The Politics of Chinese Infrastructure Loans

Are China’s Belt and Road Initiative infrastructure loans a threat to the sovereignty of the nations involved?

China’s dealings with other sovereign nations have often come under scrutiny, including when Beijing was first accused of “debt trap diplomacy” in 2017, spurring a new term that would become common, yet controversial.

The phrase “debt trap diplomacy” was coined in an analysis by an Indian strategic commentator who claimed that Beijing was offering financing for projects with the sole intention of securing Chinese access to resources or local markets—not to actually help local economies. He went on to explain that as a result, countries were “becoming ensnared in a debt trap that leaves them vulnerable to China’s influence.”

Sri Lanka’s Hambantota port, an early infrastructure project of China’s Belt and Road Initiative (BRI), is the most commonly used example of those arguing that Beijing is deliberately making loans to countries despite knowing that they won’t be able to pay them back.

The construction of the port, which is located in southern Sri Lanka and strategically overlooks the vital pathways of the Indian Ocean, was financed by Beijing. But when the Sri Lankan government’s debt soared to among the highest in Asia, it wrote off its debt to China in a 2017 debt-equity swap. That deal saw China acquire the port and 15,000 acres surrounding it in a 99-year lease. This led to immediate accusations that China’s plan was always to have the situation play out exactly as it did, so that it could claim the port as its own, potentially turning it into a dual use commercial/naval base, while simultaneously threatening Sri Lanka’s sovereignty.

Although that train of thought is echoed by numerous foreign policy experts across the globe, Matt Ferchen, Head of Global China Research at MERICS, argues that the “debt trap diplomacy” narrative is unconvincing. He believes it’s important to understand that the BRI is a “two-way street,” and that everyone in the process—from China to host countries and stakeholders—is responsible for assessing all the risks, including when it comes to sustainability and national sovereignty.

Strelka Mag's Yulia Gromova spoke with Matt Frechen to learn more about the specifics of Chinese hybrid foreign policy.

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Yulia Gromova: What is remarkable about Chinese foreign policy in relation to the Belt and Road Initiative?

Matt Frechen: There’s a comfort level that China has, in terms of blending economics and politics. To an extent in the West there’s a separation of those two—or a belief that they should be separate. But, I still think the BRI in most ways is still fundamentally commercial at the outset.

I do think that China hopes to build political goodwill, but also to build political influence, through deeper interdependence. Of course, Chinese government officials deny that there’s any sort of geostrategic or political aims as part of the BRI, but I would say it’s basically assumed that there is a connection between economics and politics that runs pretty deep in China.

It is also important to recognize that the BRI is basically built on top of a lot of relationships that China already had, especially with countries in its own neighborhood. There’s some new dimensions of the BRI—in particular the symbolism of it, the framing of it, some of the money behind it, but a lot of it is really a continuation of policies that have been well in place since at least the beginning of the 2000s.

YG: What is “debt trap diplomacy?” And why do you believe it’s an inadequate term?

MF: The idea of “debt trap diplomacy” is not very helpful. It really doesn’t explain largely what’s happened. It is a very politicized term that largely comes from the US official foreign policy pushback against China. It is basically a claim that China is purposely doing some of its loans for infrastructure deals in a way that is meant to trap other countries by lending them money for projects which China knows those countries can’t repay.

I’ve written about it in the case of Venezuela and Sri Lanka, where there are deep problems with the loans, with the projects themselves, but it wasn’t intentional. The plan wasn’t to lend with the idea that the other country or businesses would be unable to repay, and then China would be able to take over. There were political motivations on both sides. Host countries came up with projects or structures for the loans that were not all that well thought through in the first place.

There were some political motivations for doing things in the way that they did them. If you look at infrastructure anywhere in the world, there is often a lot of vagueness or potential for corrupt dealings involved in those contracts. And there are a lot of reasons why politicians want to have big infrastructure projects done, so they can show something concrete that they’ve done during the time they were in office.

So it shouldn’t be surprising that politics are being played in a lot of the infrastructure projects that China is involved with, that there are political motivations. This maybe means that some of the projects were not well designed in the first place.

YG: Why have so many BRI projects become unsustainable?

MF: The problem is that in a lot of different places, projects are not well thought through. There’s a reason why it’s difficult to build good quality infrastructure in various different countries, especially in developing or poor countries. There are political reasons, historical reasons and China just coming in and throwing money at it can’t necessarily solve that and may make the situation worse.

It all comes back to project selection. Why is a highway project or a port project or an energy project the best project or not? And I think this is where a lot of the challenge comes in—who gets to decide what’s a good project, and why do local communities get to be involved or not? Who’s deciding on the environmental impact assessment and whether that’s acceptable or not, for instance, if you’re building a dam project?

China’s doing a lot of financing and building coal fired power plants in other countries, and a lot of that comes from local demand. It’s not China putting a gun to anyone’s head and saying they must build the coal fired power plant. But a lot of that local demand also means businesses or government officials who are willing to go against national, environmental, or climate plans.

