The narrative surrounding China’s ‘debt-trap diplomacy’ is a lie that doesn’t stand up to scrutiny
China-Sri Lanka relations
  • The idea that Beijing is a bad-faith lender easily swindling recipient countries was pushed relentlessly by the Trump administration. It doesn’t hold up

China, we are told, inveigles poorer countries into taking out loan after loan to build expensive infrastructure that they cannot afford and that will yield few benefits, all with the goal of Beijing eventually taking control of these assets from its struggling borrowers. As states around the world pile on debt to combat Covid-19 and bolster flagging economies, fears of such possible seizures have only amplified.

Seen this way, China’s internationalisation – as laid out in programmes such as the Belt and Road Initiative – is not simply a pursuit of geopolitical influence but also, in some tellings, a weapon. Once a country is weighed down by Chinese loans, like a hapless gambler who borrows from the Mafia, it is Beijing’s puppet and in danger of losing a limb.
A prime example of this is the Sri Lankan port of Hambantota. As the story goes, Beijing pushed Sri Lanka into borrowing money from Chinese banks to pay for the project, which had no prospect of commercial success. Onerous terms and feeble revenues pushed Sri Lanka into default, at which point Beijing demanded the port as collateral, forcing the Sri Lankan government to surrender control to a Chinese firm.

The United States’ Trump administration pointed to Hambantota to warn of China’s strategic use of debt: in 2018, then vice-president Mike Pence called it “debt-trap diplomacy” – a phrase he used through the last days of the administration – and evidence of China’s military ambitions. Last year, erstwhile US attorney general William Barr raised the case to argue that Beijing is “loading poor countries up with debt, refusing to renegotiate terms, and then taking control of the infrastructure itself”.

Hambantota port, in February 2015. Photo: AFP

As Michael Ondaatje, one of Sri Lanka’s greatest chroniclers, once said, “In Sri Lanka a well-told lie is worth a thousand facts.” And the debt-trap narrative is just that: a lie, and a powerful one.

Research shows that Chinese banks are willing to restructure the terms of loans and have never actually seized an asset from any country, much less the port of Hambantota. A Chinese company’s acquisition of a majority stake in the port was a cautionary tale, but it is not the one we have often heard. With a new administration in Washington, the truth about the widely, perhaps wilfully, misunderstood case of Hambantota port is long overdue.

The city of Hambantota lies at the southern tip of Sri Lanka, a few nautical miles from the busy Indian Ocean shipping lane that accounts for nearly all of the ocean-borne trade between Asia and Europe, and more than 80 per cent of ocean-borne global trade. When a Chinese firm snagged the contract to build the city’s port, it was stepping into an ongoing Western competition, though one the US had largely abandoned.

It was the Canadian International Development Agency – not China – that financed Canada’s leading engineering and construction firm, SNC-Lavalin, to carry out a feasibility study for the port. More than 1,000 pages of documents detail this effort, obtained through a Freedom of Information Act request.

The study, concluded in 2003, confirmed that building the port at Hambantota was feasible, and supporting documents show that the Canadians’ greatest fear was losing the project to European competitors. SNC-Lavalin recommended that it be undertaken through a joint-venture agreement between the Sri Lanka Ports Authority (SLPA) and a “private consortium” on a build-own-operate-transfer basis, a type of project in which a single company receives a contract to undertake all the steps required to get such a port up and running, and then is allowed to operate it when it is.

The Canadian project failed to move forward, mostly because of the vicissitudes of Sri Lankan politics. But the plan to build a port in Hambantota gained traction during the rule of the Rajapaksas – Mahinda Rajapaksa, who served as president from 2005 to 2015, and his brother, Gotabaya, the current president and former minister of defence – who grew up in Hambantota. They promised to bring big ships to the region, a call that gained urgency after the devastating 2004 tsunami pulverised Sri Lanka’s coast and the local economy.

In Hambantota, instead of waiting for phase 1 of the port to generate revenue, as was advised, Mahinda Rajapaksa pushed ahead with phase 2, transforming Hambantota into a container port. In 2012, Sri Lanka borrowed another US$757 million from the Export-Import Bank of China (Eximbank), at a reduced, post-financial-crisis interest rate of 2 per cent. Rajapaksa took the liberty of naming the port after himself.

