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03/08/2018 | Opinion - China’s Empire of Debt

Neil Thompson

SUMMARY: Staggering in its ambition, China’s global-spanning One Belt One Road Initiative (OBOR) aims to spend trillions of dollars on infrastructure financing in Asia, Europe, and Africa over the coming years ahead. Even before OBOR, the rising superpower was a leading lender worldwide.


Chinese finance represents a chance for economic rejuvenation in some states. For others, it’s a shackle that will create unredeemable fiscal burdens in the near future. This model of debt dependency will increase Beijing’s geopolitical leverage over small and impoverished states, grant favorable access to key resources, and potentially revolutionize the power balance in international forums like the IMF and the UN General Assembly. It will also give Beijing a powerful voice in regional forums, allowing it to influence decision processes from which it would otherwise be excluded, such as ASEAN deliberations on the South China Sea dispute.

This is not a phenomenon that is historically unprecedented. Western countries engaged in a similar lending binge both during and after the Cold War, one that ultimately resulted in undue influence over the domestic and foreign policies of countries in the developing world.


International studies have shown there are already a number of states that are increasingly at risk of debt peonage to China (i.e. countries with large outstanding debts held by Beijing, and whose economies are unlikely to grow at a sustainable enough clip to meet their future debt payments on schedule. These countries include Djibouti, Kyrgyzstan, Laos, the Maldives, Mongolia, Montenegro, Pakistan, and Tajikistan. Then there are other countries such as Nepal or Cambodia, who could easily join this group in the near future due to their growing need for outside finance. This report will cover four countries in particular where China’s geopolitical ambitions are converging with the OBOR and other state-backed lending schemes aimed at expanding Beijing’s commercial, and by extension geopolitical, outreach. In all four cases, China’s interest goes beyond simple trading due to the geopolitical factors that make these countries strategic nodes for Beijing to expand its influence. In some cases, Chinese investment has intensified domestic and international tensions, particularly with India.

Sri Lanka

A frequently-cited case of a developing country falling into a Chinese debt-trap is Sri Lanka, which has had to give Beijing a 99-year lease on the port of Hambantota as part of a debt reduction deal after it proved unable to service its debts to Beijing. Sri Lanka’s location makes it important to the ‘string of pearls’ maritime strategy Beijing is using to cast a military and commercial net around geopolitical rival India. Hambantota joins a list of strategic ports snapped up elsewhere which together form an ambitious trade network projecting Chinese influence across Asia, Africa, and Europe. Colombo initially started to move in China’s direction under the influence of the previous President of Sri Lanka, Mahinda Rajapaksa, who may be considering a return to power after losing office unexpectedly three years ago. If Rajapaksa succeeds, it will be seen as a diplomatic coup for China.

In the meantime, the century-long lease of Hambantota went to the state-owned China Merchants Port Holdings company, which already has a 70% stake in the venture, and which has said that traffic through the port will be civilian commercial vessels only (i.e. the port will remain closed to Chinese naval traffic). But Sri Lanka owes more than $8 billion to state-controlled Chinese firms, much of it in loans taken out to rebuild the country after its civil war under the China-friendly administration of strongman Mahinda Rajapaksa. Handing over the Hambantota lease took over $1 billion off the debt. The deal left China with an extremely useful physical asset for linking up its emerging global trading empire, but it does come at a cost. The port has yet to make any money, and its fiscal bleed is one of the reasons why the Sri Lankan government cut it loose in the first place. India has also taken notice and is increasingly alarmed about Chinese encroachment in its backyard.


Cambodia is a country at risk of falling into an unsustainable debt trap due to the increasing pro-Beijing tilt of its long-time dictator Hun Sen; however, it is not yet in the same dire financial straits as Sri Lanka. China is one of Cambodia’s closest international partners and diplomatic allies, and Cambodia is already supporting China from within the regional ASEAN bloc on sensitive issues such as the South China Sea dispute. Since 1992 Cambodia, has received around $3 billion in concessional loans and grants from Beijing according to Asia Times. It has a bilateral debt of $3.9 billion with China, and owes another $1.6 billion in external multilateral public debt, some of which is also owed to Beijing. While Chinese loans are opaque and quicker to arrive (and thus attractive to Cambodia, where corruption is rampant) than international loans from multinational donor agencies like the IMF, the World Bank, the Asian Development Bank, or from developed countries like Japan or the U.S., the latter has the advantage of increased transparency, adherence to the rule of law, and greater accountability.

