Is China the World’s Loan Shark?
Some call the colossal program a new Marshall Plan, arguing that it could radically reduce the costs of international trade as well as underpin the economic transformation of poor countries.
Others accuse China of using B.R.I. as a way to flex its economic muscle for political gain on the sly. The whole effort is a cover for “debt-trap diplomacy,” goes one common criticism — or, to borrow from John R. Bolton, the United States national security adviser, China is making “strategic use of debt to hold states in Africa captive to Beijing’s wishes and demands.” (Some American Democrats seem to agree with him, at least about this.)
Yes, debt is on the rise in the developing world, and Chinese overseas lending is, for the first time, a part of the story. But a number of us academics who have studied China’s practices in detail have found scant evidence of a pattern indicating that Chinese banks, acting at the government’s behest, are deliberately over-lending or funding loss-making projects to secure strategic advantages for China.
The main example of these purported ploys is the Hambantota Port in southern Sri Lanka: The government handed control over the port to a Chinese company in 2017 after struggling to make its loan payments to China. But that’s a special case, and it is widely misunderstood.
China does not publish details about its overseas lending, but the China-Africa Research Initiative at Johns Hopkins University (which I direct) has collected information on more than 1,000 Chinese loans in Africa between 2000 and 2017, totaling more than $143 billion. Boston University’s Global Development Policy Center has identified and tracked more than $140 billion in Chinese loans to Latin America and the Caribbean since 2005.
Based on the findings of both institutes, it seems that the risks of B.R.I. are often overstated or mischaracterized.
Take Africa. The International Monetary Fund estimates that as of late January some 17 low-income African countries already were in, or were at risk of, “debt distress,” or of experiencing difficulties in servicing their public debt. We at the China Africa Research Initiative created debt profiles for those countries based on our data on Chinese loans as well as statistics from the World Bank and the I.M.F. — and we discovered that a crowd of global banks and bondholders were involved: notably, in Mozambique, Credit Suisse; or in Chad, the Anglo-Swiss mining giant Glencore. In some of the 17 countries the I.M.F. identified as vulnerable, including Cameroon and Ethiopia, China was the single-largest creditor, but non-Chinese lenders still held the majority of the debt. Only in Djibouti, the Republic of Congo and Zambia did Chinese loans account for half or more of the country’s public debt.
In its 2019 study on China in Latin America and the Caribbean, the Global Development Policy Center concluded that, aside from “the important possible exception of Venezuela,” financing from China alone did not appear to be driving borrowers above the I.M.F’s debt-sustainability thresholds.
In most of Africa and Latin America, in other words, China’s lending is significant, but fears that the Chinese government is deliberately preying on countries in need are unfounded.
Sri Lanka is often cited as the poster child for the ills of Chinese debt-trap diplomacy. China financed a port in Hambantota; the port incurred losses, making loan-repayment difficult; after the election of a new government in Sri Lanka, 70 percent of the port was sold to a Chinese company, prompting speculation that China had orchestrated the whole fiasco.
Yet the plan to build a port in Hambantota had long been part of Sri Lanka’s broader hopes to compete with Singapore as a regional transport hub. According to a 2006 feasibility study by the Danish company Ramboll, Hambantota would be economically viable in time if it focused on becoming an intermediate stop for the shipment of vehicles and on supplying fuel to ships plying the Indian Ocean. Whereas the transshipment business developed in line with predictions, domestic political infighting stymied the rollout of fuel bunkering. The port struggled for revenues and then so did the port authority to pay back its loans.
But the Hambantota loans accounted for only a tiny share of Sri Lanka’s debt overall. When the sale of the port was negotiated in 2016, Sri Lanka had an external debt of $46.5 billion; according to the I.M.F., only 10 percent of it was owed to China. As the economists Dushni Weerakoon and Sisira Jayasuriya have argued, “Sri Lanka’s debt problem isn’t made in China.”
And B.R.I. can be risky for China, too. Consider China’s largest overseas loan recipient, Venezuela, to which it has lent some $67 billion since 2007. The Chinese government was expecting to be repaid in oil exports. But the global price of oil fell sharply between 2014 and 2016. As Venezuela descended into political chaos, oil production collapsed. For the past few years, the government has paid only interest on its Chinese loans. Matt Ferchen, of the Carnegie-Tsinghua Center for Global Policy, has argued there is no evidence that Venezuela’s difficulties, including over its repayments, have served China’s geostrategic interests.
There certainly are problems with China’s approach to overseas lending. For one thing, Chinese banks still rely too heavily on Chinese construction companies to find and develop B.R.I. projects. Deals are often struck without any open tenders, creating opportunities for cronyism and kickbacks, and lending credence to accusations that projects bankrolled by China are sometimes overpriced.
But the idea that the Chinese government is doling out debt strategically, for its benefit, isn’t supported by the facts. Many of the would-be borrowers gathering in Beijing this weekend are likely to carefully scrutinize the costs and benefits of Chinese loans; some may be poor, but that doesn’t make them unaware or unsavvy. China’s B.R.I. isn’t debt-trap diplomacy: It’s just globalization with Chinese characteristics.
Deborah Brautigam is the Bernard L. Schwartz Professor of International Political Economy at the Paul H. Nitze School of Advanced International Studies, at Johns Hopkins University.