All of us have heard of China’s “Debt Trap Diplomacy”. Let me try to explain what it means, why countries went for it, what is the impact and the way out.

First, what is debt trap?

It is actually not very different from what money lenders used to do earlier. Give loans to a person knowing that (s)he cannot repay it, once (s)he defaults, take over his/her property. China has used this strategy very successfully at multiple places.

  1. Lets start with Sri Lanka. When Mahinda Rajapaksa was the president, he wanted the area around his birth place to become developed. He started taking loans from China to build a port, air port and infrastructure around Hanbatota located at the southern most tip of Sri Lanka. The location is extremely strategic for stationing a Navy. The World Bank and IMF had denied loans for the project saying that the port wont earn enough business citing that India has so many ports in vicinity. But China came forward. Obvious thing happens, the port doesn’t do any business, Sri Lanka cant repay back and China gets the port on a 99 year lease.
  2. Same happens with Laos. Laos took loans from China dreaming to develop power projects and become the “power house” of South East Asia. But it is unable to pay its loans and China has taken over the Power grid system of Laos. It can sink Laos to darkness in a second.
  3. Maldives had taken huge loans for building infrastructure. Unable to repay the debt. But India under Modiji came to rescue it at the right time.
  4. Same has happened with many African nations. Out of top 12 countries whom China has loaned, 6 are from Africa. The top 3 countries who have >25% of their GDP as loans from China are from Africa.

Second, What is the difference between loans from others institutions like IMF/World Bank and Chinese Banks?

  1. China charges very high interest in comparison to IMF/WB.
  2. The loan agreements are kept secret and are murky. The loan agreements by IMF/WB (or most other countries) are kept in public forums. But nothing such happens with Chinese banks.
  3. Repayment period is very short in comparison to loans from IMF/WB.
  4. The IMF/WB impose attach conditions to carry economic reforms and ensure that the money is well spend (not siphoned off by Corruption). But Chinese banks don’t, this gets the country’s corrupt attracted to Chinese loans. Ultimately Govt. has to repay, not the corrupt leaders.

Thirdly, how China manages to have countries take loans.

  1. It is said that Chinese bribe the political leaders to take loans or they get pro-China leaders elected to power. For e.g., The newly elected Tanzanian president had said “The loan conditions are so murky even a drunken man would not have signed it“.
  2. We know the China Pakistan Economic Corridor (CPEC) is being built on Chinese Money. Most contracts are going to Pak Army but the money will be repaid by Pakistan Govt. We know how corrupt Pak Army is and the influence it has in Pak politics. Had Pakistan taken loans from IMF/WB, they would have monitored the project execution and hence Pak Army would not have been make money.
  3. Since China keeps its loan terms secret, the public/media cannot review it, and hence it becomes easy for corrupt politicians and bureaucrats make money from Chinese loans. That wont happen if the loan were from IMF/WB as the loan conditions are always kept in full public domain.

China has 2 major goals in giving loans:

  1. Take over strategic assets and hence create a sort of colonial empire.
  2. Use the loans as leverage and exploit natural resources (as in case of Tajikistan or Srilanka).

What should be the solution? It is not easy actually. But what can be done is:

  1. Corrupt govts. LOVE Chinese loans. Public awareness need to be build against such govts. For e.g., Pakistanis need to realize how dangerous is the Pak Army or Imran Khan for them. In case of Maldives, Srilanka and Tanzania people voted the corrupt/pro China Govts. out of power.
  2. Bigger and democratic countries need to come forward and help such grief stricken countries come out of debt trap. For e.g., the way India helped Maldives is commendable. EU/Japan/US/Australia need to do more for such countries.
  3. Last but not least, world as a whole need to build alternate manufacturing regions(like India, Vietnam, Bangladesh, South America, Africa) so that China’s financial might is diminished. If China doesn’t have money, it of course cannot lend.

Enough damage is already done through out the world. It will take several years for the countries to come out the “Chinese Spider Web

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