By 2014, Hambantota was losing money. Realising that they needed more experienced operators, the SLPA signed an agreement with China Harbour and China Merchants Group to have them jointly develop and operate the new port for 35 years. China Merchants was already operating a new terminal in the port in Colombo, and China Harbour had invested US$1.4 billion in Port City Colombo, a lucrative property project involving land reclamation. But while the lawyers drew up the contracts, a political upheaval was taking shape.

Sri Lanka’s then president Maithripala Sirisena (left) and then leader of the opposition Mahinda Rajapaksa in February 2019. Photo: Getty Images

Rajapaksa called a surprise election for January 2015 and in the final months of the campaign, his own health minister, Maithripala Sirisena, decided to challenge him. Just as they had done for opposition candidates in Malaysia, the Maldives and Zambia, the incumbent’s financial relations with China and allegations of corruption made for potent campaign fodder. To the country’s shock, and perhaps his own, Sirisena won.

Steep payments on international sovereign bonds, which comprised nearly 40 per cent of the country’s external debt, put Sirisena’s government in dire fiscal straits almost immediately. When Sirisena took office, Sri Lanka owed more to Japan, the World Bank and the Asian Development Bank than to China.

Of the US$4.5 billion in debt service Sri Lanka would pay in 2017, only 5 per cent was because of Hambantota. The Central Bank governors under Rajapaksa and Sirisena do not agree on much, but they both said that Hambantota, and Chinese finance in general, was not the source of the country’s financial distress.

There was also never a default. Colombo arranged a bailout from the International Monetary Fund, and decided to raise much-needed dollars by leasing out the underperforming Hambantota port to an experienced company – just as the Canadians had recommended. There wasn’t an open tender, and the only two bids came from China Merchants and China Harbour; Sri Lanka chose China Merchants, making it the majority shareholder with a 99-year lease, and used the US$1.12 billion cash infusion to bolster its foreign reserves, not to pay off China’s Eximbank.

The truth about China’s role in Sri Lanka’s Hambantota port

Before the port episode, “Sri Lanka could sink into the Indian Ocean and most of the Western world wouldn’t notice,” says Subhashini Abeysinghe, research director at Verité Research, an independent Colombo-based think tank. Suddenly, the island nation featured prominently in foreign-policy speeches in Washington. Pence voiced concern that Hambantota could become a “forward military base” for China.

Yet Hambantota’s location is strategic only from a business perspective: the port is cut into the coast to avoid the Indian Ocean’s heavy swells, and its narrow channel allows only one ship to enter or exit at a time, typically with the aid of a tugboat. In the event of a military conflict, naval vessels stationed there would be proverbial fish in a barrel.

The notion of “debt-trap diplomacy” casts China as a conniving creditor and countries such as Sri Lanka as its credulous victims. On a closer look, however, the situation is far more complex. China’s march outward, like its domestic development, is probing and experimental, a learning process marked by frequent adjustment.

After the construction of the port in Hambantota, for example, Chinese firms and banks learned that strongmen fall and that they had better have strategies for dealing with political risk. They are now developing these strategies, getting better at discerning business opportunities and withdrawing where they know they cannot win. Still, American leaders and thinkers from both sides of the aisle give speeches about China’s “modern-day colonialism”.

Chinese President Xi Jinping (left) and Rajapaksa at Bandaranaike International Airport, near Colombo, in 2014. Photo: Getty Images

Over the past 20 years, Chinese firms have learned a lot about how to play in an international construction business that remains dominated by Europe: where­as China has 27 firms among the top 100 global contractors, up from nine in 2000, Europe has 37, down from 41. The US has seven, compared with 19 two decades ago.

Chinese firms are not the only companies to benefit from Chinese-financed projects. Perhaps no country was more alarmed by Hambantota than India, the regional giant that several times rebuffed Sri Lanka’s appeals for investment, aid and equity partnerships.

Yet an Indian-led business, Meghraj, joined the Britain-based engineering firm Atkins in an international consortium to write the long-term plan for Hambantota port and for the development of a new business zone. The French firms Bolloré and CMA CGM have partnered with China Merchants and China Harbour in port developments in Nigeria, Cameroon and elsewhere.

The other side of the debt-trap myth involves debtor countries. Places such as Sri Lanka – or, for that matter, Kenya, Zambia and Malaysia – are no strangers to geopolitical games. And they are irked by American views that they have been so easily swindled.

As one Malaysian politician remarked, speaking on condition of anonymity to discuss how Chinese finance featured in that country’s political drama, “Can’t the US State Department tell the difference between campaign rhetoric that our opponents are slaves to China and actually being slaves to China?”

Text: The Atlantic