China and Diplomacy Debt Trap: Accusations Without Evidence

I am too young to have seen this law at work with Adolf Hitler. I remember it well with Margaret Thatcher, though, and more recently with British Prime Minister Boris Johnson and his call to nostalgic Britons that Brexit could rejuvenate a once-great nation.

Of course, it is former US president Donald Trump and his loyal conspiracy theorists who provide a masterclass with the breathtaking audacity of their claim that widespread voter fraud stole the presidency. There can be no more frightening evidence of the law’s perplexing power than to watch so many US political leaders in high places prostrating themselves before Trump’s “big lie”.

To work well, the lie must be introduced early, repeated often and insulated from contradiction by a narrative of “fake news” and accusations of “witch hunts”.

I was reminded of the law by the latest claims of the “debt trap diplomacy” China has allegedly employed across the developing world, supposedly with the express aim of creating aid dependency and taking control of strategic resources and infrastructure.

The narrative of China strategically deploying foreign investment to secure power over developing countries arose among Trump’s acolytes in 2018. John Bolton, then US national security adviser, warned that China was poised to take over Zambia’s national power and utility company to collect on Zambia’s financial obligations.

The most popular example was the troubled Hambantota container port in Sri Lanka. The conservative American Enterprise Institute and Heritage Foundation weighed in with a “China Global Investment Tracker” which identified 300 “troubled Chinese projects” in the developing world worth US$400 billion.

However, work led by Deborah Brautigam of Johns Hopkins University and Harvard’s Meg Rithmire, first published in The Atlantic magazine in February, has raised questions about the “debt trap diplomacy” narrative.

I fear these facts will do little to alter many people’s conviction that China is a malevolent force bent on establishing control over large parts of the world.

To be fair, China is not blameless. For starters, it has emerged at intimidating speed from poverty and isolation to become one of the world’s leading economic forces.

According to UNCTAD’s World Investment Report, China’s total stock of foreign direct investment (FDI) was a puny US$28 billion in 2000. By 2019, its stock of outward FDI had soared to US$2.1 trillion, putting it third in the world behind the US’ US$7.7 trillion and the Netherlands’ US$2.56 trillion. It has leapfrogged the Britain, Japan and Germany – all of whom have built up their FDI stock for a century or more.

Perhaps more importantly, this investment has been largely driven by state-owned enterprises and government-owned banks, mainly the Export-Import Bank of China and the China Development Bank. There has been deep opacity about the terms of foreign contracts and lending terms.

China has also refused to join the international creditors’ cartel, the Paris Club. This has created concern that the confidentiality of its FDI contracts could let it jump the queue if and when a government looked like it might default.

While China was a minnow in foreign investment, this did not particularly matter. But now China is one of the world’s largest sources of FDI, not having it at the table as the debts of troubled economies have to be restructured or written off is a source of concern.

Research released in March, titled “How China Lends”, lifts the veil on China’s debt contracts with foreign governments. Done by AidData, the Peterson Institute for International Economics and the Kiel Institute, it provides some valuable insights when put alongside the work at Johns Hopkins’ China-Africa Research Institute.

The study, based on 300 contracts worth more than US$36 billion, says the “mix of confidentiality, seniority and policy influence could limit the sovereign debtor’s crisis management options and complicate debt renegotiation”.

However, it also says the debate over China’s lending strategy and intention is largely based on conjecture.

“Existing research and policy debate rests upon anecdotal accounts in media reports, cherry-picked cases and isolated excerpts from a small number of contracts.”

Chinese cash funds African coal plants despite environmental concernsChinese cash funds African coal plants despite environmental concerns

Brautigam, of the China-Africa Research Institute, reaches similar conclusions. “China’s march outward, like its domestic development, is probing and experimental, a learning
In another publication, she said her studies of China’s FDI contracts found no asset seizures, evidence of use of courts to enforce payment or penalty interest rates. Countering claims that China refused to renegotiate contracts, she found 94 cases of cancellation, 16 of debt restructuring and one case of refinancing.
While China’s obsession about confidentiality and lack of transparency “fuels suspicion about intentions”, she found that “despite critics’ worries that China would seize its borrowers’ assets, we do not see China attempting to take advantage of countries in debt distress”.
While I am certain this evidence is unlikely to dislodge the “debt trap diplomacy” narrative, it leads to at least one bright point. The World Bank and International Monetary Fund are seeking a common framework on debt relief through to the end of 2021 for developing economies worst hit by the pandemic recession.
They need all the big creditors at the table, and they need them to agree on fairly shared debt-relief terms.
Fortunately, China is part of this massive effort and, in the process, seems set to make its foreign investment contracts much more transparent. A baby step maybe, but it is valuable nevertheless.