A major criticism of China’s Belt and Road Initiative (BRI) is that it designed as a debt trap for developing nations. The allegation is that, through the BRI, China makes loans for infrastructure projects which developing nations cannot afford to repay and that China then steps in to take over the asset. BRI has been described by critics as ‘debt trap diplomacy’.But what is the reality?
In September 2019[1], David Dollar, Senior Fellow – Foreign Policy, Global Economy and Development, John L. Thornton China Centre at the Brookings Institute wrote of the BRI:
“The initiative is generally popular in the developing world, where almost all countries face infrastructure deficiencies and a shortage of resources to overcome them. Through large amounts of loans to participating countries to construct infrastructure in various sectors, the BRI can potentially bring significant benefits to these countries by filling their infrastructure gaps and boosting economic growth.
While popular with developing countries, the initiative has received various criticisms from advanced industrial economies: that the program lacks transparency and serves to facilitate China’s export of its authoritarian model; that the commercial loan terms are bringing on a new round of debt crises in the developing world; and that the projects have inadequate environmental and social safeguards.
This paper examines the implementation of BRI infrastructure projects in Africa and concludes that African experiences with the BRI are quite heterogeneous. Some of the major borrowers have debt sustainability problems, while others have integrated the loans from China into sound overall macroeconomic programs. Some of the major borrowers are authoritarian countries with poor records of human rights, but other major participants are among the more democratic countries of Africa. It is hard to make simple generalizations about BRI in Africa. For this reason, it would be wise for Western countries to tone down their rhetoric on BRI, as many of the projects will probably work out well. It would help if Western countries provided more support to the International Monetary Fund to help countries manage their borrowing and to the World Bank to provide more infrastructure financing that that increased options for the developing countries of Africa.”
The prime example referred to by critics of the BRI is the Sri Lankan port of Hambantota. According to critics, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues eventually pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.
But in an article[2] published in ‘The Atlantic’ magazine in February 2021, Meg Rithmire[3], and Deborah Brautigram[4], analyse the complex nature of the Sri Lankan port deal and find that the debt trap attributed to BRI by its critics is a myth. They conclude:
“The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment. After the construction of the port in Hambantota, for example, Chinese firms and banks learned that strongmen fall and that they’d better have strategies for dealing with political risk. They’re now developing these strategies, getting better at discerning business opportunities and withdrawing where they know they can’t win. Still, American leaders and thinkers from both sides of the aisle give speeches about China’s “modern-day colonialism.”
Similarly, in October 2019 David Dollar wrote[5]:
“American officials have criticized the program as “debt trap diplomacy.” This fear seems exaggerated. Most of the countries borrowing from China also borrow from Western donors, the multilateral banks, and private bond holders. They have diversified sources of finance, and there is no reason to think that they are particularly beholden to China…
While it is hard to find evidence of debt trap diplomacy, there are real concerns about debt sustainability that are relevant for all lenders. Foreign debt is different from domestic debt in that it ultimately must be serviced via exports, and there are clear limits to how much debt poor countries can take on. Furthermore, the pandemic and recession drive home how quickly the perception of sustainability can change. Prior to COVID-19, most developing countries looked good in terms of debt sustainability, according to IMF analysis. But the recession is having a devastating effect on GDP and exports. Of China’s main clients in Africa, a majority are now in debt distress or at high risk of debt distress. China has joined the other G20 countries in offering poor countries a moratorium on debt servicing during 2020.”
Development economist Jeffrey Sachs[6] describes US criticism that BRI is a debt trap as mostly propaganda. Developing countries need green electrification, fast rail, digital access etc. These investments will not fail. They are good investments. They can be ‘win -win”. China will benefit as the lender and because it will have exported much of the infrastructure.
Sachs says both the US and China have made some bad investments in developing countries. The quality of the BRI investments needed to improve from what they were at the beginning. At this time China tended to ask recipient countries what they wanted and too many times they came back with projects that were more related to local politics than to good long term development. But since this time learning has taken place and the program improved.
