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Refuting the 'China's debt trap' narrative in three steps
Editor's note: Under the chairmanship of Hussein Askary, vice president of the Institute of the Belt and Road in Sweden, Li Xing Yunshan, a Lead Academician and a professor at the Guangdong Institute of International Strategies in China, the 21st In his presentation at the conference session titled "Belt and Road Initiative and the Global South" held at the Century Maritime Silk Road 2024 International Think Tank Forum, he proposes a research method that focuses on three fundamental questions to refute the narrative of "China's debt trap". According to the data revealed by Arkasy, the claim of "China's debt trap" is a propaganda tool that is not based on concrete data. On the contrary, China's infrastructure-oriented loans have the potential to increase the productivity of countries under debt. However, broader financing strategies are needed to solve all the problems of these countries.
Refuting the "China's debt trap" narrative: A new three-step research method
Hussein Askary, Li Xing
Our research on China's “debt trap” narrative, which the US Department of State has heavily supported with widespread funding and media support since May 2018, reveals that there is no concrete evidence to support this claim.
This narrative mainly serves as a geopolitical propaganda tool used to hinder the progress of China's proposed Belt and Road Initiative (BR) and to damage China's international reputation.
When we examined the last ten years of financial and economic developments in countries such as Sri Lanka, Pakistan, Zambia, Kenya and Montenegro, we observed a coherent model.
This model shows that the financial difficulties experienced by these countries are caused by a combination of internal and external factors that cannot be directly associated with China or the KIG. Thanks to this review, we have developed a systematic method that allows us to reveal the main mistakes contained in this narrative.
This research method can be used to examine the situation of any country that has come to the fore with the claim of "China's debt trap" and thus separate the reality from the myth. In addition, this research will help decision-makers set solid policies on infrastructure development loans over the next decade, which will form the cornerstone of their countries' economic development.
This method suggests that those who accept the debt trap narrative should answer these three basic questions:
1- What is the debt structure of the country?
2- How is the nature of the debts?
3- What is the source of the country's financial problems?
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1. Debt structure
What is meant by the debt structure is the distribution of a country's total external debt to different creditors, and this distribution is usually expressed in percentages [see. Figure 1]. In our review, we immediately realized that the debt to China accounted for only a small part of the total debt (10 percent for Sri Lanka in 2022, 15.5 percent for Kenya in 2024).
Figure 1. Kenya's 2024 and Sri Lanka's 2022 total foreign debt distribution
However, Western think tanks and the media focus on the concept of “bilateral debt” instead of total external debt by conducting semantic manipulation. This is often presented as: “China is the largest bilateral creditor of Country X” [see Figure 2]. This selective framing creates a misleading perception that disproportionately magnifies China's role in the financial problems of these countries.
Figure 2. Emphasizing Kenya's bilateral debt with China instead of total external debt
Therefore, researchers should not be satisfied with the information provided by only the media or think tanks. Instead, it should use publicly available official data from each country, such as the ministry of finance or the central bank. Figure 2 uses the information obtained from the January 2024 Monthly Bulletin of the National Treasury of Kenya.
When we look at the total debt composition graphs, we see that only 10 percent of Sri Lanka's debt belongs to China; in contrast, 80 to 90 percent of the debt belongs to Western institutions or organizations affiliated with Western states. More importantly, the data reveals the “real truth that is overlooked”: 47 percent of Sri Lanka's debt consists of commercial loans, and much of that debt belongs to Western private bondholders such as American BlackRock and British Ashmore. These bond holders have four times the debt that China has given to Sri Lanka. In Kenya, commercial loans exceed the amount of debt to China, and multilateral loans, most of which belong to the World Bank and the International Monetary Fund (IMF), are three times the debt to China.
2. Debt quality
Chinese loans under KYG are almost entirely aimed at building modern infrastructure in sectors such as transportation, energy, water, education and health. These projects are efficient investments that increase the productivity of the receiving countries. These loans, which improve the infrastructure, support the industrial, agriculture and service sectors, enabling economies to earn income and gain the capacity to repay debts. On the other hand, most of the financial resources provided with commercial and multilateral loans are generally aimed at closing financial and trade deficits. Countries that face serious economic difficulties such as the aforementioned countries have to borrow heavily from international bond markets to solve sudden economic crises.
