Thread by @DrLeeJones

A thread on my @ChathamHouse research report coauthored with @ShaharHameiri:

"Debunking the Myth of ‘Debt-trap Diplomacy’: How Recipient Countries Shape China’s Belt and Road Initiative."

It contains detailed case studies of #Malaysia & #SriLanka.

chathamhouse.org/publication/de…

1/23

This report takes on a view propagated by think tanks and senior Western policymakers: that China's #BeltandRoad Initiative involves "debt trap diplomacy": deliberately luring developing countries into contracting unsustainable debt to finance infrastructure projects.

2/23

The idea being that, when these countries fall into debt distress, China can grab the infrastructure for itself, extending its geostrategic reach (e.g. more port bases for its navy), or otherwise exerting influence. US Sec of State Tillerson called it "predatory economics".

3/23

Our report shows the #DebtTrapDiplomacy thesis is wrong in two ways.

First, it gets China wrong.

We show that the #BRI is primarily economically motivated, as a spatial fix for a deep crisis within Chinese capitalism. It's designed to soak up surplus capacity & capital.

4/23

Moreover, China's party-state is not configured to use outbound investment for geostrategic purposes. It is too decentralised and fragmented for that. Outbound investment is very poorly governed and skewed towards helping firms (especially state-owned enterprises) expand.

5/23

China's weak governance of development financing is why so many investments are ill-conceived and c.1/2 are loss-making. SOEs often exploit shonky governance to subsidise their expansion.

This alone suggests we need to rule out cock-up before we assume conspiracy.

6/23

Secondly, the #DebtTrapDiplomacy thesis ignores the interests and agency of recipients.

Even if China had a secret blueprint for world domination (which it doesn't - even unofficial maps were banned in 2017), it can't build anything at all without recipients' agreement.

7/23

Recipient-state elites have their own interests and agendas.

They might contract #BRI projects out of need, or greed (h/t @bill_hayton). They need infrastructure to grow their economies, maintain social stability and bolster their performance legitimacy.

8/23

But recipient-state elites can also harness the #BRI to:
- Extract kickbacks
- Funnel projects to politically important communities
- Insert client companies into joint ventures
- Get side-payments to important groups in ruling coalitions (e.g. military aid)

9/23

BRI projects thus emerge from
1) Primarily economic motives & struggles on the Chinese side
*AND*
2) Political economy and social conflict dynamics on the recipient side.

*Together* these shape project design, selection, implementation and outcomes.

10/23

Our #SriLanka and #Malaysia case studies show how this works in detail.

#SriLanka's Hambantota Port is cited as *the* case of #DebtTrapDiplomacy par excellence.

Except it's not.

HP wasn't pushed on SL by China, it was conceived by SL elites, egged on by Chinese SOEs.

11/23

Hambantota Port was one of many reckless projects pursued by President M.R. Rajapaksa, producing many white elephants.

Nor did SL fall into a Chinese "debt trap".

SL did experience debt crisis. But only c.6% of its debt was owed to China.

12/23

The real reason for SL's debt distress? Heavy borrowing on mostly *Western* financial markets amid QE, followed by spiralling debt-servicing costs when QE was tapered off.

And nor did China exploit this situation for a "debt-for-equity swap", seizing Hambantota Port.

13/23

China provided zero debt relief. Zero. The loans for HP remain on the books, to be repaid - because they are long-term.

Instead, a Chinese SOE agreed to invest $1.2bn in SL so SL could pay off pressing loans to *other* creditors.

14/23

The SOE now has a 99yr *lease* to try to recoup its massive outlay (SL remains owner). At current usage rates, it will take that long.

And can China's navy use the port, as pundits suggested?

Nope.

That's specifically forbidden in the lease agreement.

15/23

SL navy (which remains responsible for security at Hambantota) plans to move its southern base to HP.

No Chinese navy ships have even called at HP. Conversely, Indian, Japanese and US vessels have.

So, in short, everything most people "know" about Hambantota is a myth.

16/23

As for #Malaysia, the usual story is that China preyed on the country to help circumvent the Malacca Straits and extend its strategic reach.

In reality, *every* major project involving Chinese investors was initiated by Malaysian actors, many of them private businesses.

17/23

The #BRI projects that proved most controversial in #Malaysia were the East Coast Rail Line and two pipeline projects, contracted in 2018.

Were these offered by China for geostrategic purposes?

No. They were requested by Malaysian PM Najib Razak.

18/23

Why did PM Najib ask China to do these projects? Because he wanted Chinese SOEs to pad the construction contracts so he could skim off money to bail out the sovereign wealth fund 1MDB, which Najib had looted to fund political campaigns and a lavish lifestyle.

19/23

No doubt Chinese elites responded positively to Najib's request because they saw a way to make $$$ and to cement ties with a friendly state (not expecting Najib's regime to be ousted in the 2018 general election). But this is opportunism, not "grand strategy".

20/23

It also wasn't a "debt trap". Malaysia never fell into debt distress; its ability to repay its creditors, Chinese or otherwise, was never in doubt.

Nonetheless, China naturally faced push-back from Najib's successors and was forced to renegotiate the ECRL.

21/23

Nonetheless, this pushback was only limited to 1MDB-related projects. It was not, contrary to what pundits suggested, a backlash against the BRI in general. You can't understand that without considering how the BRI got bound up in specific domestic controversies.

22/23

So what's the basic lesson of our report?

It takes two to tango!

China cannot/ does not impose #BRI projects unilaterally. Recipient-country interests matter and shape BRI projects and their effects profoundly.

China, recipients and development actors, take note.

23/23