Introduction

“Predatory economics”, “coercive economic manoeuvring”, and a reconstruction of “the current geopolitical landscape” are some of the rhetoric used to describe China’s lending policies (Tillerson 2017; Basu 2021; Fallon 2015). Formerly, China was a beneficiary of international economic assistance (Hatton 2021). Conversely, in the space of 18 years, China has loaned money to over 13,000 infrastructure projects valued at $843bn, spanning 165 countries (Malik et al. 2021). Such an accelerated overturn of done to donor status as China challenges Western hegemony has been surveyed with major suspicion.

Indeed, China’s most recent global infrastructure investment scheme known as the Belt and Road Initiative (BRI) has been met with vehement condemnation by policymakers and political scholars since its conception in 2013. These criticisms have manifested themselves as accusations that China has been exercising so-called ‘debt-trap diplomacy’; enticing developing states with deceptively agreeable loans to undertake ambitious infrastructure ventures so that, when they can no longer sustain the debt, the government will expropriate the asset. In doing so they supposedly proliferate their geopolitical influence internationally (Blanchard and Martina 2019; Brautigam 2019a).

Originating as a ‘meme’ in 2017, ‘debt-trap diplomacy’ has become the mantra and bête noire of political commentary on China and the BRI, with the phrase diffusing all the way to the US government, with then-US Vice President Mike Pence uttering the idiom to describe China’s loan behaviour in 2018 (Brautigam 2019a; Jones and Hameiri 2020). This analysis is motivated by exploring the truth that lies in the meme. Is ‘debt-trap diplomacy’ something that we should be genuinely worried about, or is it political hysteria emerging from western hegemonic insecurity?

As such this paper aims to analyse the extent to which China gives loans under the BRI for its own geopolitical interests by studying the case of the failed Sri Lankan Hambantota Port. This paper will begin with a background of how states give loans to other countries and how they can be used for geopolitical aims. It will then look at the rationale behind China’s bilateral loan policies. Finally, it will evaluate the extent to which China utilises loans for geopolitical purposes in relation to the case of the Hambantota Port.

How states use loans as geopolitical tools:

The international norm for giving out foreign loans is in the form of financial support through international development financial institutions (DFIs). Most foreign loans are conducted through multilateral development banks (MDBs) such as the World Bank, and bilateral development banks (BDBs) such as the Inter-American Development Bank. While MDBs and BDBs are private sector branches of DFIs, most of these institutions are state-owned. These organisations aim to promote development in recipient countries by means of supplying long- and medium-term funds for productive investment (Britannica 2017; Ligeti 1985).

Nevertheless, the mechanisms practised and the motives behind national governments in their interaction with DFIs are widely debated. Supporters of state intervention in DFIs argue that such a high degree of presence is essential for the promotion of economic development and growth, while critics insist that states are egoistic in their engagement with DFIs, utilising them as a canvas for the expansion of their own political intentions (Yeyati et al. 2004). Musacchio et al. (2017) highlight the possibility of the successful implementation of the norms and interest of donating countries in these loan agreements. They conclude that an exploitation of a development bank is dependent on whether the institution is adequately structured and safeguarded. In the absence of safeguards, development banks may be used for rent-seeking governmental policies (Ingram, 2021; ibid.). From this, we can theorise that this could translate into such institutions constituting a tool for the coordination of geopolitical interests (Ingram 2021; Musacchio et al. 2017).

Separately, countries may wish to acquire aid via direct bilateral loans. Outwardly, bilateral direct loans are formulated to promote economic growth. With fewer checks and balances than DFIs, in truth, many are designed with the intention of creating geopolitical tools (Ross 2021). This can be seen in Belarus-Russian relations and Putin’s most recent commitment to their ally: a release of $500 million from a previously negotiated loan of $US1.5 billion under the condition that Belarus strengthens its economic, political, and military ties with Russia (Newnham 2020; Quinn & Arkhipov 2021). Such blatant Russian political strategising displays how bilateral loans of this nature can easily and outrightly be used for political objectives.

Chinese Loaning:

China’s bilateral loans procedure is an exception to international norms. Instead of participating in DFIs or granting direct loans, most of the money it invests is in the form of state banking loans. National governmental branches are not specified in many of these loan agreements and thus they are kept from official governmental debt reports (Hatton 2021). Such confidentiality has been viewed with suspicion, causing western policymakers and commentators to speculate about what exactly is China concealing, a suspicion that has emanated into the ‘debt-trap diplomacy’ meme. The money from Chinese state banking loans is linked to the BRI and so we must discuss the functioning of the BRI to understand why it gives loans.

To explain, the BRI is a development plan initiated by the Chinese government in 2013 intending to foster cooperation and connectivity across the six major international economic corridors (OECD 2018). It is a reiteration of existing Chinese commitment to international investment engagement (Hurley et al. 2018). It is understandable that the West is sceptical of the BRI. Rather than understanding it to be a more complicated economically driven initiative, it is easier to view it as a fragment of an extensive narrative about dwindling western hegemony (Jone & Hameiri 2020). While there is a clear desire for greater Chinese leverage on the world political stage by way of the BRI and its influence on the global economy, Jones & Hameiri (2020) explain its primary aim, thatis, externalising domestic economic issues. China’s manufacturing industry suffers from production overcapacity, leaving futile surplus production (Liu et al. 2017).

A solution to unload unwanted supply is to send it outwards. Thus, China launched the BRI with the intention of increasing demand for Chinese-funded infrastructure projects to rectify these structural issues. In fact, the externalisation of domestic problems has been embedded in past Chinese economic strategies. The BRI is in essence a more extensive version of such existing initiatives that aim to fulfil economic motivations.

