How Chinese 'Debt-Trap Diplomacy' Is Costing Poor-Yet-Aspiring Nations Their Sovereignty

Numerous projects are at the risk of falling prey to China’s debt-trap diplomacy. Countries with debt exposure to China are in $385 billion worth of hidden debt, which doesn’t show up in the World Bank’s Debtor Reporting System.

To understand this phenomenon, it is essential to examine what purpose this lending serves for China and which factors have created a circumstance that led China to adopt this ‘solution’.

For decades, China’s growth has been fuelled by the low cost of labour and lax regulations, which ensured the cost of manufacturing remained low. This low cost of manufacturing and a large pool of cheap labour made China an attractive destination for the offshoring of manufacturing units from developed countries.

Over the years, as China’s economy has grown and more people have been lifted out of abject poverty, China has been staring at the hurdle of the middle-income trap.

As living standards in a country improve, it is only natural that workers will demand higher wages and the cost of labour will go up. This has led to a situation where China loses its competitive advantage as there are alternative nations with a cheaper labour pool.

Other countries have encountered this middle-income trap in the past. This challenge arises when a country is no longer cheap enough to remain a great manufacturing centre or rich enough to become a self-sufficient market.

Given China’s population, a significant amount of its growth can be fuelled by domestic consumption, but the rate of growth will decline. Moreover, despite decades of growth, China still has a large percentage of its population who are unskilled and poor.

This is where the Belt and Road Initiative comes in. China has been financing infrastructure projects in Africa and Asia through its state-owned China Development Bank and Export Import Bank of China.

According to a report by Morgan Stanley, China’s total investment in BRI could reach $1.2 trillion by 2027.

The credit line offered to other developing countries isn’t altruistic, but predatory. Firstly, the contracts with host countries are opaque.

According to the US State Department, contracts most often include clauses that ensure that contracts for these infrastructure projects are given to Chinese companies and the labour used in these projects is Chinese labour and not local labour of the host country.

These kinds of contracts ensure that a significant amount the money circles back to China itself, and as the opportunities for manufacturing goes down in China, its significant labour force is used elsewhere and doesn’t become a burden on the Chinese economy.

The strategy is in many ways similar to what Imperial Britain did by setting up colonies, only more subtle with slight changes as the CCP adopts it for the 21st century.

China’s proposal to finance infrastructure projects, which seems attractive to developing countries at first, often ends up becoming a trap for the countries.

The projects simply fail to generate enough revenue for the host countries to pay back their debt to China and China extracts its debt by taking control of the host nation’s critical infrastructure, which arms China with long-term geopolitical advantage.

The only hope for these countries is that China agrees to restructure the contracts, which China mostly doesn’t agree to.

Uganda

The Ugandan government had signed an agreement with Exim Bank back in 2015. An amount of $207 million was borrowed to expand and modernise the airport by 2033.

In March 2021, Uganda sent officials to China to renegotiate toxic clauses of the deal, but Beijing refused to play ball. Matia Kasajia, Uganda’s Finance Minister, apologised to the parliament last week, according to reports.

Zambia

Uganda isn’t alone; Zambia may end up losing its mining assets to China as a result of its failure to repay the debt it owes to China. Zambia’s previous government headed by Edgar Lungu stated that it owed $3.4 billion to China.

However, a paper published by Boston University’s Global Development Policy Centre disclosed that Zambia’s real debt to China was around $6.6 billion.

Shortly after the new president, Hakainde Hichilema, won the elections in August 2021, in a meeting with reporters, he admitted that “We had known for a long time that there was non-full disclosure… So now that we’re in, we are beginning to see that the debt numbers that were being talked about officially are not really the comprehensive numbers”.

Restructuring negotiations are currently going on between Zambia and China. China already has a controversial stake in Zambia’s national broadcaster, ZNBC.

Now China is seeking to liquidate Konkola copper mines and other mining assets. Zambia is Africa’s second-largest source of copper production.

Kenya

China has been financing the development of the Standard Gauge Railway in Kenya which is the largest infrastructure project in Kenya since 1963. A study conducted by the World Bank to examine the project’s debt sustainability concluded that the project ‘didn’t make economic sense.

Kenya’s borrowing from China to fund the SGR project increased its debt to China by 750 per cent from the period of 2014 and 2019. A study published by the Council of Foreign Relations mentions that the SGR project which was designed to transport 22 million tonnes of cargo, only transported 3.25 million tonnes of cargo.

The project’s need was overestimated as it never managed to generate enough revenues. By 2020, it was running losses of more than $200 million.

A report by Paul Wafula has highlighted the neo-colonial aspects of this project as well. Local Kenyans are paid less than a quarter of what their Chinese counterparts are paid for doing the same work at the same site.

“Racism is so real here, there is an unwritten rule of where you need to sit; you just cannot sit at the ‘Chinese’ table”, says a locomotive driver to Wafula in his report.

Like most agreements, the agreement between Kenya and China has a clause that specifically mentions that any disputes arising regarding repayment of the debt would be arbitrated in China.

There are reports that if Kenya fails to generate enough revenue from the project to repay China, then, China would take over Mombasa port, which is the largest port in Africa.

Kenya’s predicament of losing a strategic national asset would be similar to Sri Lanka’s, which in 2017 lost Hambantota port to China for a ‘lease' of 99 years after failing to repay Beijing.