The China Debt Trap Lie that Won’t Die

Secretary of the Treasury Janet Yellen talks about the Chinese debt trap nearly every time she speaks. National security advisor Jake Sullivan delved into the topic in his big economic vision speech. And recently the Associated Press ran a long piece entirely devoted to the falsehood.

The criticism all claims that Chinese loans to poor nations drive these countries to instability and are designed to seize assets offered as collateral. The problem is it is all untrue.

Deborah Bräutigam, the Director of the China Africa Research Initiative at the Paul H. Nitze School of Advanced International Studies, has written that this is “ a lie, and a powerful one.” She wrote, “our research shows that Chinese banks are willing to restructure the terms of existing loans and have never actually seized an asset from any country.”

Even researchers at Chatham House admit that’s not the case, explaining that the lending has instead created a debt trap for China. That is becoming more evident as nations are unable to repay, largely due to the economic fallout from the pandemic and the US proxy war against Russia in Ukraine.

Could there be something more to the US’ obsession with this talking point?  Gong Chen, founder of Beijing-based think tank Anbound, says that if countries are unwilling or unable to repay their debts to China, it could be devastating for Beijing:

Widespread debt evasion and avoidance would have a significant impact on China’s financial stability,” he said, “and we are concerned that some countries may try to avoid paying back their debt by utilizing geopolitics and the ideological competition between East and West.

While Beijing certainly seeks influence in countries where it lends, it also usually builds infrastructure. And while those roads, train tracks, ports and more are also usually beneficial to Chinese operations, their construction also helps the host country. It’s also way more than the West offers in terms of infrastructure.

The US possibly had the opportunity to join with China in its Belt and Road Initiative (BRI), one of the largest and most ambitious global infrastructure projects ever, but declined:

He says the West also dramatically misunderstands the BRI.

He reveals – which I think is an exclusive (never heard it before) – that they first proposed to John Kerry to do it jointly with the US, which the US didn’t even want to consider. pic.twitter.com/CNoC11NtZp

— Arnaud Bertrand (@RnaudBertrand) June 1, 2023

While China’s initial instinct has been to try and tackle debt repayment issues at a bilateral level, typically by extending maturities rather than accepting write-downs on loans, it’s increasingly getting involved in multilateral talks that include US-backed institutions like the IMF. Take the case of Zambia, which got a $1.3 billion loan from the IMF in September. From The Diplomat:

Zambia will shift its spending priorities from investment in public infrastructure – typically financed by Chinese stakeholders – to recurrent expenditures. Specifically, Zambia has announced it will totally cancel 12 planned projects, half of which were due to be financed by China EXIM Bank, alongside one by ICBC for a university and another by Jiangxi Corporation for a dual highway from the capital. The government has also canceled 20 undistributed loan balances – some of which were for the new projects but others for existing projects. While such cancellations are not unusual on Zambia’s part, Chinese partners account for the main bulk of these loans…

While some of these cancellations may have been initiated by Chinese lenders themselves, especially those in arrears, Zambia may not have needed to cancel so many projects. Since 2000, China has canceled more of Zambia’s bilateral debt than any sovereign creditor, standing at $259 million to date.

Nevertheless, the IMF team justified the shift because they – and presumably Zambia’s government – believe that spending on public infrastructure in Zambia has not returned sufficient economic growth or fiscal revenues. However, no evidence is presented for this in the IMF’s report.

Zambia and its government creditors, including China, reached a deal last week to restructure $6.3 billion in loans, which the IMF approved. Full details of the deal weren’t announced, but according to the AP:

French officials said Zambia’s debt would be reorganized over 20 years, with a three-year grace period. It also includes a clause aimed at ensuring that Zambia gets similar treatment from private creditors, who hold an additional $6.8 billion in loans to Zambia, but it wasn’t clear that those private creditors could be required to do so.

The IMF deal last year was also an effort to relegate China to the backseat, as it allows for 62 concessional loan projects to continue, only two of which will involve China. The vast majority of the projects will be administered by multilateral institutions and involve recurrent expenditure rather than infrastructure-focused projects.

In August, China announced the forgiveness of 23 interest-free loans for 17 African nations, while also pledging to deepen its collaboration with the continent. Despite that gesture and its efforts to extend maturities, the West continues to hammer home the message that Beijing is engaged in debt-trap diplomacy with Yellen claiming multiple times that Beijing has become the biggest obstacle to “progress” in Africa.