Those who acknowledge China’s economic motivations and still criticise the BRI may accuse it of utilising ‘economic statecraft’ to achieve geopolitical interests (Chellaney 2017; Jones & Hameiri, 2017.). However, there is limited empirical evidence of the actuality of this behaviour. Critics of the BRI overestimate its efficacy, giving it a far more grandiose reputation than is warranted. In reality,
the BRI is operated via a loose, item-by-item system of administration rather than having a specific strategy. This system of administration is reflected in China’s willingness to loan to countries with discreditable governance such as Pakistan, Afghanistan, and Myanmar. China does not prioritise the good governance of borrower countries like the west does. This makes China a great alternative creditor for developing countries because they view good governance as secondary to economic development (Vlaskamp 2019). Attracted potential borrowers initiate these specific development projects, materialising in a “bottom-up, piecemeal manner” (Jones & Hameiri 2017). Essentially, there is no coercion on China’s part for a country to take on these loans. Even if China did have a specific strategy, it could not force countries to undertake these projects and as such, there is limited space for the BRI to be utilised as a geopolitical tool.

Indeed, this model of administration is not necessarily productive in the sense that the BRI has funded many ill-executed foreign projects. As a rudimentary initiative, the BRI lacks experience in the global marketplace, resulting in some illogical high-risk investments. These miscarriages have fabricated hysteria in the West as opponents of the BRI use the case of the Hambantota Port in
Sri Lanka as the poster child for their debt-trap accusations against Chinese loaning behaviour. Additionally, they postulate that China is attempting to create a ‘Chinese naval outpost’ to anchor its geopolitical position there (Jones & Hameiri). However, evidence for these allegations is relatively narrow (Brautigam 2019b). Indeed, based on the economic and structural dynamics discussed above, we will look at the case of the Hambantota Port and analyse to what extent China is using it for geopolitical objectives.

The case of the Hambantota Port:

In 2017, saddled with debt, Sri Lanka ceded operational control of the commercially inviable Hambantota Port to a Chinese-commanded joint venture on a 99-year lease in exchange of a $US1.1 billion investment from China Merchant Port Holdings (CMPort). Characterised as ‘debt-trap diplomacy’, opponents of the BRI declared the deal was an intentional asset seizure initiated by China for a loan that they knew would create debt distress.

The debt trap accusations about the Hambantota Port mirrors another geopolitical hypothesis known as the ‘String of Pearls, which argues that China aims to establish a nexus of commercial and military facilities along maritime routes on the Indian Ocean, spanning from China to Port Sudan to achieve maritime hegemony (Brautigam 2019a). Indeed, China has placed a considerable emphasis on joint venture port development projects since the 1970s. Many of these investments have been highly successful. However, profits gained by these projects are not entirely dependent on Chinese intervention. Rather, revenue relies on strategic planning from the recipient country to attract ships and recover loan costs.

Indeed, in the case of Sri Lanka, the government had concocted the idea of developing a port in Hambantota decades before and then approached the Chinese to fulfil the project. In 2017, China Harbor Engineering Company (CHEC) and the Sri Lankan government successfully lobbied for an agreement with China Eximbank to finance the project (Brautigam 2019b). However, the
Hambantota Port transpired to be unlucrative, with use of the facility decreasing annually (Sri Lankan Department of Census and Statistics 2017). Jones & Hameiri (2020) flag local economists’ commentary on the port who cite governmental incompetence and commercial neglect for the unmarketability of the port. While critics point to a geo-strategised debt trap, the initiative’s failings appear to be primarily due to Sri Lankan governance issues and an element of poor risk assessment.

Sri Lanka was in an unstable position, recovering from civil war and the effects of a tsunami, when the Hambantota Port project was propelled. Nevertheless, the development was initiated via excessive borrowing from both Chinese and Western-dominated financial markets (Jones & Hameiri 2020). The port was subject to mismanagement by the Sri Lankan Port Authority (SPLA). Evidently, the Sri Lankan government failed to implement any fixed strategy on how to commercialise the port, resulting in the SPLA losing over $US300 million (Brautigam 2019a). In addition, China Eximbank overlooked Sri Lankan vulnerability as a recuperating state. These factors contributed to Sri Lankan economic instability and by 2014, Sri Lanka was experiencing a debt crisis. By the end of 2016, the IMF estimated Sri Lanka’s external debt to be US$46.6 billion.

In 2015, the Rajapaksa administration was defeated in elections and to pay their debts, its successors privatised a majority stake of the port to collect foreign exchange in the joint venture deal for 70% shares with CMPort. Despite this data being public, misinformation among academics led to speculation that it was an asset-seizure deal and that it gave China naval control of the port. Evidently, this was not the case; China did not get Sri Lanka to “cough up a port” (Abi-Habib 2018). The deal was a manifestation of inefficient Sri Lankan governance and commercial strategy, and an absence of adequate risk assessment by both China and Sri Lanka. There is no evidence that China intended on adding Hambantota to its fictional ‘string of pearls’. In essence, claims that China partakes in ‘debt trap diplomacy’ to gain geopolitical leverage cannot be backed by the case of the Hambantota Port.

Conclusion:

In conclusion, this evidence supports our hypothesis that the extent to which China uses lending for geopolitical purposes is limited. In reality, the BRI is much more elementary in its operations. China commits to bilateral investment projects primarily for its own egoistic desire to solve problems in its own economy, rather than to strategise global domination. Indeed, such wariness of Chinese loaning behaviour may be a projection of western consciousness of their increasing vulnerability on the world stage. This paper recommends that if China adopted more transparency in its lending negotiations, the west would have less capacity to create this scapegoat. However, with China being a notoriously secretive political actor, that reality is unlikely to be realised. Thus, only until China stops fostering so much ambiguity around the BRI will these debt trap accusations continue to appear.

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