The Chinese side tends to be fairly flexible in doing those kinds of deals, and the end result is you get a bunch of coal fired power plants built which are not very efficient and put out a lot of pollution, and potentially are not economically viable in the long-run. So it really comes down to the specific projects: why they’re chosen, who gets to decide. A lot of times it’s politicized, there’s not enough engagement with local communities, there’s not enough careful risk analysis done at many different levels.

And that happens both on the host country and the Chinese side. That said, I still think part of the reason for the popularity of the BRI in a lot of regions is because there’s this fundamental recognition that more and better infrastructure really could be helpful to overcome long-standing challenges. And even with all these downsides, I think a lot of countries are willing to give it a try. And this is why I think you start to see, say, the EU or the United States come in with counter proposals. There’s a kind of recognition that there is something fundamentally there that China’s offering.

YG: Can the BRI potentially undermine the state sovereignty of host countries?

MF: It has that potential. I think if you look at any kind of foreign government building infrastructure, whether that’s transport infrastructure or energy infrastructure or now digital infrastructure—any country doing that in any other country I think has for the last few centuries had the potential to be seen as a security risk. There’s always this potential, and different governments at different points in history have been more or less comfortable with allowing foreign governments to come in and do some of that financing and build foreign infrastructure.

But I think in general, even historically, it’s been the case that these are the risk factors involved, and it really comes back to the rules and how well enforced they are in the host countries. So, again, going back to “debt trap diplomacy,” I think even if it were China’s intent to trap other countries and then take over these infrastructure projects (which I really don’t think it is), I think they would have a lot of limits on their ability to actually do that.

For example, in the case of the Sri Lankan port, let’s say that China wanted to come in and use that for military purposes—it wouldn’t be very easily done on China’s part. The Sri Lankan government would almost certainly oppose that. There are many different ways in which it might go about opposing that. So there’s no easy way in which China could physically claim full control over some of these projects in other countries. That isn’t to say that it couldn’t do it, or that it won’t in some future cases do that.

If China felt that its economic interests in some of these foreign projects were undermined, I think we would probably first see some sort of legal procedures taking place. So there are ways in which China’s financing and building of infrastructure in other countries does bring up real questions of sovereignty. I do think there are limits on what China could actually do, in terms of taking physical control or even financial control over these things.

The other area where I see real potential for this, though, is in China’s promotion of special economic zones. China has been promoting these overseas special economic zones in other countries. We see a lot of it in Africa, but increasingly also in Southeast Asia, including in areas where China shares a border with other countries. So China has proposed some of these deals, for instance with Vietnam and other countries in the region, and what you see is a potential breakdown of the border area, or of sovereignty, or of where you could see the potential for China trying to carve out areas where the host country’s laws and rules and standards really have to make way for the special economic zones which are going to have special legal treatment, which is more or less in line with China’s interests.

Again, I don’t think that China could impose this unilaterally. But I see this as an area where there’s big question marks about sovereignty. From what I understand, countries like Vietnam have been very reluctant to agree to anything like this, exactly because of concerns about sovereignty.

YG: Do you see potential for BRI infrastructure to bring some kind of positive change for local populations in host countries?

MF: I’m pretty skeptical about this. I think most of the projects, especially the really big ones that you see—ports, highways, railways, energy transportation projects those projects are worth, hundreds of millions or billions of dollars. I’ve heard complaints in quite a few countries that are from smaller, medium-sized businesses who are happy to see more infrastructure ideas out there, including cooperation with China, but they feel excluded from being able to participate. And they think this just builds on or supports old patterns where the people who already have the money and the power get to have more of it. I think there’s always those concerns, there’s question marks about how much you can actually democratize big projects like this.

There’s been far too little community involvement on the social impact, the environmental impact. There is a lot of potential for these projects to basically be in the interests of government officials, powerful businesses or powerful groups, including militaries in some countries, or families of powerful officials, and that’s a concern. China has a pretty high level of comfort with doing things like that. A lot of Chinese officials, government officials, and businesses feel that that builds in security. They know who they’re dealing with, they like government-to-government dealmaking. They think that if you do it that way, then you can count on the other side to hold up to its end of the bargain.

That’s certainly China’s model. Domestically there wasn’t a whole lot of community engagement. China would decide it was going to build a big dam or a highway or a railway or an airport, and it could basically tell the people in those areas that it was going to do it and it would move them. And if people said they didn’t want to move, they would get moved anyway. It’s a little bit tricker when you do that in other countries.

It all depends on host governments and host communities and whether or not they’re willing and able to demand different kinds of procedures with their Chinese counterparts.

Matt Ferchen

Matt Ferchen is a head of Global China research at MERICS. His research focuses on China's economic statecraft, China's Belt and Road Initiative (BRI) as part of China-developing country relations with Southeast Asia, Latin America and Africa, and on US-China relations. He specializes in connections between China's domestic and foreign political economy, the governance of China’s informal economy, and the relationship between economic development and security in China’s foreign policy.

From 2008 to 2017 Matt was a faculty member in the Department of International Relations at Tsinghua University and from 2011 to 2019 he was a scholar with the Carnegie-Tsinghua Center for Global Policy, where he directed the China and the Developing World program. He holds an MA from John Hopkins SAIS and a PhD from Cornell University.