{"id":121739,"date":"2022-01-05T00:54:44","date_gmt":"2022-01-05T06:54:44","guid":{"rendered":"http:\/\/www.lankaweb.com\/news\/items\/?p=121739"},"modified":"2022-01-04T11:04:54","modified_gmt":"2022-01-04T18:04:54","slug":"the-chinese-debt-trap-is-a-myth-the-narrative-wrongfully-portrays-both-beijing-and-the-developing-countries-it-deals-with-2","status":"publish","type":"post","link":"https:\/\/www.lankaweb.com\/news\/items\/2022\/01\/05\/the-chinese-debt-trap-is-a-myth-the-narrative-wrongfully-portrays-both-beijing-and-the-developing-countries-it-deals-with-2\/","title":{"rendered":"The Chinese \u2018Debt Trap\u2019 Is a Myth \u2013 The narrative wrongfully portrays both Beijing and the developing countries it deals with."},"content":{"rendered":"

By Deborah Brautigam and Meg Rithmire Courtesy The Atlantic <\/em><\/span><\/h2>\n\n\n
\"\"<\/figure>\n\n\n\n

Breakdown of Sources SL\u2019s Debt Burden<\/p>\n\n\n\n

China, we are told, inveigles poorer countries into taking out\nloan after loan to build expensive infrastructure that they can\u2019t afford and\nthat will yield few benefits, all with the end goal of Beijing eventually\ntaking control of these assets from its struggling borrowers. As states around\nthe world pile on debt to combat the coronavirus pandemic and bolster flagging\neconomies, fears of such possible seizures have o<\/a>nly<\/a> amplified<\/a>.<\/p>\n\n\n\n

Seen this way, China\u2019s internationalization\u2014as laid out in\nprograms such as the Belt and Road Initiative\u2014is not simply a pursuit of\ngeopolitical influence but also, in some tellings, a weapon<\/a>. Once a country is weighed down by\nChinese loans, like a hapless gambler who borrows from the Mafia, it is\nBeijing\u2019s puppet and in danger of losing a limb.<\/p>\n\n\n\n

The prime example of this is the Sri Lankan port of Hambantota.\nAs the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese\nbanks to pay for the project, which had no prospect of commercial success<\/a>. Onerous\nterms and feeble revenues eventually pushed Sri Lanka into default, at which\npoint Beijing demanded the port as collateral<\/a>, forcing the\nSri Lankan government to surrender control to a Chinese firm.<\/p>\n\n\n\n

The Trump administration pointed to Hambantota to warn of\nChina\u2019s strategic use of debt: In 2018, former Vice President Mike Pence called\nit debt-trap diplomacy<\/a>\u201d\u2014a phrase he used\nthrough the last days<\/a> of the administration\u2014and\nevidence of China\u2019s military ambitions. Last year, erstwhile Attorney General\nWilliam Barr raised the case to argue<\/a> that Beijing is loading poor\ncountries up with debt, refusing to renegotiate terms, and then taking control\nof the infrastructure itself.\u201d<\/p>\n\n\n\n

As Michael Ondaatje, one of Sri Lanka\u2019s greatest\nchroniclers, once said<\/a>, In Sri Lanka a well-told lie is\nworth a thousand facts.\u201d And the debt-trap narrative is just that: a lie, and a\npowerful one.<\/p>\n\n\n\n

Read: What happens when China leads the world<\/a><\/p>\n\n\n\n

Our research shows<\/a> that Chinese banks are\nwilling to restructure the terms of existing loans and have never actually\nseized an asset from any country, much less the port of Hambantota. A Chinese\ncompany\u2019s acquisition of a majority stake in the port was a cautionary tale,\nbut it\u2019s not the one we\u2019ve often heard. With a new administration in\nWashington, the truth about the widely, perhaps willfully, misunderstood case\nof Hambantota Port is long overdue.<\/p>\n\n\n\n

