The China Debt Trap Lie that Won’t Die

Secretary of the Treasury Janet Yellen talks about the Chinese debt trap nearly every time she speaks. National security advisor Jake Sullivan delved into the topic in his big economic vision speech. And recently the Associated Press ran a long piece entirely devoted to the falsehood.

The criticism all claims that Chinese loans to poor nations drive these countries to instability and are designed to seize assets offered as collateral. The problem is it is all untrue.

Deborah Bräutigam, the Director of the China Africa Research Initiative at the Paul H. Nitze School of Advanced International Studies, has written that this is “ a lie, and a powerful one.” She wrote, “our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country.”

Even researchers at Chatham House admit that’s not the case, explaining that the lending has instead created a debt trap for China. That is becoming more evident as nations are unable to repay, largely due to the economic fallout from the pandemic and the US proxy war against Russia in Ukraine.

Could there be something more to the US’ obsession with this talking point?  Gong Chen, founder of Beijing-based think tank Anbound, says that if countries are unwilling or unable to repay their debts to China, it could be devastating for Beijing:

Widespread debt evasion and avoidance would have a significant impact on China’s financial stability,” he said, “and we are concerned that some countries may try to avoid paying back their debt by utilizing geopolitics and the ideological competition between East and West.

While Beijing certainly seeks influence in countries where it lends, it also usually builds infrastructure. And while those roads, train tracks, ports and more are also usually beneficial to Chinese operations, their construction also helps the host country. It’s also way more than the West offers in terms of infrastructure.

The US possibly had the opportunity to join with China in its Belt and Road Initiative (BRI), one of the largest and most ambitious global infrastructure projects ever, but declined:

While China’s initial instinct has been to try and tackle debt repayment issues at a bilateral level, typically by extending maturities rather than accepting write-downs on loans, it’s increasingly getting involved in multilateral talks that include US-backed institutions like the IMF. Take the case of Zambia, which got a $1.3 billion loan from the IMF in September. From The Diplomat:

Zambia will shift its spending priorities from investment in public infrastructure – typically financed by Chinese stakeholders – to recurrent expenditures. Specifically, Zambia has announced it will totally cancel 12 planned projects, half of which were due to be financed by China EXIM Bank, alongside one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital. The government has also canceled 20 undistributed loan balances – some of which were for the new projects but others for existing projects. While such cancellations are not unusual on Zambia’s part, Chinese partners account for the main bulk of these loans…

While some of these cancellations may have been initiated by Chinese lenders themselves, especially those in arrears, Zambia may not have needed to cancel so many projects. Since 2000, China has canceled more of Zambia’s bilateral debt than any sovereign creditor, standing at $259 million to date.

Nevertheless, the IMF team justified the shift because they – and presumably Zambia’s government – believe that spending on public infrastructure in Zambia has not returned sufficient economic growth or fiscal revenues. However, no evidence is presented for this in the IMF’s report.

Zambia and its government creditors, including China, reached a deal last week to restructure $6.3 billion in loans, which the IMF approved. Full details of the deal weren’t announced, but according to the AP:

French officials said Zambia’s debt would be reorganized over 20 years, with a three-year grace period. It also includes a clause aimed at ensuring that Zambia gets similar treatment from private creditors, who hold an additional $6.8 billion in loans to Zambia, but it wasn’t clear that those private creditors could be required to do so.

The IMF deal last year was also an effort to relegate China to the backseat, as it allows for 62 concessional loan projects to continue, only two of which will involve China. The vast majority of the projects will be administered by multilateral institutions and involve recurrent expenditure rather than infrastructure-focused projects.

In August, China announced the forgiveness of 23 interest-free loans for 17 African nations, while also pledging to deepen its collaboration with the continent. Despite that gesture and its efforts to extend maturities, the West continues to hammer home the message that Beijing is engaged in debt-trap diplomacy with Yellen claiming multiple times that Beijing has become the biggest obstacle to “progress” in Africa.

While Beijing offers imperfect infrastructure-for-minerals deals, the US, offers up worthless token items like cultural ties (as Biden said at last year’s US-Africa Leaders Summit, the US has a significant population of African Americans. “I might add that includes my former boss,” he said.) and stuff like this:

Regardless of what the US says and no matter how many times its officials repeat this debt trap talking point, it doesn’t change the fact that countries now prefer arrangements with the Chinese. Ken Opalo writes at An Africanist Perspective about how the US cannot compete with China economically in Africa:

The fact of the matter is that if you want to do anything serious in the region within a tight political business cycle and need financing, calling Beijing is typically the smart option. This is especially true if you happen to be an incumbent in a competitive electoral democracy like Kenya or Zambia (I hope Washington sees the irony here). According to Nikkei Asia, China has invested 2.5 times more in African infrastructure development than all Western countries combined. The same dynamics obtain in the private sector. Whether you are looking for machinery or cheap imports (and increasingly markets), China is often the best option. Trends in trade volumes demonstrate this fact.. In 2022 Africa-US trade (under $40b) was less than a fifth of Africa-China volumes.

