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The “debt trap” issue of Chinese investments – explained

This article was originally published on Silk Road Explained, on January 28, 2021. Thank you to the author for his kind authorisation to re-publish.

The “debt trap” phrase or originally “debt-trap diplomacy” phrase was initially coined by Mr Brahma Chellaney, a renowned academic and public intellectual from New Delhi, India. The term describes a powerful overpowering tool in bilateral diplomacy where a dominant country engages in a credit loan arrangement with a disproportionally inferior borrowing country to such an extent that the inferior country becomes fully dependent on the dominant one since it cannot repay the credit loan. The term is specifically associated with China, and more precisely to its Belt and Road Initiative (BRI). The BRI is a rollout of capital infrastructure investment projects, spanning from roads, power plants to ports and industrial facilities throughout the Eurasian continent. It was announced in 2013 by Chinese president Xi Jinping as the flagship project of China (and president Xi’s ongoing presidency) in decades to come. The BRI clings on the global reminisce of the ancient Silk Road – which was a network of trading routes that by land connected Europe and Asia, in the period between 2nd century BC and the 18th century, and was on a global scale pivotal to cultural, economic, political and religious interaction between Europe and Asia. When announced, the BRI consisted of two components: the Belt part referred to maritime connection, whereas the Road referred to the land connection. Since its launch in 2013, it has been modified considerably both in terms of budget and timeline, but most importantly scope. In 2015 the Digital Silk Road was added, only to be followed by the Health Silk Road, in the midst of the Covid-19 pandemic. 

Though BRI, with all of its components, keeps growing, the “debt trap” issue is constantly mentioned and underlined by opponents of this Chinese initiative, whereas Chinese officials fiercely denounce such claims. The proponents of “debt trap” argue that China, against the backdrop of BRI, deliberately pressures countries’ governments to engage themselves in developing capital infrastructure projects (megaprojects) which are financed through Chinese state banks, and later implemented by Chinese state companies, whereas the facility itself remains the ownership of the host country. The host country then pays back the credit loan, with interest, to the Chinese company who was responsible for the implementation of the project. The host state, as the owner of the facility, is also responsible for costs that might occur as a result of facility malfunction of underperformance. However in case, the host state is not capable of paying back the credit loan, meaning in case the credit loan goes default, then China – through the authorities of the state bank administering the credit loan, is entitled to acquire the land/location of the project. And this is where lines are crossed and when you move from bad project management and incorrect project due diligence to global security and politics area.

The problem of labelling BRI projects as debt traps lies in the complexity of the projects, the global bias concerning China and the historical moment.

Complexity of projects 

Michael Jordan, by acclamation the greatest basketball player of all time, once said:  “I’ve missed more than 9000 shots in my career. I’ve lost almost 300 games. I’ve been trusted to take the game-winning shot 26 times and missed. I’ve failed over and over and over again in my life. And that is why I succeed.” Same goes with capital infrastructure projects or megaprojects. The fact that megaprojects experience time and cost overruns is no news to people dealing with project management, investment management or construction management, be it in the academic spheres or in business. The paradox that “the bigger the better” approach in engineering and design inevitably leads to schedule and cost overruns. Businesses conduct evaluations and constant reassessments in order to decrease the disparity between what was planned and what was achieved. The beauty of the Sidney Opera House, one of the most admirable pieces of modern architecture, can only be matched by the appalling fact that the cost overruns for it were staggering 1400% (that’s right – no extra zeros there), while the charm of bagpipes and whiskey cannot diminish the cost overruns of the Scottish Parliament construction which was 1600% (link). So yes – megaprojects can turnout into mega failures in terms of cost and time, so it would be superficial to attribute them solely to China. However, the ratio of failed megaprojects compared to one’s total portfolio is a parameter according to which investors, developers and builders can compete among themselves. Undoubtedly China’s ranking here would not be praiseworthy. 

Global bias 

Being dependent on someone is a bad thing without a doubt. It also makes difference who are you dependent on. Mapping global indebtedness is a demanding task which requires meticulous data collection, processing, alignment and further interpretation. World Bank statistics gives very visual and explanatory information on that (link). Both developed countries and international institutions, each with their own interest and motivation, lend money to interested parties who need it for reasons that vary. The International Monteary Fund – IMF for example at the moment provides a 0% interest rate to low-income countries and at the moment is managing 34 lending arrangements (link). Just for the purpose of balancing, by the end of 2020, USA owned 1.26 trillion EUR to Japan (link). So criticizing China for their intention of pushing countries into a “debt trap” can be interpreted as a bit one-sided given that – everybody ows everybody and that’s simply how modern business works. It is noteworthy that China did sign the Debt Service Suspension Initiative (DSSI) under the G20 framework, including its extension to June 2021 (link). 

