Is the Chinese debt trap a myth?

It has been suggested that China cajoles less developed countries into taking out multiple loans to build expensive infrastructure that they can’t afford to fund themselves. This then leads to fears of possible takeover of assets by China when the borrowing country defaults on its debt. An example of this is the Sri Lankan port of Hambantota. However, a deeper look shows that accusations of so-called debt trap diplomacy turn out to be unfounded.

Sri Lanka – Hambantota.

It was the Canadian International Development Agency—not China—that financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. The initial phase of the project should allow for the transport of non-containerised cargo—oil, cars, grain—to start bringing in revenue, before expanding the port to be able to handle the traffic and storage of traditional containers.

In 2007 after being turned down by the US and Indian companies, China Harbor won the contract to build the port with China Eximbank agreeing to fund it – $307 million,15-year commercial loan with a 6.3% interest rate. There were 2 phase of the build:

Phase 1 – infrastructure to handle non-containerised cargo – oil, grain, cars etc.
Phase 2 – transforming Hambantota into a container port.

Instead of waiting for Phase 1 to generate income the government went ahead with Phase 2 and borrowed $757 million from China Eximbank at an interest rate of 2%. By 2015 Hambantota was losing money and the Sri Lankan Port Authoroity (SLPA) signed an agreement with China Harbor and China Merchants Group to have them jointly develop and operate the new port for 35 years.

By this time with a change of government and increases in sovereign bond payments the Sri Lankan fiscal position was desperate. They owed more to Japan, the World Bank and the Asian Development Bank than to China. Only 5% of $4.5bn debt servicing was due to Hambantota.

It is important to note that there was never a default – IMF raised money by leasing out the Hambantota Port to an experienced company. Two bids came from China Merchants and China Harbor; Sri Lanka chose China Merchants, making it the majority shareholder with a 99-year lease, and used the $1.12 billion cash infusion to bolster its foreign reserves, not to pay off China Eximbank.

Africa and Chinese infrastructure projects

The video below from ‘Bloomberg Quicktake Originals’ looks at a similar scenario in Africa to that of Sri Lanka. Over the past two decades, China has built large infrastructure projects in almost every country in Africa, making Western powers uncomfortable amid wider concerns about Beijing’s investments across the continent. However, a deeper look shows that accusations of so-called debt trap diplomacy turn out to be unfounded.

Source:

The Chinese ‘Debt Trap’ Is a Myth – The Atlantic 6-2-22

For more on Developing Countries view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

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