China’s Debt Diplomacy

This week, leaders from around the world are descending on Beijing for China’s second Belt and Road Forum, a conference to showcase China’s signature diplomatic initiative. But these leaders should be clear-eyed that China’s efforts to use its Belt and Road Initiative (BRI) to broaden its geopolitical and economic clout risk saddling developing countries with unsustainable debt while increasing their dependency on China.

The fact that poorer countries struggle with debt is nothing new, but after years of successful efforts to reduce their debt burden—including through the largest debt forgiveness program in history, started under U.S. President Bill Clinton and advanced by the George W. Bush Administration and the international community—they are once again going into the red. Unlike before, developing countries’ strategic assets, such as their resources, mineral deposits, port access rights, and the like, are now targeted by creditors as collateral in many of these predatory deals.

In many vulnerable countries, much of the burdensome debt is owed to a single source: China. According to a study by the International Monetary Fund (IMF), from 2013 to 2016, China’s contribution to the public debt of heavily indebted poor countries nearly doubled from 6.2 percent to 11.6 percent. China’s lending is expanding even more through BRI. Noting a lack of economic feasibility of some BRI projects, many observers suspect that the initiative is partly motivated by China’s desire to stimulate its own economy, obtain strategic assets, and convert its economic access into political and strategic influence in recipient nations.

The lack of transparency in China’s lending obscures its risks to recipient countries.

In such a scenario, the economic benefits of China’s debt-driven projects to recipient nations’ populations are an afterthought. And the lack of transparency in China’s lending obscures its risks to recipient countries, many of which are already vulnerable to or are suffering from financial or fiscal distress. But concealing risks does not eliminate their consequences, and when cash-strapped developing countries fail to pay back the loans for multibillion-dollar projects, it can result in a loss of strategic assets, major hurdles to economic development, and a loss of sovereignty.

For example, unable to repay China for a loan used to build a new port in the city of Hambantota, in 2017 Sri Lanka signed over to China a 99-year lease for its use, potentially as a strategic base for China’s navy. In Djibouti, public debt has risen to roughly 80 percent of the country’s GDP (and China owns the lion’s share), placing the country at high risk of debt distress. That China’s first and only overseas military base is located in Djibouti is a consequence, not a coincidence. Elsewhere in Africa, Burundi, Chad, Mozambique, and Zambia are all either in debt distress or at high risk of it, a situation China’s predatory lending practices are exacerbating.

By contrast, traditional donor nations belonging to the Paris Club, a group of sovereign creditors including the United States and 21 others, have pledged themselves to support a different relationship with poorer nations. Paris Club members have committed to sustainable repayment solutions for debtor nations and to provide appropriate debt relief if a debtor undertakes reforms to stabilize and restore its macroeconomic and financial situation.

China does not support such globally recognized sustainable and transparent lending practices; where the Paris Club would offer transparency and financial sustainability, China would trade debt for a country’s strategic assets. It stands outside of international efforts—principally driven through the IMF and World Bank—to promote transparency, which improves policymaking, prevents debt crises, and discourages corruption.

Under the Trump administration, the U.S. Agency for International Development (USAID), which I lead, centers development initiatives on helping countries on what it calls their “journey to self-reliance.” As reflected in the administration’s Africa Strategy, USAID wants to help partner countries adopt reforms and address the challenges necessary for them to achieve first self-reliance and then, hopefully, prosperity.

President Donald Trump’s National Security Strategy emphasizes that private sector development in emerging economies is the best alternative to state-driven approaches. As a result, Congress has passed the president’s proposal to increase the United States’ ability to provide transparent, sustainable finance through a new U.S. International Development Finance Corp., and USAID has undertaken a major cultural and operational transformation to expand our engagement with the private sector to achieve long-lasting and sustainable results.

Given evidence that China’s lending imposes unsustainable burdens on vulnerable countries globally, it is past time for world leaders to insist that all projects adhere to internationally accepted best practices for transparency and financial sustainability and that lenders adopt modern labor, governance, and environmental standards for their development projects.

This week, China is showcasing its signature global initiative. But anyone who wants a brighter, more self-reliant future for developing countries should join together to demand that China help break the chains of debt it is wrapping around the developing world.