The Council of Foreign Affairs is a prominent US think tank which is recognised as an influential institution of the US foreign policy establishment. On 6 April 2023, Nadia Clark, Nadia Clark a Research Associate for International Political Economy at the Council has written[7]:
“Western media and senior policy officials seem to feel that China is using the BRI to exert undue influence over the world, especially because the initiative mostly funds infrastructure rather than the social sector projects, such as health or education initiatives… Critics worry that China will be able to seize control of these assets for military use or use them as leverage in future negotiations… In reality, this lending is nothing new; China has been providing economic aid and technical assistance to other countries since the 1950s, shortly after the official founding of the People’s Republic of China and a time when China itself was still a developing nation. The real reason why the BRI has struggled to sustain itself is not due to debt traps or predatory lending, but something far more mundane: poor risk management and a lack of attention to detail and cohesion from the Chinese state-owned enterprises and banks, private companies, and local governments involved.”
Clark concludes:
“China is now realizing the true cost of the BRI, as it is forced to choose between repayment on the hundreds of billions in loans its companies and state banks have issued and whatever goodwill it may have accumulated through this initiative. Top Chinese officials such as Wang Wen, chief economist of China Export and Credit Insurance Corporation (aka Sinosure), and even Xi Jinping himself, have warned Chinese developers and financiers of BRI projects to step up their risk management and stressed the need for improved quality control. For all its faults, the original vision of the BRI has its merits – infrastructure and connectivity projects are key to fostering development in low-income countries, and sometimes China is the only willing financier. If the BRI can be saved, it will require both the Chinese government officials and host countries to implement rigorous risk management procedures and to improve coordination at all project stages. China should be wary lest the BRI follow the path of its ancient predecessor, with fragmentation contributing to decline and eventual collapse.”
Jessica C. Liao, assistant professor of political science at North Carolina State University and Wilson China Fellow 2020–21, says that BRI is a risk for China as much as it is for developing countries. She writes[8]:
“Critics pushing the debt trap diplomacy slogan often downplay the fact that BRI debt is as much a problem for China as it is for borrowing countries. International lending has always been a risky business. Information asymmetry between lenders and borrowers incentivizes the latter to misuse loans, while lenders lack credible enforcement power over international loan contracts. From Africa and Latin America in the 1970s and ‘80s to Asia in the 1990s, history has shown that over-exuberant lending on the part of transnational banks and investors regularly contributes to the boom and bust cycles of what many have termed “casino capitalism…What is distinct about the BRI is that it is a state-led lending initiative aimed at exporting not only China’s excess capacity and capital, but also the Chinese economic growth model centred on infrastructure investment. However, expanding this model internationally entails a high degree of financial risk, particularly in the Global South where many countries have a record of debt defaults.”
Finally, it should be noted that the US dollar’s status as the world’s reserve currency also increases risks around developing country debt sustainability. According to the World Bank around two thirds of international debt securities and syndicated loans are denominated in US dollars. The percentage is even higher for lower income countries where 80% of the external debt is in US dollars. This exposes developing countries to higher levels of exchange rate risk. If their own currency depreciates against the US dollar their debt burden increases because they need more of their own currency to repay their dollar denominated debt.
This situation is exacerbated by the fact that when there is turmoil the US dollar tends to appreciate because there is increased demand for a safe store of value and as the reserve currency the US dollar appeals as a safe haven. For example, the US dollar appreciated after the GFC and the COVID epidemic as investors sought safe assets such as the US dollar or US bonds.
[1] https://www.brookings.edu/wp-content/uploads/2019/09/FP_20190930_china_bri_dollar.pdf
[2] ‘There is no Chinese Debt Trap’ https://www.theatlantic.com/international/archive/2021/02/china-debt-trap-diplomacy/617953/
[3] Associate professor at the Harvard Business School and Deborah Brautigram,
[4] Professor of International Political Economy at the School of Advanced International Studies at Johns Hopkins University
[5] https://www.brookings.edu/blog/order-from-chaos/2020/10/01/seven-years-into-chinas-belt-and-road/
[6] https://www.youtube.com/watch?v=suT053i2urI
[7] https://www.cfr.org/blog/rise-and-fall-bri
[8] https://thediplomat.com/2021/10/how-bri-debt-puts-china-at-risk/