Countries borrow new from the bond markets to pay for old bonds; however, these debts are usually made with much higher interest rates. For example, in February of this year, the Kenyan government did not have enough cash to recover its $2 billion eurobonds, which would expire in June. Instead, it raised $1.5 billion by issuing a new 7-year bond; however, this debt had an interest rate as high as 10 percent, unlike old bonds bought with a 6 percent interest rate. The cycle of closing such new debts and old debts with higher interest rates is literally creating a “poisonous pill” effect. Even if borrowing is to be used in infrastructure projects, short-term borrowing for projects that will provide income in the long term stands out as a classic mistake. This is one of the main reasons for the real debt trap.
Another important difference of Chinese loans is that they offer longer repayment periods and lower interest rates. For example, the loan provided by the Export-Import Bank of China for the Bar-Boljare highway in Montenegro has advantages such as a 20-year repayment period, a 6-year non-refundable period and an interest rate of only 2 percent. Similar rates and conditions apply to the Mombasa-Nairobi Railway and other projects in Kenya. On the other hand, commercial loans are usually short-term, such as 5 to 7 years, with interest rates ranging from 6 percent to 12 percent.
While China often offers countries experiencing financial difficulties the opportunity to restructure debts or alleviate debts, Western bondholders are legally forcing full and timely payment through Western courts.
In addition, Chinese loans do not include any political or economic prerequisites, while Western multilateral loans generally have conditions such as exchange rate devaluation, cuts in public infrastructure investments, implementation of certain political changes, privatization of state enterprises and natural resources. Such conditions reduce economic productivity in total. For example, as a result of the privatization of copper mining in Zambia on the instruction of the IMF, this sector has passed under the control of Western multinational companies, and Zambia can receive little contribution from its natural wealth to the national economy. Therefore, each case should be examined by considering the qualitative differences of different types of debt.
Most of these countries were already in financial trouble, even before the KDG was launched in 2013. Later, various internal and external developments increased these problems. Reasons such as civil wars, terrorism, epidemics, pandemics, financial management shortages, corruption and changes in the global financial/monetary system are the source of these problems, and none of them is directly related to China. We can list the main reasons as follows:
a. Many countries depend on only one or two main sources of income, making them vulnerable to price fluctuations or operating cuts. For example, both Sri Lanka and Montenegro are largely dependent on tourism. Sri Lanka was affected by terrorist attacks in 2019 and experienced a major decline in tourism. Trying to recover in 2020, this time the Covid-19 pandemic hit the country's economy. Likewise, Montenegro's economy was seriously affected by the pandemic in 2021 and 2022.
b. Sri Lanka's economy faces low productivity problems. For example, the textile industry is based on imported machines, fuel and cotton inputs, and provide added value only with low-cost labor. The rise in global fuel prices after the Ukraine crisis in 2022 has completely eroded profit margins in this sector.
c. Many countries depend on oil, natural gas and fertilizer imports in agriculture. Some countries borrow from foreign sources for food imports. When global prices rise, these countries take a heavy hit.
d. The depreciation of the exchange rate significantly increases the debt burden. Because all external debts, including Chinese loans, are in US dollars and the depreciation of the exchange rate leads to more payment than the national wealth to pay the same amount of dollars. For example, with the US passing the Inflation Reduction Act in 2022, the US dollar appreciated against almost all global currencies. This situation seriously affected the debtor countries.
Conclusion
Examining and addressing these three fundamental problems can provide a more accurate and objective assessment of the debt crises of these countries. China is not the cause of these problems. Essentially, China's approach to providing productive loans to these countries will help countries that have been trapped in this debt trap for a long time to get out of this situation. Thanks to the appropriate financing provided for the infrastructure, these countries can increase their productivity, restore their financial balance and more easily repay their debts to both China and other creditors.
In this sense, China and the Belt and Road Initiative are not the cause of debt problems, but part of their solution. However, China alone cannot solve all the problems faced by these countries. There is a need to develop new methods for the financing of infrastructure and development projects. This topic will be discussed in a separate article.