The city of Hambantota lies at the southern tip of Sri Lanka, a\nfew nautical miles from the busy Indian Ocean shipping lane<\/a> that accounts\nfor nearly all of the ocean-borne trade between Asia and Europe, and more than\n80 percent of ocean-borne global trade. When a Chinese firm snagged the\ncontract to build the city\u2019s port, it was stepping into an ongoing Western\ncompetition, though one the United States had largely abandoned.<\/p>\n\n\n\n

It was the Canadian International Development Agency\u2014not\nChina\u2014that financed Canada\u2019s leading engineering and construction firm,\nSNC-Lavalin, to carry out a feasibility study for the port. We obtained more\nthan 1,000 pages of documents detailing this effort through a Freedom of Information\nAct request. The study, concluded in 2003, confirmed that building the port at\nHambantota was feasible, and supporting documents show that the Canadians\u2019\ngreatest fear was losing the project to European competitors. SNC-Lavalin\nrecommended that it be undertaken through a joint-venture agreement between the\nSri Lanka Ports Authority (SLPA) and a private consortium\u201d on a\nbuild-own-operate-transfer basis, a type of project in which a single company\nreceives a contract to undertake all the steps required to get such a port up\nand running, and then gets to operate it when it is.<\/p>\n\n\n\n

The Canadian project failed to move forward, mostly because of\nthe vicissitudes of Sri Lankan politics. But the plan to build a port in\nHambantota gained traction during the rule of the Rajapaksas\u2014Mahinda Rajapaksa,\nwho served as president from 2005 through 2015, and his brother Gotabaya, the\ncurrent president and former minister of defense\u2014who grew up in Hambantota.\nThey promised<\/a> to bring big ships to the\nregion, a call that gained urgency after the devastating 2004 tsunami\npulverized Sri Lanka\u2019s coast and the local economy.<\/p>\n\n\n\n

We reviewed a second feasibility report, produced in 2006 by the\nDanish engineering firm Ramboll, that made similar recommendations to the plans\nput forward by SNC-Lavalin, arguing that an initial phase of the project should\nallow for the transport of non-containerized cargo\u2014oil, cars, grain\u2014to start\nbringing in revenue, before expanding the port to be able to handle the traffic\nand storage of traditional containers. By then, the port in the capital city of\nColombo, a hundred miles away and consistently one of the world\u2019s busiest, had\njust expanded and was already pushing capacity. The Colombo port, however, was\nsmack in the middle of the city, while Hambantota had a hinterland, meaning it\noffered greater potential for expansion and development.<\/p>\n\n\n\n

Read: The undoing of China\u2019s economic miracle<\/a><\/p>\n\n\n\n

To look at a map of the Indian Ocean region at the time was to\nsee opportunity and expanding middle classes everywhere. Families in India and\nacross Africa were demanding more consumer goods from China. Countries such as\nVietnam were growing rapidly and would need more natural resources. To justify\nits existence, the port in Hambantota would have to secure only a fraction of\nthe cargo that went through Singapore, the world\u2019s busiest transshipment port.<\/p>\n\n\n\n

Armed with the Ramboll report, Sri Lanka\u2019s government approached the United States <\/a>and<\/a> India<\/a>; both countries said no. But a\nChinese construction firm, China Harbor Group, had learned about Colombo\u2019s\nhopes, and lobbied hard for the project. China Eximbank agreed to fund it, and\nChina Harbor won the contract.<\/p>\n\n\n\n

This was in 2007, six years before Xi Jinping introduced the\nBelt and Road Initiative. Sri Lanka was still in the last, and bloodiest, phase\nof its long civil war, and the world was on the verge of a financial crisis.\nThe details are important: China Eximbank offered a $307 million, 15-year commercial\nloan with a four-year grace period, offering Sri Lanka a choice between a 6.3\npercent fixed interest rate or one that would rise or fall depending on LIBOR<\/a>, a floating rate. Colombo chose the\nformer, conscious that global interest rates were trending higher during the\nnegotiations and hoping to lock in what it thought would be favorable terms.\nPhase I of the port project was completed on schedule within three years.<\/p>\n\n\n\n

