Debt-trap diplomacy is an international financial relationship where a creditor country or institution extends debt to a borrowing nation partially, or solely, to increase the lender's political leverage. The creditor country is said to extend excessive credit to a debtor country with the intention of extracting economic or political concessions when the debtor country becomes unable to meet its repayment obligations. The conditions of the loans are often not publicized. The borrowed money commonly pays for contractors and materials sourced from the creditor country.
A neologism, the term was first coined by Indian academic Brahma Chellaney in 2017 to contend that the Chinese government lends and then leverages the debt burden of smaller countries for geopolitical ends. Many academics, professionals, and think tanks have rejected the hypothesis, concluding that China's lending practices are not behind the debt troubles faced by borrowing nations, and that Chinese banks have never seized an asset from any nation, and are willing to restructure the terms of existing loans.
Origin and background Due to the 2008 financial crisis, central banks in the U.S. and Europe lowered interest rates, leading to low interest rates in private markets in those countries throughout the 2010s. This made those markets less attractive to investors, who turned more towards countries with emerging or frontier markets in pursuit of higher returns. In 2013, China, which was less affected by the 2008 crisis than the U.S. and Europe, started its Belt and Road Initiative (BRI), making loans available through its policy banks and other state-linked firms for infrastructure projects primarily in the same sorts of emerging markets that private investors were focusing on. This led to China becoming the world's largest bilateral lender. As the decade progressed, many countries with low-income governments ran into debt distress in the wake of earlier large-scale borrowing, with the IMF estimating in 2019 that over 40% of such countries were in debt distress or at high risk of it.
It was in this context that Indian analyst Brahma Chellaney published his 2017 article "China's Debt-Trap Diplomacy", where he is widely credited with having coined the term. He claimed that China's BRI belied predatory geostrategic motives on the part of its government, aiming "not to support the local economy" in countries that took on loans through it, but "to facilitate Chinese access to natural resources, or to open the market for low-cost and shoddy Chinese goods." He further asserted that when these countries ran into debt distress, "it [was] even better for China," allowing China to pressure these countries into taking out more loans through it, ceding control of state assets to it, or aligning their foreign policy with it, in exchange for debt relief.
This hypothesis attracted wide interest, being covered in prominent newspapers like The Guardian and The New York Times and reiterated in foreign policy analyses by other academics, and inspiring anxiety in the governments of the U.S. and its allies. The U.S. administration publicly endorsed the hypothesis; Rex Tillerson, then the U.S. Secretary of State, decried China for "using opaque contracts, predatory loan practices and corrupt deals that mire nations in debt and undercut their sovereignty, denying them the long-term, self-sustaining growth," in a May 2018 speech aimed at African governments before starting an official tour there. Google returned around 2 million results for "debt-trap diplomacy" by November.
Chellaney's hypothesis became the subject of controversy with academics, journalists, and financial analysts publishing rebuttals. By 2023, according to the Associated Press, a consensus had formed among experts that Chinese lending to foreign governments was "far too haphazard and sloppy to be coordinated from the top," coming from "dozens of banks on the mainland" without signs of any overarching geostrategic plan. The debt crises among low- and middle-income countries that had been growing in the late 2010s only worsened in the early 2020s with the COVID-19 pandemic and rising commodity prices due to the Russian invasion of Ukraine, but although many of these countries did owe large sums of money to Chinese banks, many had also borrowed heavily from private investors and organizations like the IMF and World Bank, and China did not appear to be in a good position to benefit from many of these crises.
Chinese lending to other developing countries is predicated on the view that time and continued financing can solve debt problems that arise. The underlying assumption is that development generated through debt for industrial projects or infrastructure projects will lead to urbanization and industrial development that raises fiscal revenue and land revenue for public borrowers, allowing them to repay loans in the long run.
Chinese policy banks have lent domestically to local governments in China on the same basis since the 1990s. Its policy banks provided local governments with loans that were excessive on the basis of their fiscal capacity. By collateralizing local governments' land and fiscal revenues, local governments were empowered to borrow large amounts to capitalize industry and infrastructure projects.
Assessments Media outlets Western, Indian, and African media outlets have criticized the terms of Chinese state loans and their high interest rates. One example was a 2006 loan to Tonga to rebuild infrastructure. In 2013 and 2014, Tonga experienced a debt crisis when the Exim Bank of China (its creditor) did not write them off. The loans cost 44 percent of Tonga's gross domestic product (GDP). According to some analysts, such practices highlight China's hegemonic intentions and its challenges to state sovereignty.