The rising debt to China is leading to some calls for Cambodia to diversify its borrowing sources to avoid increasing Chinese influence to the point of a client-patron dependency. Without cultivating alternatives, Cambodia is heading into a trap of its own making whereby Beijing will automatically gain the upper hand in any future financial, trade, or diplomatic negotiations. Already more than 80 percent of what Cambodia imports comes from China, and trade between China and Cambodia has reached $4.8 billion per year. Meanwhile, since the introduction of OBOR, Cambodia also owes a total of $4.3 billion in debt to China – equal to about twenty percent of its annual national budget. That puts Cambodia squarely on the path toward joining states like Mongolia and the Maldives, which have already been flagged by international studies as ‘vulnerable to debt distress’ due to OBOR financing. Cambodia is already classified as ‘at risk’ of debt distress today. Meanwhile, the man mainly responsible for his country’s current tilt towards China, Hun Sen, recently celebrated 33 years in power and says he intends to say on as prime minister for another ten years.

The Maldives

China has supported the shaky regime of President Yameen despite the notorious corruption scandals dogging the president, who has reciprocated Beijing’s embrace enthusiastically. Opposition politicians accuse President Yameen of allowing the Chinese to lease 16 islands after inflating the costs of the land so he could skim money off of the deal; this included leasing China the uninhabited island Feydhoo Finolhu for 50 years for the purposes of tourism and related activities. Yameen has also pushed a free trade deal with Beijing through the Maldives parliament despite India’s reservations about Chinese state-owned firms operating there.  Popular fears of growing Chinese influence in the Indian Ocean archipelago have spiraled as China’s presence expands in the country’s infrastructure, trade, and energy sectors. Already the Maldives spends $92 million a year making payments to China, which accounts for about 10 percent of the country’s entire budget. Meanwhile, Yameen faces elections in September after a turbulent six years since coming to power in a coup in 2012 (he then won an election in 2013).

The Maldives’ experience could quickly follow the pattern of Sri Lanka if the president’s fall brings a more pro-Indian administration to power; paying back debts racked up by questionable infrastructure deals and other Chinese loans could quickly drain any reforming government’s budget and give China an opening to cement Beijing’s control over the Maldives’ trade and physical infrastructure. As with Sri Lanka, ports and other public assets can be seized in lieu of payments so any of Yameen’s possible successors would still have a strong incentive to settle the debt quickly or risk compromising politically on issues important to Beijing in matters of foreign policy. Indeed, Chinese naval ships have already docked in the Maldives several times now, an unprecedented foray by China into what had traditionally been India’s sphere of influence. Even if President Yameen’s regime is coming to an end, it will be hard to dislodge China from the position of influence it has now gained across the Maldives.



Vanuatu is a Pacific island nation that constitutes 80 islands and a total population of around 275,000. It has become increasingly indebted to the Chinese government following a series of development initiatives and concessional loans extended over the past decade.

From 2006-2016, China has lent at least $2.6 billion to Pacific nations. Over the same period, Vanuatu has receivedsome $243 million in loans, which places China behind Australia ($402 million) as Vanuatu’s second-largest creditor. These loans have gone into 25 projects, including a national convention center, tuna processing facility, 45 km worth of road upgrades, and the redesign of the prime minister’s office. Many of them include an initial grace period followed by a 15-20 year repayment schedule at interest rates ranging from 1-3%. China already accounts for around half of Vanuatu’s $440 million total foreign debt.

One standout initiative is the $114 million Luganville wharf project, which has a scale that lacks any clear rationale beyond being the potential site for a future Chinese military base. Opposition leader Ishmael Kalsakau voiced his fears of growing Chinese influence in the tiny island nation earlier this year, adding that even parliamentarians are not fully aware of the terms of the lending deals. It’s possible that the wharf would pass into Chinese ownership in the (likely) event of non-payment down the line.

