns over the financing of the project.
    • There are concerns about Nepal falling into a similar debt trap (Like Hambantota) with the government signing agreements worth $2.4 billion ranging from infrastructure and energy projects to post-disaster reconstruction efforts.
  • Bangladesh
    • China established its presence in this country by establishing a naval base at Chittagong Port. Bangladesh has recently announced plans to purchase two submarines from China for self-defense.
  • Myanmar
    • China is strengthening military and economic ties with this Indian neighbour to use its territory against India.
  • Maldives
    • This country is located in the Indian Ocean, near the Indian island of Lakshadweep. China has also established an army base in this country. So that it can take a firm stand against India in the Indian Ocean.

Other countries

  • As of 2021, the countries in Africa with the largest Chinese debt are Angola ($25 billion), Ethiopia ($13.5 billion), Zambia ($7.4 billion), the Republic of Congo ($7.3 billion), and Sudan ($6.4 billion).
  • In total the Chinese have loaned US$143 billion to African governments and state-owned enterprises between 2000 and 2017.
  • Djibouti
    • China has set up a first-ever abroad naval base in Djibouti in 2017.
    • China argues that the Djibouti base is to support anti-piracy, UN peacekeeping, and humanitarian relief missions.
    • Djibouti owes over 80 percent of its GDP to China and in 2017.
    • The presence of a naval base in Djibouti has fueled Indian concerns that it is part of China’s strategy to encircle the Indian subcontinent with the help of military alliances and assets in Bangladesh, Myanmar, and Sri Lanka.
  • Kenya
    • China had lent huge amounts for the development of Kenya’s railway network, which the African nation is not in a position to repay. China had lent 550 billion Kenyan shillings for the construction of Kenya’s Standard Gauge Railway project.
    • It is not fetching enough revenue and has lost 10 billion Kenyan shillings in the first year itself. China is going to acquire not only that project but also the immensely profitable Mombasa port to make up for the deficit.
  • Republic of the Congo: an estimated $2.5 billion is owed to Chinese lenders.
  • China has made loans to Kyrgyzstan, Laos, Tajikistan, and Mongolia, and build a national highway in Montenegro, as part of the BRI.

Countries making a move to save themselves

  • These experiences should serve as a warning that the OBOR (One Belt and One Road initiative of which CPEC is a part) is essentially an imperial project and few countries already realizing that have canceled projects-
  • Some countries are however realizing the downside of Chinese money.
    • In 2017, Malaysia, canceled a $20 billion railway link and two pipeline projects that were being funded by the Chinese, because of their debt crisis.
    • Myanmar has rolled back plans for a $7 billion Chinese-backed port on its western coast, seeking to negotiate the terms of its deal with China.
  • Pakistan-China Pakistan Economic Corridor (CPEC) Project can also have a similar fate as Pakistan’s current and future economic prospects are not that encouraging.
  • The country currently suffers from declining foreign reserves, a skyrocketing current-account deficit, and an export to GDP ratio of below 10%, lower than other countries in the region.

Is debt-trap diplomacy affecting India?

  • India has not entered into a direct loan agreement with China.
  • However, India has been the Asian Infrastructure Investment Bank’s largest borrower (AIIB).
  • It is a multilateral bank with China as the largest shareholder (26.6 percent voting rights) and India as the second-largest shareholder (7.6 percent voting rights), among other countries.
  • China’s vote share gives it veto power over decisions that require a supermajority.
  • Loans to India may also pave the way for Chinese companies to enter and gain experience in the promising Indian infrastructure market.

Criticism of Debt diplomacy of China

  • The exploitation of poor countries and neo-colonialism
    • Some commentators fear that China is buttressing repressive regimes, exploiting developing countries in a neo-colonialist manner through high-rate loans.
    • Most of all, seeking to coerce the countries invested in to align with key strategic and military issues.
    • China has been accused of requiring secret negotiations leading to non-competitive pricing on projects where bidding must go to Chinese state-owned or linked companies that charge significantly higher prices than would be charged in the open market.
  • The difference in the loans of IMF, WB, and China
    • Unlike the International Monetary Fund and World Bank lending, Chinese loans are collateralized by strategically important natural assets with high long-term value (even if they lack short-term commercial viability).
    • Hambantota, for instance, straddles Indian Ocean trade routes linking Europe, Africa, and the Middle East to Asia.
    • In exchange for financing and building the infrastructure that poorer countries need, China demands favourable access to their natural assets, from mineral resources to ports.
  • No transparency
    • Rather than offering grants or concessionary loans, China provides huge project-related loans at market-based rates, without transparency, and much less environmental- or social impact assessments.
    • Private investment ( venture capitalists) supported by State can also push countries towards the debttrap.

Way forward

  • Multilateralizing OBOR Finances
    • The World Bank and other Multilateral Development Banks (MDBs) should work toward a more detailed agreement with the Chinese government when it comes to the lending standards that will apply to any OBOR project, no matter the lender.
  • Proactive lending by WB and other MDBs
    • Given the evidence that China’s lending imposes unsustainable burdens on vulnerable countries globally.
    • It is past time for world leaders to insist that all projects adhere to internationally accepted best practices for transparency and financial sustainability and that lenders adopt modern labour, governance, and environmental standards for their development projects.
  • The Blue Dot Network (BDN) shoud be strengtehend
    • It is a multi-stakeholder initiative formed by the United States, Japan, and Australia to provide assessment and certification of infrastructure development projects worldwide on measures of financial transparency, environmental sustainability, and impact on economic development, to mobilize private capital to invest abroad.
    • Redressal of Sovereignty Issues
    • The CPEC passes through Pakistan-Occupied Kashmir and is the main reason for India not participating in the BRI.
    • No country can accept a project that ignores its core concerns on sovereignty and territorial integrity.
    • The best way forward is for China should respect other country’s Sovereignty Issues.
  • Sustainable Funding by China
    • China should make this Belt and Road Initiative sustainable and prevent debt risks. It should support financing via multiple channels.
    • One step it has already taken in this direction by using third-party market cooperation in addition to earlier funding from AIIB only.
  • India’s role
    • India should help neighbouring countries by providing concessional loans, development grants, line of Credit, and technological and other help for important projects so that they will not fall into such debt traps.

Mains model question

  • What is China’s debt-trap diplomacy? Why is India worried? Discuss.

References