In March 2022, Bloomberg News reported that despite China making the Western world uncomfortable with its large infrastructure projects in Africa, a deeper look into the evidence showed that the accusations towards China of doing debt-trap diplomacy in the continent, were "unfounded". The Economist investigation found that China, although a big lender, accounted for fewer shares of loans compared to the World Bank and commercial loans. No evidence of predatory lending practices was found.
The Associated Press reported, in May 2023, that a dozen countries, including Pakistan, Kenya, Zambia, Laos and Mongolia, were on the "brink of collapse" under the weight of overwhelming foreign debt, "much of [it] from the world’s biggest and most unforgiving government lender, China." However, the analysts quoted in the article disputed the idea that this was in line with any grand geostrategic plan of China's, saying that there is "no single person in charge" of the lending as it comes from "dozens of banks on the mainland" and "is far too haphazard and sloppy to be coordinated from the top." Rather, they surmised that Chinese banks were reluctant to forgive or restructure foreign debt because of difficult economic conditions domestically.
Governments In August 2018, a bipartisan group of 16 U.S. senators accused China of engaging in debt-trap diplomacy. In an October 2018 speech, U.S. Secretary of State Mike Pompeo said that China's loans are facilitated with bribes. According to senior U.S. government officials, Beijing "encourages dependency using opaque contracts [...] that mire nations in debt and undercut their sovereignty".
In 2021, the Trinidad and Tobago government defended its decision to accept a multi-million dollar loan from China rather than from the IMF by saying that (unlike the IMF) Beijing was not demanding any "stringent conditions" for its loans. Minister of Finance Colm Imbert said at a news conference,
Studies A May 2018 paper by Sam Parker and Gabrielle Chefitz from the Belfer Center for Science and International Affairs posited three strategic goals behind China's lending: "filling out a 'String of Pearls' to solve its 'Malacca dilemma' and project power across vital South Asian trading routes; undermining and fracturing the US-led regional coalition contesting Beijing's South China Sea claims; and enabling the People's Liberation Army Navy to push through the 'Second Island Chain' into the blue-water Pacific."
A March 2018 report released by the Center for Global Development said that between 2001 and 2017, China restructured or waived loan payments for 51 debtor nations (most of the BRI's participants) without seizing state assets.
In September 2018, W. Gyude Moore, a former Liberian public works minister and senior policy fellow at the Center for Global Development, said, "The language of 'debt-trap diplomacy' resonates more in Western countries, especially the United States, and is rooted in anxiety about China's rise as a global power rather than in the reality of Africa." Moore stated in 2021 that "China has been a net positive partner with most African countries." Academic David M. Lampton writes China's lending to risky borrowers is not a plot and that in American political discourse it is easier to allege a strategy like "debt-trap diplomacy" than it is for Americans to accept that domestic politics often drive excesses in China just as they do in other countries.
An August 2018 China Africa Research Initiative report authored by Deborah Bräutigam, Janet Eom, and Lina Benabdallah said, "Chinese loans are not currently a major contributor to debt distress in Africa." According to the report, China was at the time "the most significant contributor to high risk of/actual debt distress" to three African countries: Zambia, Djibouti, and Congo.
In April 2019, the Rhodium Group said that China's leverage in debt was limited in power. According to a May 2019 Sydney Morning Herald article, accusations of "debt trap diplomacy" were being questioned by new research; an analysis of 40 Chinese debt re-negotiations by the Rhodium Group found "asset seizures are a very rare occurrence", and debt write-off is the most common outcome. The article also reported the views of Australian National University senior lecturer Darren Lim, who (referring to the Rhodium Group study) said that much of the leverage shifts to the borrower rather than the lender after the loan has been made. Lim also said that although the debt-trap diplomacy theory was never credible, the Trump administration embraced it. La Trobe University head of humanities and social sciences Nick Bisley said that China aimed to build political capital through the BRI, but asset seizures would not achieve that end.
An October 2019 report by the Lowy Institute said that China had not engaged in deliberate actions in the Pacific which justified accusations of debt-trap diplomacy (based on contemporaneous evidence), and China had not been the primary driver behind rising debt risks in the Pacific; the report expressed concern about the scale of the country's lending, however, and the institutional weakness of Pacific states which posed the risk of small states being overwhelmed by debt. A 2020 Lowy Institute article called Sri Lanka's Hambantota International Port an example of China debt-trap diplomacy, but called the narrative a "myth" because the project was proposed by former Sri Lankan president Mahinda Rajapaksa, not Beijing. The article added that Sri Lanka's debt distress was not caused by Chinese lending, but by "excessive borrowing on Western-dominated capital markets".