Historical moment 

Many observers compare the BRI with the European Recovery Plan, more popularly known as the Marshall Plan of 1948. The Marshall Plan was an initiative led by the United States in the aftermath of the World War 2, to provide over 12 billion US$ (today’s worth of over 130 billion US$), for the purpose of supporting economic recovery programs to Western European economies (link). Chinese are right to disagree with the comparison. The Marshall Plan was selective on political grounds – the funds were not provided to the USSR, though USA and USSR were allies in World War 2, merely on grounds of political system disagreement. BRI makes no such differences and Chinese are proud of that. However, while Europe was being built from ashes with the support of the Marshall Fund, China was being established as we know it today – as a People’s Republic. When architects, designers and engineers were planning, drafting and building roads, bridges, plants and ports of today’s modern Europe, and when Europe was reaching its highest annual total of babies being born (link), back in China tens of millions of lives were lost as a result of the Great Chinese Famine, while the country was experiencing its Great Leap Forward under its CCP leadership. Six years prior to Deng Xiaoping, the de facto leader of PR China following the death of Mao Zedong, visiting Washington in 1979 (link), UK, Denmark and Ireland joined the EU. This can serve as a hint to why capital infrastructure projects have not taken very well in Europe, Western Europe to be exact, to the disappointment of China. Simply said – China was some 50 years too late.

The Hambantota deepwater port  

The trigger for the “debt trap” avalanche of criticism was the case of the Hambantota deepwater port on Sri Lanka’s southern coast. The case concerns a project of constructing a deep water port in Hambantota, for which the Sri Lankan authorities signed an EPC contract with China Harbour Engineering Company Ltd – CHEC. When the Sri Lankan contracting side was unable to follow through with the obligations of the credit arrangement, the Chinese side proceeded to acquire the land on which the project was to be located as its own. This was seen as a unique and unlikely precedent, causing a tidal wave of global security concern. It is natural then that China is accused of applying the “debt trap diplomacy” approach as initially defined, in order to acquire strategic land in the Indo-pacific region.

However, there is more to the case than it meets the eye. The project of the Hambantota deepwater port itself dates back to 1970s. A Feasibility Study in 2001 proved its unsuitability, but despite that, the project was incorporated in the Regaining Sri Lanka development strategy (link) adopted by the Sri Lankan government in 2002. Upon becoming Prime Minister in 2004, Mr Percy Mahinda Rajapaksa requested for another feasibility study, but it too resulted in extensive overhead costs leading in the inefficiency of the project from the financial perspective. The feasibility study conducted by a Danish company Rambøll, showed partial viability of the project, which was enough for the Sri Lanka Port Authority (SLPA) to approve of the project in 2007.

At that point, the SLPA went on a quest to find the suitable, and willing, investor, for the project. China Harbour Engineering Company Ltd – CHEC (, a subsidiary of China Communications Construction Company – CCCC ( conglomerate heard the call and responded. In direct communication and cooperation with Sri Lanka government and SLPA, the initial project concept was modified and upgraded by CHEC, while at the same time CHEC provided feasibility studies proving the viability of scaling up the project free of charge. The first phase of the project was built by 2010 and opened in November 2010 (18th of November, for Mr Rajapaksa’s birthday to be precise). The second phase followed and was completed by 2014, making it the biggest deepwater port of its kind in South Asia. When the straw broke the camel’s back, and the debt crisis was inevitable, it was too late to turn back. Mr Rajapaksa lost the presidential elections in 2015 to Mr Maithripala Sirisena, who upon taking his duty called IMF for assistance in handling the situation. IMF came and provided a 1.5 billion US$ stabilization package in 2016.  

By 2016 the Hambantota deepwater port project was financially sinking. Sri Lanka went to Japan and Indian companies with a proposal of leasing the port in order to repay the credit loan. There was no one to answer the call. Quoting on Mr Mahinda Samarasinghe, Sri Lanka’s Minister for Ports and Shipping, at that time Prime Minister of Sri Lanka Mr Ranil Wickremesinghe asked President of China Mr Xi Jinping to acquire a majority of shares in the port, but was rejected. However, Sri Lanka was offered a lease agreement – with the Chinese company China Merchants Port Holdings Company Limited – CMPort ( in July 2017. It was agreed that the Hambantota project gets split into 2 entities: 

  • Hambantota International Port Group – HIPG (, to operate the port under lease agreement for the next 99 years, while SLPA remains the owner ;
  • Hambantota International Port Services – HIPS (, to manage common user facilities as well as for SLPA to sell 85% of HICG to CMPort while in return HPCG acquires 58% of HIPS shares.

If this seems a bit confusing, it is worth remembering that the Sri Lankan government was grateful to CHEC financing the development of the feasibility studies that confirmed that, in case CHEC leads the development of the Hambantota project, it will prove to be a successful one.

Timeo Danaos et dona ferentes...

Lessons learned 

Superficial and oversimplifying perception and interpretation of complex issues do no good to anyone. In baseline assessment of capital infrastructure projects on a global scale, one should focus on universally acceptable and easily measurable parameters related to quality, cost and time. For a more in-depth assessment, one can expand the previous three parameters to the whole timeline of the project lifecycle and engaged stakeholders. There is no room for bias here on any grounds. With megaprojects, everything is scaled up and exacerbated – both the stakeholders’ interests and benefits, as well as the lasting effects of the underperformance, malpractice or failure.

The hard, but crucially important step in getting better at what you do is to acknowledge your mistakes and learn from them. This takes a lot of gut, courage, knowledge, nerve, patience and other similar features one cannot always find in an individual. When scaling it up on a level of a nation – it gets even more complicated. China’s BRI is no less ambitious than its similar scope-wise predecessors. Yet China needs to learn to adapt and adopt. Initiatives such as BRI will provide a good environment for this and foster the much-needed cross-sector dialogue. There is a lot of explaining to be done on the New Silk Road.

Picture credits: Voice of Djibouti

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