The Belt and Road Initiative is many things, but there is little evidence that it is a debt trap. Observers should dispense with this grand narrative and focus on how to engage with the nuances of Chinese lending.
In Sri Lanka late last year, U.S. Secretary of State Mike Pompeo warned his counterparts that debt-trap diplomacy was baked into Chinese lending, calling on them to eschew deals with the Chinese Communist Party.
The much-bandied Chinese debt-trap narrative tells the story of a China that lends to countries that it knows will not be able to repay. The strategic goal is to acquire a stake in and control of key infrastructure in exchange for debt relief, in what is known as a debt-for-equity swap.
Granted, concerns about potential debt-traps are prevalent across Southeast Asia. For example, about half of Laotian and Cambodian debt is owed to the Chinese. This ties the future development funding for both countries closely to their relations with China. Elsewhere on the mainland, Myanmar’s policymakers have reported concerns that heavy reliance on the Chinese for diplomatic support over the Rohingya crisis has made it more difficult for them to say no to Chinese investment, leaving Myanmar more susceptible to a debt-trap.
While such concentration of debt owed to a single lender has the potential to limit the policy space available to a country, this does not mean that all or even most Chinese lending along the Belt and Road Initiative is motivated by a desire to ensnare countries in a debt-trap. Painting Chinese lending activity with such a broad brush is unhelpful, especially when more funding is needed to build critical infrastructure across the region.
There is little evidence that most Chinese lending has led to a debt-trap. A recent study of 130 instances found that debt-for-equity swaps were limited to just two cases. Rarity itself does not preclude the possibility that China may, in certain situations, desire a key strategic asset as the end goal, but arguing that this is the primary aim of Chinese lending severely overstates Chinese state capacity. Before state-owned enterprises are considered, more than 40 government agencies are involved in China’s development lending. While the Chinese Communist Party may spell out broad directives and goals, actors within the Chinese system have varying and at times clashing incentives. Moreover, borrowing country elites play a significant role in shaping a given project. This happened in Sri Lanka, where the elites initiated debt-for-equity swaps in pursuit of their domestic agendas.
It is possible that the end goal of Chinese lending is not control of specific assets but rather leverage over borrowing countries or preferential access to specific resources. However, this is a much more tenuous and challenging argument that is rarely made. Instead, most proponents usually stress debt-for-equity swaps as incontrovertible evidence of debt-trap diplomacy, citing the two debt-for-equity swaps – Hambantota Port in Sri Lanka, and the national electrical grid in Laos – as manifestations of Chinese coercion.
There is no doubt that strategic concerns may be factored into Chinese lending decisions. However, strategic aims can only explain a limited subset of Chinese lending decisions. To better understand why much of Chinese lending has been facing difficulty, it useful to consider the challenges of development lending itself.
For Southeast Asia, a region that has to deal with and borrow from China, seeing clearly through the smoke of the debt-trap myth is crucial.
Development lending is incredibly fraught. The repeated failures and missteps of the World Bank and International Monetary Fund stand testament to this basic fact. From over-optimistic debt sustainability analyses that project unrealistic borrower country growth rates when calculating debt repayment ability, to elite capture of projects to the detriment of local communities, development financiers are well acquainted with the gamut of problems faced when lending overseas. Chinese lenders have, in turn, faced variants of these problems themselves. This is not to say that there is nothing unique or concerning about Chinese lending, but rather that some of the problems facing Chinese development finance can be explained as teething pains of a country coming to grips with the challenges of development lending.
Examining China’s internal development record is also instructive. Its development banks have had a long record of lending to provincial and municipal governments in China from the 1990s. These banks have become more focused on the profitability of their loans over time and have dealt with financing unprofitable but necessary infrastructure within China by bundling them with profitable projects. This process of grouping profitable and unprofitable projects required extensive coordination with borrowing governments and could not be done in an open-tender style. Seen in this light, Chinese lending for potentially unviable railways in Laos alongside more profitable hydropower investment projects becomes more explicable when viewed through this lens of development lending with Chinese characteristics.
At the heart of the debt-trap myth is the belief that Chinese lenders want their investments to fail commercially. Such an assertion transforms all Chinese lending errors into a strategy that does not exist and overlooks the solvability of some lending challenges. For Southeast Asia, a region that has to deal with and borrow from China, seeing clearly through the smoke of the debt-trap myth is crucial.