Now that the grace period for interest payments has expired, the Vanuatu government is having a hard time making its payments. A debt management unit was established in 2015 and tasked with advising the government on sustainable borrowing practices. The problem Vanuatu faces is that many of the projects financed with Chinese funding do not contribute any tangible economic benefit. For example, the new national convention center is larger than could ever be needed for such a small nation, and it has been a drain on state finances since opening due to a lack of bookings and high utility bills.

The latest visit from the IMF recommended that Vanuatu embark on financial and monetary tightening in order to bring its debt under control. Through 2017-2018 the government has been running a fiscal deficit just shy of 8 percent, which is exacerbating its debt servicing problem and increasing China’s potential leverage in the future.


Nepal initially turned down a Chinese loan offer last year for funding to build a hydroelectric dam in favor of other sources of funding; but the temptation to take Chinese money remains strong for its political parties, and China has been successful at lobbying to have the project returned. This has accompanied a flood of other investments into Nepal, which together have eroded India’s traditional influence in the small Himalayan country. In India, the powerful Nepalese Prime Minister KP Sharma Oli is seen by some as pro-China, but in fact he may be playing both powers off against one another as they jostle for influence in his strategically positioned state. The strategy seems to be working: in the first half of the fiscal year starting in July 2017, China poured $79.26 million of foreign direct investment (FDI) commitments into Nepal, accounting for almost 60 percent of Nepal’s FDI in that period, compared with India’s $36.63 million, which was in turn trailed by the U.S. and Japan.

The danger is that in courting Chinese investment, Oli is leading his impoverished country into the same type of debt trap that has ensnared other small or impoverished countries around India’s rim, including India’s arch-rival Pakistan. Nepal is particularly important because it acts as a buffer between nuclear-armed China and India, who have a bitter ongoing border dispute. Nepal’s debt-to-GDP ratio is presently 22 percent. Against an average for low-income countries of 43 percent, the country can still borrow relatively freely, and some see its gravitation towards China as a natural fit, as Beijing is eager to invest abroad even without taking geopolitical considerations into account. Apparently it is already doing so: together with the Heritage Foundation, the American Enterprise Institute has launched a global tracker aimed at tracking global patterns of Chinese investment. According to the tracker, between 2005-2017 China invested $2.88 billion in Nepal – a country with a GDP of $21.14 billion. Nepal may not yet be in the same straits as Sri Lanka or Pakistan, but if current trends continue, it may be joining the club in the near future.


In terms of geopolitics, Pakistan is all-in on China, its’ ‘iron brother.’ Islamabad has long been on friendly military terms with Beijing and Pakistan’s Gwadar port could come to host China’s second overseas military base. Pakistan is front-and-center in the China-Pakistan Economic Corridor (CPEC), an ambitious arm of One Belt One Road (OBOR) that will link China’s northwest to the Gulf of Oman. And Pakistan’s economy is also closely linked to China’s following the signing of the China-Pakistan Free Trade Agreement (CPFTA) in 2006.

Close bilateral cooperation between the two countries has brought much-needed financing from Beijing. But of course this money comes at a cost, and as the debts continue to mount there are worries in Islamabad about the country’s ability to pay them off down the road.

Pakistan’s public debt hit a 15-year high recently, crashing through the 70%-of-GDP threshold. When the current government came to power in 2013, the debt level was 63% of GDP. China recently became the largest single holder of Pakistan debt, surpassing Japan. Beijing is thought to hold one fifth of Pakistan’s external debt, or around $20 billion.

The debt load is hard to quantify precisely as much of it came in the form of opaque loans related to CPEC projects, the details of which have remained obscured from public scrutiny. Some estimates put Pakistan’s final bill at $90 billion on an initial $50 billion worth of loans and investments, good for a 40% return on China’s end. Others have estimated an average 7% interest rate on Chinese loans to Pakistan.

The debt burden will be hard to tackle as-is; but keep in mind – it’s still growing, and fast. Pakistan is grappling with a currency crisis in which China has emerged as a lender of last resort, further compounding Pakistan’s obligation to Beijing.

If CPEC brings the development dividend that Pakistanis hope for, the debt will be manageable. If not, Pakistan will be relegated to semi-colonial status and become even more sympathetic toward China’s geopolitical goals than it currently is.


**This article was originally published on April 11, 2018 and was last updated on July 26, 2018. (Canadá)


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