For a conflict-torn country that struggled to generate tax\nrevenue, the terms of the loan seemed reasonable. As Saliya Wickramasuriya, the\nformer chairman of the SLPA, told us, To get commercial loans as large as $300\nmillion during the war was not easy.\u201d That same year, Sri Lanka also issued its\nfirst international bond, with an interest rate of 8.25 percent<\/a>. Both\ndecisions would come back to haunt the government.<\/p>\n\n\n\n

Finally, in 2009, after decades of violence, Sri Lanka\u2019s civil\nwar came to an end. Buoyed by the victory, the government embarked on a\ndebt-financed push to build and improve the country\u2019s infrastructure. Annual\neconomic growth rates climbed to 6 percent, but Sri Lanka\u2019s debt burden soared\nas well.<\/p>\n\n\n\n

In Hambantota, instead of waiting for phase 1 of the port to\ngenerate revenue as the Ramboll team had recommended, Mahinda Rajapaksa pushed\nahead with phase 2, transforming Hambantota into a container port. In 2012, Sri\nLanka borrowed another $757 million from China Eximbank, this time at a\nreduced, post-financial-crisis interest rate of 2 percent. Rajapaksa took the\nliberty of naming the port after himself.<\/p>\n\n\n\n

By 2014, Hambantota was losing money. Realizing that they needed\nmore experienced operators, the SLPA signed an agreement with China Harbor and\nChina Merchants Group to have them jointly develop and operate the new port for\n35 years. China Merchants was already operating a new terminal in the port in\nColombo, and China Harbor had invested $1.4 billion in Colombo Port City, a\nlucrative real-estate project involving land reclamation. But while the lawyers\ndrew up the contracts, a political upheaval was taking shape.<\/p>\n\n\n\n

Rajapaksa called a surprise election for January 2015 and in the\nfinal months of the campaign, his own health minister, Maithripala Sirisena,\ndecided to challenge him. Like opposition candidates in Malaysia, the Maldives,\nand Zambia, the incumbent\u2019s financial relations with China and allegations of\ncorruption made for potent campaign fodder. To the country\u2019s shock, and perhaps\nhis own, Sirisena won.<\/p>\n\n\n\n

Steep payments<\/a> on international sovereign\nbonds, which comprised nearly 40 percent of the country\u2019s external debt, put\nSirisena\u2019s government in dire fiscal straits almost immediately. When Sirisena\ntook office, Sri Lanka owed more<\/a> to Japan, the World Bank, and\nthe Asian Development Bank than to China. Of the $4.5 billion in debt service\nSri Lanka would pay in 2017, only 5 percent<\/a> was because of Hambantota.\nThe Central Bank governors under both Rajapaksa and Sirisena do not agree on\nmuch, but they both told us that Hambantota, and Chinese finance in general,\nwas not the source of the country\u2019s financial distress.<\/p>\n\n\n\n

There was also never a default. Colombo arranged a bailout<\/a> from the International Monetary\nFund, and decided to raise much-needed dollars by leasing out the\nunderperforming Hambantota Port to an experienced company\u2014just as the Canadians\nhad recommended. There was not an open tender, and the only two bids came from\nChina Merchants and China Harbor; Sri Lanka chose China Merchants, making it\nthe majority shareholder with a 99-year lease, and used the $1.12 billion cash\ninfusion to bolster its foreign reserves, not to pay off China Eximbank.<\/p>\n\n\n\n

Read: How Xi Jinping blew it<\/a><\/p>\n\n\n\n

Before the port episode, Sri Lanka could sink into the Indian\nOcean and most of the Western world wouldn\u2019t notice,\u201d Subhashini Abeysinghe,\nresearch director at Verit\u00e9 Research, an independent Colombo-based think tank,\ntold us. Suddenly, the island nation featured prominently in foreign-policy\nspeeches in Washington. Pence voiced worry that Hambantota could become a\nforward military base\u201d for China.<\/p>\n\n\n\n

