Sunday, June 23, 2024

China’s Debt-trap for Developing Nations

The Asian continent and its neighbors have been going through immense geopolitical and economic instability for a few years. Nations are conflicting over borders. The world is dealing with deadly coronavirus with its new variants emerging in uncertain intervals. Then, there are nations defaulting on paying debts, mainly in South Asia.

Nations in South Asia are crumbling down, causing internal and geopolitical chaos due to unprecedented economic crises. Two of India’s neighbors recently had a major political episode in ten days. One is India’s southern neighbor, Sri Lanka, whose president Gotabaya Rajapaksa had declared a state of emergency throughout the island. While Pakistan, too, saw political drama with the Imran Khan government being ousted and the leader of the opposition Shehbaaz Sharif taking over as the new prime minister.

Although both the nations have ever enjoyed regular political stability, the reason for recent chaos lies somewhere towards the northeast of India’s borders. As experts believe, China is the prime reason behind the collapse of both nations’ economies. And also behind the dysfunctional state in India’s other neighboring countries such as Maldives, Laos, and Nepal.

Most experts say that China’s strategy of giving out loans to these nations is the prime reason these countries face a humanitarian crisis today.

How is China responsible for the economic crisis in South Asia? 

As the US’s former president Donald Trump controversially coined the term ‘China’s Debt-Trap Strategy’ during his tenor. He had pointed out China’s strategy of giving out loans to Asia and poor African nations under undisclosed clauses.

Under the leadership of President Xi Jinping, China began its Belt and Road Initiative (BRI) to re-establish the long-forgotten Silk Road-an ancient trade network established during the Han Dynasty about 2000 years ago.

Belt and Road Initiative

China’s Belt and Road Initiative is a strategy for redesigning ancient trade routes connecting Asia (China) with Africa and Europe through land and maritime networks. With this initiative, China aimed to leverage its economic growth through regional integration and become a superpower.

BRI, also known as the One Belt, One Road initiative, creates a passage linking China with Southeast Asia, South Asia, Central Asia, Russia, and Europe via a Maritime Silk Road and land. This also entails policy coordination, infrastructure connectivity, unimpeded trade, and financial integration while also connecting people.

While the initiative may sound pious on paper but to put it straight, the communist country aims at creating colonies by lending a large number of loans to lower-and-middle-income nations for infrastructural development such as constructing ports, roads, railways, airports as well as telecommunication networks.

Hence, China led an initiative to finance infrastructure development in developing countries as a disguised debt trap for lower-and-middle-income countries. The country gives loans at high-interest rates for a shorter period, and when the country defaults, it takes charge of its real estate.

Which countries have been debt-trapped?

Most of the neighboring countries of India have fallen into China’s debt trap and are now facing a severe economic crisis, as citizens live without bare essentials for their survival.

According to AidData, more than 40 economically poor nations have “hidden debt” to Chinese lenders totaling more than 10% of their GDP. Some countries, such as Laos, Zambia, and Kyrgyzstan, have Chinese debts that exceed 20% of their GDP.


Laos, a landlocked country between China, Vietnam, Cambodia, Thailand, and Myanmar, was among the first few to fall into China’s debt-trap diplomacy.

While the country had been in talks with China to build a rail network, both countries struck a deal of a whopping $6 billion in 2015 under Belt and Road Initiative. Although the railway network was ready by 2021, China owned a 70 percent stake in it.

As the Chinese Government-backed the project, Laos took a loan of $480 million from a Chinese bank. Laos gave its potash mines as a collateral guarantee in return for the loan. Hence, if Laos defaulted, China would take over its money-making potash mines. In fact, in 2020, when a debt-ridden Laos faced bankruptcy, it had to sell a part of its energy grid (worth $600), pleading for debt relief from China.

Hence, it means that China practically owns Laos’s railway network and its profits, if any, and Laos remains bankrupt.


The recent advancement of Pakistan’s internal politics has triggered a state of economic instability and vice versa. As a result, the country has trapped itself in its strategy to buy new debt to pay the old debt. While this time, the country is poorly trapped between dragon claws, as a massive chunk of Pakistan’s debt is from China.

The politically unstable Pakistan runs its revenue comes from external debt. At the same time, the government of Pakistan finalized China-Pakistan Economic Corridor (CPEC), a regional connectivity framework at $46 billion. The Chinese government promised to cater to infrastructure projects in Pakistan in 2013. However, the prime reason behind the country’s tanking economy is CPEC, as now the government owes 25 percent of its debt to China.

While Pakistan is extending its hands for aid and bailout packages from IMF, Imran Khan failed to fulfill IMF’s requirement to be eligible. Hence, the country has to take loans from Saudi Arabia with high interests.

Finally, Imran Khan failed in governance and action to deal with colossal debt and lost the Pakistani leadership before completing his term.

Sri Lanka 

Sri Lankan Government signed a Hambantota port deal during the leadership of Mahinda Rajapaksa in 2007. Under the one-billion-dollar deal, the government onboarded Chinese contractors to fund the project and develop a full-fledged port to develop its trade.

As a corrupted Sri-Lankan government drew the country towards debts, the government had to give away its Hambantota port to Chinese firms on a 99-year lease losing rights. Moreover, the government took another loan to buy land and build factories in the port the Chinese government used. Hence, China made Sri Lanka pay for buying property on its soil.

Today, Sri Lankan citizens are on the streets fighting for their rights, asking for the Rajapaksa government to quit even in a state of emergency, while the leaders are reaching out to China (again) and India for financial aid. Such is the power of China’s debt-trap diplomacy.


In 2017, Nepal too signed up for China’s BRI in hopes of becoming a middle-income country by 2030. China had promised Nepal to make it a land-linked country from being a land-locked. The Himalayan country risked its relations with its age-old friendly neighbor India for the same. However, five years later, Nepal has called off its deal with China understanding its intentions.

India’s Friendly Approach 

While China believes in taming its developing nations through its debt trap, India has a more friendly approach to its neighbors in times of its crisis. For example, while India maintains a safe distance from Pakistan, the Government of India provided a line of credit worth $ 2.5 billion as financial assistance to Sri Lanka.

The Indian Government also sent 11,000 MT of rice ahead of Sinhala on humanitarian grounds. Earlier, India sent 76,000 tonnes of fuel to Sri Lanka following its power crisis. India has never failed to help its neighbors while maintaining solid diplomatic ties.

For such insights on the economy in and around us, stay tuned to CorpIndiaNews.

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