While Beijing offers imperfect infrastructure-for-minerals deals, the US, offers up worthless token items like cultural ties (as Biden said at last year’s US-Africa Leaders Summit, the US has a significant population of African Americans. “I might add that includes my former boss,” he said.) and stuff like this:

Ghana’s debt problems will soon be behind us given that the US is sending a full-time resident debt advisor. This is the only ingredient that was missing. pic.twitter.com/62CUnJWX0C

— Grieve Chelwa (@gchelwa) March 27, 2023

Regardless of what the US says and no matter how many times its officials repeat this debt trap talking point, it doesn’t change the fact that countries now prefer arrangements with the Chinese. Ken Opalo writes at An Africanist Perspective about how the US cannot compete with China economically in Africa:

The fact of the matter is that if you want to do anything serious in the region within a tight political business cycle and need financing, calling Beijing is typically the smart option. This is especially true if you happen to be an incumbent in a competitive electoral democracy like Kenya or Zambia (I hope Washington sees the irony here). According to Nikkei Asia, China has invested 2.5 times more in African infrastructure development than all Western countries combined. The same dynamics obtain in the private sector. Whether you are looking for machinery or cheap imports (and increasingly markets), China is often the best option. Trends in trade volumes demonstrate this fact.. In 2022 Africa-US trade (under $40b) was less than a fifth of Africa-China volumes.

It’s hard to beat something with nothing as Nigerian Vice President Yemi Osinbajo explained during his March 27 remarks at King’s College in London:

China is Africa’s largest bilateral trading partner and about $254 billion in trade in 2021. China is the largest provider of foreign direct investment, supporting hundreds of thousands of African jobs. This is roughly double the level of U.S foreign direct investment and China remains by far, the largest lender to African countries.

Chinese companies have also taken the lead in exploiting minerals in Africa, many now in lithium mining in Mali, Ghana, Nigeria, DRC, Zimbabwe and Namibia. Most African countries are in my view, rightly unapologetic about their close ties with China. China shows up where and when the West is reluctant to show up. And many African countries are of the view that the “beware of the Chinese Trojan loans” advice from the West is wise, but probably self-serving.

Africa needs the loans and the infrastructure and China offers them. In any case, the history of loans from Western institutions is not great. The memory of the destructive conditionalities of the Breton Woods loans is still fresh and the debris is everywhere. And the preoccupation of Western governments and media with the so-called China debt trap might well be an overreaction.

In the arguments about the Chinese death traps (as it is called sometimes) and the large amounts of loans to African countries, I think that what is clear is that the Chinese have proven to be quite responsible in the giving out of these loans. There are always arguments about whether you get the best deal all the time, but the real question of Africa and African governments is who else is offering these loans? Who else is offering the support? It is not a question of here or there, it is really a question of what is available and it seems to me to make sense to take what is available.

What about World Bank and IMF debt traps? Yellen and Sullivan don’t talk about that, but African countries, for example, currently owe three times more debt to Western institutions compared to China, and they’ve received far less in return. African political economists, including Grieve Chelwa write about how it is actually the western institutions trapping poorer nations in a cycle of debt and austerity:

In the early months of the pandemic in 2020, the IMF offered to open up new windows for borrowing that they said would come without conditionalities. The G20 Debt Service Suspension Initiative and other such offers to pause debt payments suggested that the poorer nations would receive assistance to prevent total economic collapse and to gain access to vaccines. However, Oxfam found that thirteen of the fifteen IMF loan programmes during the second year of the pandemic (2021) required ‘new austerity measures such as taxes on food and fuel or spending cuts that could put vital public services at risk’. The Commitment to Reducing Inequality Index reveals that fourteen out of the sixteen countries in West Africa planned to cut their budgets by a total of $26.8 billion in 2021 to contain haemorrhaging national debt crises and that these policies have been encouraged by the IMF’s COVID-19 loans.

The evidence is clear: the IMF not only engineers austerity-driven debt crises, but its policies are designed to ensure and manage a permanent debt crisis, not to erase debt.

They are also hopeful that China’s public and private debt forgiveness during the pandemic will apply pressure on western financial institutions to “rethink the harshness of their debt repayment-austerity governance model.”

But it appears that rethinking has led to a strategy to amplify the China debt trap myth rather than offering something on par or better than the Chinese.