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In 2017, when Indian academic Brahma Chellaney coined the term debt-trap diplomacy – a situation where a powerful lending country seeks to saddle a nation with debt so as to increase its leverage over the borrowing nation – it did not have many takers in policy circles.
Just four years later, this thing has become the focal point in dealing with China’s wolf-warrior diplomacy – a key pillar of Xi Xinping’s aggressive foreign policy.
There is a pattern there: Pakistan’s China Pakistan Economic Corridor (CPEC), airports and the seaports in Sri Lanka, its debt to Maldives and Malaysia, are few of the examples where China has been throwing money around in a bid to gain the diplomatic upper hand.
These countries are just a small chunk of the nations that have fallen into China’s debt trap. There are countries across Asia, Europe, Africa and Latin America that have also fallen into this trap.
According to a report by the Institute of International Finance in January 2021, China's outstanding debt claims on the rest of the world increased from about US$1.6 trillion in 2006 to more than US$5.6 trillion as of mid-2020, making China one of the biggest creditors to low-income countries.
Even the world’s supposed sole “superpower” isn’t immune to the Chinese shenanigans. China owns US$1.1 trillion of the US treasuries – enough to plug any kind of major coercive action by Washington.
But that is just one side of the story. Somehow, China clung to the notion that debt was a magical wand that would dissolve all their problems. With over CNY20 trillion in government debt alone, the Chinese debt has grown at the fastest rate in this century.
With such a huge pile of debt, it is not surprising that chicken have come home to roost for China, with property developer China Evergrande Group’s impending default. The group alone is sitting on a pile of debt worth 2.1% of China’s (US$14 trillion) economy.
China has seen its go-go years of economic growth in this century. The point to be noted here is that most of this glittering growth story was built on foundations of easily available credit lines. So, it comes as no surprise that of the top five banks by asset size, first four are from China.
Bottom line:
Now, with Evergrande on the brink of disaster, China has its task cut out. Before Evergrande collapses, it has to be bailed out. Otherwise, it will have massive ripple effect on the Chinese, as well as the world economy. May be China can focus on setting its own house in order, before setting eyes on debt-trapping the low-income nations.
(The opinions expressed in this article are those of the author only, and do not reflect the opinions or views of Kalkine Media or its related entities.)
