China ensnares vulnerable states in a debt trap

Easy loans are used to secure influence and grab control of strategic assets


A ship departs a port in Zhanjiang, China, in July 2017 for Djibouti to dispatch members of the People’s Liberation Army to man a military base there. © Xinhua

Brahma Chellaney, Nikkei Asian Review

“There are two ways to conquer and enslave a country,” American statesman John Adams (U.S. president from 1797 to 1801) famously said. “One is by the sword. The other is by debt.”

China has chosen the second path. Aggressively employing economic tools to advance its strategic interests, Beijing has extended huge loans to financially-weak states and ensnared some in debt traps that greatly strengthen its leverage.

After establishing a growing presence in the South China Sea, Beijing seems increasingly determined to extend its influence in the Indian Ocean, not least in countries surrounding India, its regional strategic rival.

From Djibouti in Africa to the Indian Ocean island of Sri Lanka, China has converted big credits into political influence and even a military presence.

Now a political crisis in the Maldives has highlighted the fact that China has quietly acquired several islets in the heavily-indebted Indian Ocean archipelago.

Mohamed Nasheed, the nation’s first and only democratically elected president who was ousted at gunpoint, says the country cannot repay the $1.5bn-$2bn it owes China, equivalent to 80% of the total foreign debt. “Without firing a single shot, China has grabbed more land” in the Maldives than what Britain’s “East India Company did at the height of the 19th century.”

Among the unpopulated Maldivian islands China has acquired on lease are Feydhoo Finolhu, lying close to the capital Male and previously used for police training, and the seven-kilometer-long Kalhufahalufushi, with a magnificent reef. For Feydhoo Finolhu, it paid $4 million, which is what a luxury apartment in Hong Kong sells for; Kalhufahalufushi was even cheaper.

China is the only country to come out in support of Maldives’ embattled authoritarian president, Abdulla Yameen, who came to power in 2013. Beijing has also issued an open threat against India, which has traditionally been the dominant foreign influence in the Maldives since the islands were granted independence from Britain. Chinese state-controlled media has warned that if India militarily intervenes in the Maldives, Beijing won’t “sit idly by” but will “take action to stop” it.

To be sure, China claims sound commercial grounds for acquiring its Maldivian islands. But across the Indian Ocean, port projects that China insisted were purely commercial have acquired military dimensions.

After lending billions of dollars to Djibouti, China last year established its first overseas military base in that tiny but strategically important state, located on the northwestern edge of the Indian Ocean. In Pakistan, Beijing has deployed its warships for the security of the Chinese-built Gwadar port, whilst seeking to establish a military base nearby.

Beijing’s creditor diplomacy scored a major success in December when Sri Lanka formally handed over its strategically located Hambantota port to China under a 99-year lease valued at $1.12 billion. Earlier, after Sri Lanka’s $500-million, largely Chinese-owned Colombo Port container terminal opened in 2014, Chinese submarines arrived quietly and docked there.

Further east in Myanmar, there are concerns in India and the West that Kyauk Pyu, a deep-water port to be developed and financed largely by China, could eventually also serve military purposes.

In the Maldives, Beijing has shown interest in turning an uninhabited island into a naval base by cutting through the surrounding coral reefs to create passageways for its warships. Or it could create an artificial island and militarize it, as it has done in the South China Sea.

Underscoring Beijing’s strategic calculations, three Chinese frigates visited the Maldives about six months ago, docking in Male and at Girifushi Island and imparting special training to Maldivian troops.

Meanwhile, China’s stepped-up naval presence in the Indian Ocean in recent weeks might be intended to send a message to India, including seeking to deter it from militarily intervening in the Maldives, as New Delhi did with Western backing in 1988, when Indian paratroopers foiled a coup attempt. The action reinforced India’s claim to be the region’s peacekeeper.

The current ruler, Yameen, has facilitated China’s island acquisitions in his country by amending the constitution in 2015 to legalize foreign ownership of land. The amendment appeared tailored for China; the new rules for foreign ownership require a minimum $1 billion construction project that involves reclaiming at least 70% of the desired land from the ocean.

By also awarding Beijing major Chinese-financed infrastructure contracts, Yameen is saddling the Maldives with mounting debt that is likely to prove unserviceable.

Several countries that have fallen into, or risk slipping into, debt servitude to China are India’s immediate neighbors, including Bangladesh, the Maldives, Myanmar, Nepal, Pakistan and Sri Lanka. This holds major foreign-policy implications for India, which is seeing its influence erode in its backyard. By establishing a Djibouti-type naval base in the Maldives, China could open an Indian Ocean front against India in the same quiet way that it opened the trans-Himalayan threat under Mao Zedong by gobbling up Tibet, the historical buffer.

China’s strategy in southern Asia and beyond is aimed at fashioning a Sinosphere of trade, communication, transportation and security links. By financially shackling smaller states through projects it funds and builds, it is crimping their decision-making autonomy in a way that helps bring them within its strategic orbit. It is even replicating some of the practices that were used against it during the European-colonial period when, in the words of the Chinese nationalist revolutionary leader Sun Yat-sen, “India was the favored wife of Britain while China was the common prostitute of all powers.” One such practice is the long-term lease, an echo of the 99-year-lease through which 19th-century Britain secured control of the New Territories, expanding Hong Kong’s landmass by 90%.

The International Monetary Fund has warned that Chinese loans, offered at rates as high as 7 percent, are promoting unsustainable debt burdens. The price that such loans exact can extend to national sovereignty and self-respect. The handover of Hambantota was seen in Sri Lanka as the equivalent of a heavily indebted farmer giving away his daughter to the cruel money lender.

In Pakistan, Chinese state companies have secured energy contracts on terms that include ownership of the plants and 16% guaranteed yearly returns, very high by global standards. The “economic corridor” that China seems intent on building across Pakistan has become a vehicle for a deep Chinese penetration of the Pakistani state, with most of the investment going into energy, agricultural and security projects often unrelated to a corridor.

Against this background, the word “predatory” is increasingly being used internationally about China’s practices. U.S. Secretary of State Rex Tillerson has called China a “new imperialist power” whose practices are “reminiscent of European colonialism.”

Mao said, “Political power grows out of the barrel of a gun.” But with China emerging as the first major power in modern history without real allies, an additional principle is guiding its policy: buying friendship by opening a fat wallet. China is co-opting states into its sphere of influence by burying them in debt.

Brahma Chellaney is a geostrategist and the author of nine books, including the award-winning “Water, Peace, and War.”

© Nikkei Asian Review, 2018.