China’s Creditor Imperialism

China’s Creditor Imperialism

Loans from Beijing put natural resources and sovereignty at risk for recipient nations


Just as European imperial powers employed gunboat diplomacy, China is using sovereign debt to bend other states to its will. As Sri Lanka’s handover of the strategic Hambantota Port shows, states caught in debt bondage to the new imperial giant risk losing natural assets and their very sovereignty.

In December 2017, Sri Lanka, unable to pay an onerous debt to China, formally handed over the strategically located Hambantota Port to the Asian giant. It was a major acquisition for China’s Belt and Road Initiative (BRI) — which Chinese President Xi Jinping calls the “project of the century” — and proof of just how effective China’s debt-trap diplomacy can be.

Moreover, as Sri Lanka’s experience starkly illustrates, Chinese financing can shackle its “partner” countries. Rather than offering grants or concessionary loans, China provides huge project-related loans at market-based rates, without transparency, much less environmental- or social-impact assessments. As then-U.S. Secretary of State Rex Tillerson put it in December 2017, with the BRI, China is aiming to define “its own rules and norms.”

To strengthen its position further, China has encouraged its companies to bid for outright purchase of strategic ports, where possible. The Mediterranean port of Piraeus, which a Chinese firm acquired for U.S. $436 million from cash-strapped Greece in 2016, will serve as the BRI’s “dragon head” in Europe.

Hundreds of Sri Lankans protest the government’s plan to lease the Hambantota Port to a Chinese-controlled joint venture in exchange for heavy loans to build the port. THE ASSOCIATED PRESS

By wielding its financial clout in this manner, China seeks to achieve two aims at once. First, it wants to address overcapacity at home by boosting exports. Second, it hopes to advance its strategic interests, including expanding its diplomatic influence, securing natural resources, promoting the international use of its currency, and gaining a relative advantage over other powers.

China’s predatory approach over securing Hambantota is ironic. In its relationships with smaller countries such as Sri Lanka, China is replicating the practices used against it in the European-colonial period, which began with the 1839-1860 Opium Wars and ended with the 1949 communist takeover — a period that China bitterly refers to as its “century of humiliation.”

China portrayed the 1997 restoration of its sovereignty over Hong Kong, following more than a century of British administration, as righting a historic injustice. Yet, as Hambantota shows, China is now establishing its own Hong Kong-style neocolonial arrangements. Apparently, Xi’s promise of the “great rejuvenation of the Chinese nation” is inextricable from the erosion of smaller states’ sovereignty.

Chinese People’s Liberation Army personnel attend the opening ceremony in August 2017 of China’s new military base in Djibouti, where China already has deployed troops. AFP/GETTY IMAGES

Just as European imperial powers employed gunboat diplomacy to open new markets and colonial outposts, China uses sovereign debt to bend other states to its will, without having to fire a single shot. Like the opium the British exported to China, the loans China offers are addictive. Because China chooses its projects according to their long-term strategic value, they may yield short-term returns that are insufficient for countries to repay their debts. This gives China added leverage, which it can use, say, to force borrowers to swap debt for equity, thereby expanding China’s global footprint by trapping a growing number of countries in debt servitude.

Even the terms of the 99-year Hambantota Port lease echo those used to force China to lease its own ports to Western colonial powers. Britain leased the New Territories from China for 99 years in 1898, causing Hong Kong’s land mass to expand by 90 percent. Yet, the 99-year term was fixed merely to help China’s ethnic Manchu Qing Dynasty save face; the reality was that all acquisitions were believed to be permanent.

Now, China is applying the imperial 99-year lease concept in distant lands. China’s lease agreement over Hambantota, concluded in the summer of 2017, included a promise that China would shave
U.S. $1.1 billion off Sri Lanka’s debt. In 2015, a Chinese firm took out a 99-year lease on Australia’s deep-water port of Darwin — home to more than 1,000 U.S. Marines — for U.S. $388 million.

Similarly, after lending billions of dollars to heavily indebted Djibouti, China in 2017 established its first overseas military base in that tiny but strategic state, just a few miles from a U.S. naval base — the only permanent American military facility in Africa. Trapped in a debt crisis, Djibouti had no choice but to lease land to China for U.S. $20 million per year. China has also used its leverage over Turkmenistan to secure a natural gas pipeline largely on Chinese terms.

Several other countries, from Argentina to Namibia to Laos, have been ensnared in a Chinese debt trap, forcing them to confront agonizing choices to stave off default. Kenya’s crushing debt to China now threatens to turn its busy port of Mombasa — the gateway to East Africa — into another Hambantota.

These experiences should serve as a warning that the BRI is essentially an imperial project that aims to bring to fruition the mythical Middle Kingdom. States caught in debt bondage to China risk losing both their most valuable natural assets and their very sovereignty. The new imperial giant’s velvet glove cloaks an iron fist — one with the strength to squeeze the vitality out of smaller countries.

This article was reprinted with permission from Project Syndicate, an international media organization that publishes and syndicates commentary and analysis on a variety of important global topics. The article was first published on Project Syndicate’s website on December 20, 2017.