Yet Hambantota\u2019s location is strategic only from a business\nperspective: The port is cut into the coast to avoid the Indian Ocean\u2019s heavy\nswells, and its narrow channel allows only one ship to enter or exit at a time,\ntypically with the aid of a tugboat. In the event of a military conflict, naval\nvessels stationed there would be proverbial fish in a barrel.<\/p>\n\n\n\n

The notion of debt-trap diplomacy\u201d casts China as a conniving\ncreditor and countries such as Sri Lanka as its credulous victims. On a closer\nlook, however, the situation is far more complex. China\u2019s march outward, like\nits domestic development, is probing and experimental, a learning process\nmarked by frequent adjustment. After the construction of the port in\nHambantota, for example, Chinese firms and banks learned that strongmen fall\nand that they\u2019d better have strategies for dealing with political risk. They\u2019re\nnow developing these strategies, getting better at discerning business\nopportunities and withdrawing where they know they can\u2019t win<\/a>.\nStill, American leaders and thinkers from both sides of the aisle give speeches\nabout China\u2019s modern-day colonialism<\/a>.\u201d<\/p>\n\n\n\n

Over the past 20 years, Chinese firms have learned a lot about\nhow to play in an international construction business that remains dominated by\nEurope: Whereas China has 27 firms among the top 100 global contractors, up\nfrom nine in 2000, Europe has 37, down from 41. The U.S. has seven, compared to\n19 two decades ago.<\/p>\n\n\n\n

Chinese firms are not the only companies to benefit from\nChinese-financed projects. Perhaps no country was more alarmed by Hambantota\nthan India, the regional giant that several times rebuffed Sri Lanka\u2019s appeals\nfor investment, aid, and equity partnerships. Yet an Indian-led business,\nMeghraj, joined the U.K.-based engineering firm Atkins Limited in an international consortium<\/a> to write the\nlong-term plan for Hambantota Port and for the development of a new business\nzone. The French firms Bollor\u00e9 and CMA-CGM<\/a> have\npartnered with China Merchants and China Harbor in port developments in\nNigeria, Cameroon, and elsewhere.<\/p>\n\n\n\n

The other side of the debt-trap myth involves debtor countries.\nPlaces such as Sri Lanka\u2014or, for that matter, Kenya, Zambia, or Malaysia\u2014are no\nstranger to geopolitical games. And they\u2019re irked by American views that\nthey\u2019ve been so easily swindled. As one Malaysian politician remarked to us,\nspeaking on condition of anonymity to discuss how Chinese finance featured in\nthat country\u2019s political drama, Can\u2019t the U.S. State Department tell the\ndifference between campaign rhetoric that our opponents are slaves to China and\nactually being slaves to China?\u201d<\/p>\n\n\n\n

The events that led to a Chinese company\u2019s acquisition of a\nmajority stake in a Sri Lankan port reveal a great deal about how our world is\nchanging. China and other countries are becoming more sophisticated in\nbargaining with one another. And it would be a shame if the U.S. fails to learn\nalongside them.Deborah Brautigam<\/a> is Bernard L. Schwartz\nProfessor of International Political Economy at the School of Advanced\nInternational Studies at Johns Hopkins University<\/p>\n","protected":false},"excerpt":{"rendered":"

By Deborah Brautigam and Meg Rithmire Courtesy The Atlantic Breakdown of Sources SL\u2019s Debt Burden China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they can\u2019t afford and that will yield few benefits, all with the end goal of Beijing eventually taking control of these assets […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6],"tags":[],"class_list":["post-121739","post","type-post","status-publish","format-standard","hentry","category-politics"],"_links":{"self":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/121739","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/comments?post=121739"}],"version-history":[{"count":0,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/posts\/121739\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/media?parent=121739"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/categories?post=121739"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lankaweb.com\/news\/items\/wp-json\/wp\/v2\/tags?post=121739"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}