It’s hard to beat something with nothing as Nigerian Vice President Yemi Osinbajo explained during his March 27 remarks at King’s College in London:

China is Africa’s largest bilateral trading partner and about $254 billion in trade in 2021. China is the largest provider of foreign direct investment, supporting hundreds of thousands of African jobs. This is roughly double the level of U.S foreign direct investment and China remains by far, the largest lender to African countries.

Chinese companies have also taken the lead in exploiting minerals in Africa, many now in lithium mining in Mali, Ghana, Nigeria, DRC, Zimbabwe and Namibia. Most African countries are in my view, rightly unapologetic about their close ties with China. China shows up where and when the West is reluctant to show up. And many African countries are of the view that the “beware of the Chinese Trojan loans” advice from the West is wise, but probably self-serving.

Africa needs the loans and the infrastructure and China offers them. In any case, the history of loans from Western institutions is not great. The memory of the destructive conditionalities of the Breton Woods loans is still fresh and the debris is everywhere. And the preoccupation of Western governments and media with the so-called China debt trap might well be an overreaction.

In the arguments about the Chinese death traps (as it is called sometimes) and the large amounts of loans to African countries, I think that what is clear is that the Chinese have proven to be quite responsible in the giving out of these loans. There are always arguments about whether you get the best deal all the time, but the real question of Africa and African governments is who else is offering these loans? Who else is offering the support? It is not a question of here or there, it is really a question of what is available and it seems to me to make sense to take what is available.

What about World Bank and IMF debt traps? Yellen and Sullivan don’t talk about that, but African countries, for example, currently owe three times more debt to Western institutions compared to China, and they’ve received far less in return. African political economists, including Grieve Chelwa write about how it is actually the western institutions trapping poorer nations in a cycle of debt and austerity:

In the early months of the pandemic in 2020, the IMF offered to open up new windows for borrowing that they said would come without conditionalities. The G20 Debt Service Suspension Initiative and other such offers to pause debt payments suggested that the poorer nations would receive assistance to prevent total economic collapse and to gain access to vaccines. However, Oxfam found that thirteen of the fifteen IMF loan programmes during the second year of the pandemic (2021) required ‘new austerity measures such as taxes on food and fuel or spending cuts that could put vital public services at risk’. The Commitment to Reducing Inequality Index reveals that fourteen out of the sixteen countries in West Africa planned to cut their budgets by a total of $26.8 billion in 2021 to contain haemorrhaging national debt crises and that these policies have been encouraged by the IMF’s COVID-19 loans.

The evidence is clear: the IMF not only engineers austerity-driven debt crises, but its policies are designed to ensure and manage a permanent debt crisis, not to erase debt.

They are also hopeful that China’s public and private debt forgiveness during the pandemic will apply pressure on western financial institutions to “rethink the harshness of their debt repayment-austerity governance model.”

But it appears that rethinking has led to a strategy to amplify the China debt trap myth rather than offering something on par or better than the Chinese.

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  1. Aeg

    All of the Western hysteria over Chinese debt traps/debt diplomacy looks like flagrant projection from where I’m sitting.

    1. JonnyJames

      Yes, now that you mention it, most of the narratives and claims of “the West” and US imperial overlords is flagrant projection.

    2. Hayek's Heelbiter

      You all are absolutely right!
      Has anybody ever done a Jungian analysis of political pontification in terms of projection of the political shadow self?
      And likewise for Russian, Chinese and Indian politicians.
      A side note, it’s interesting that Modi delivered his address to the recent major banquet with Blinken in Hindi rather that English, a subtle tell about his obsession with HIndutva and the utter contempt he holds for the West and Westerners (though he loves Western money) in his almost Hitlerlike obsession to restore a mythical Indian Golden Age. A close reading of his speeches illustrates, guess what? Projection of blaming enemies (including the BBC) for sins that himself has committed!
      I guess it was thus always.

  2. TomDority

    Same type of – If we do it it’s OK but if you do it its bad – childish geopolitics.
    Like Trump would do… if he were doing questionable stuff … he would accuse the opposition of that very thing first.
    Sort of how our Dems and Repubs have been using fear politics for so long that the ruse is finally showing some slippage —- so the parties (who show a level of incompetence and spoliation that boggles my mind) are looking for other avenues to hide their gross negligence in serving the American people to support the Party for the party sake and the trough of FIRE cash in which to dip their snouts.

  3. Sausage Factory

    for sure a lot of this is projection, seems to be US’ first line of defence (or attack?) is to accuse the ‘other’ of doing what they have been doing for decades. We see it against Russia, in Ukraine against China but for people with brain cells a memories we know its all drivel from a country in decline verging on collapse. Has there ever been two more incidious instituions as the IMF and the World Bank? debt, default, threats, destruction, keeping countries poor so they cannot develop, taking natural resources as capital or in lieu of debt repayments? We have seen it all but this is not my experience of China at all, why? Because its a double edged sword and they naturally do not want to destroy or enslave the countries they can provide goods and services too as they develop, including infrastructure development. The western way of finacial enforcment and slavery also encourages mass resentment which is driving the new multipolar world order.

  4. The Rev Kev

    It’s not hard to work out why countries prefer China. I heard this African leader a week or so ago say that China offers help in building things like roads, airports and ports whereas the US offers bases and military training – which does nothing for your economy. In fact, the later fuels instability as shown by the number of countries that have experienced a coup in Africa and it turns out the coup leader had US training.

  5. Revenant

    I thought China took Hanbantota port in Sri Lanka in lieu if a repayment or to clear a default?

    1. Conor Gallagher Post author

      From what I’ve read, that is not correct, although it’s oft-repeated. Here’s The Diplomat:

      “…it is incorrect to claim that China acquired Hambantota port because Sri Lanka failed to pay off the debt obtained to construct the port. The often quoted “port deal” was actually a lease agreement clearly separate from the loans obtained for the purpose of constructing the port and the money obtained from the lease was used to strengthen the foreign reserves of the country, not to repay China. There was no cancellation of debt, although the port was leased to China for 99 years. There has been no change in ownership. However, as per the lease agreement, a significant portion of the operations in the port will be handled by China Merchant Port company, thus a large portion of the profit, if any, will be earned by CM Port.”

    2. Piotr Berman

      If true, it would resemble a Greek tragedy, more specifically (Wikipedia)
      “The Port of Piraeus is majority owned by China COSCO Shipping[12] (the successor of China Ocean Shipping (Group) Company (COSCO)), the 3rd largest container ship company in the world. In 2003 the port had its IPO, after which the Port was majority owned by the Greek state (74.5%), while the rest was held by investors.” I guess most of you are aware that since antiquity, this is the port of Athens and thus the main port of Greece.

      Yet, it is not cited as a problem for Greece. In the case of Sri Lanka, the port is not the port of the capital, instead, it is on the southern tip of the island, thus perfectly situated for trans-shipment activities en route from Suez Canal and Persian Gulf to Pacific regions of Asia. A Chinese owner can capitalize on this potential better than Sri Lanka itself, and if shipping cost to- and from- Sri Lanka will decline from having a shipping hub it would benefit the country regardless of ownership. This is hardly annexation, and like Greece, Sri Lanka was in dire need to convert some loans to cash. (99 year old lease is practically a sale for real estate less expansive than Hong Kong).

      Foreign ownership of key infrastructure is routine, and unless the owner is rapacious (free market!), beneficial.

  6. Susan the other

    We Westerners and imperialists set the stage for debt-trap-austerity economics. We were either amazingly stupid or capable of deep denial to continue to think it was viable. It was rationalized from the get-go. One big question is, Why isn’t debt service a balanced concept? Why is debt interest too high and aggressively compounded when it is so obviously unproductive? The reasonable approach would be based on some reasonable productivity. Otherwise it is productivity inflation, like every other component of an extractive paradigm. Since the whole world exploits and devastates the environment to service debt, repair of that destruction should be added to the equation to create sustainability. There is method to the madness of the green new dealers. China is off on the right foot because they forgive the unpayable debts. Paying down debt should never rely on speculation or growth these days unless it is the growth of fully sustainable economies.

  7. Felix_47

    Is the US in a debt trap with China? How much does the US owe China for everything we consume? I am no economist…….just wondering. I know my electric car is filled with thousands of little Chinese batteries. My I phone is made in China but it says designed in California…….but made in China.

    1. Kimm Warren

      Like Felix_47 the Us debt is the first thing that comes to mind when discussions turn to Chinese debtors. It’s the higher interest rates we need pay which is why the Fed keeps hitting the brakes.

  8. maray

    There is a problme with China’s financing that mirrors the error from the west and that is they are financing large infrastructure projects and neglecting the population. For example, the East African manufacture of cotton products has been devastated. Although they still grow, this is now exported to China for manufacture, printed with faux African designs and re- imported.
    the workers are again being forgotten

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