In the space of a decade and a half, China has become Africa’s largest bilateral creditor, with having committed to lend over 150bn USD between 2000-2018, larger than any OECD (Organization for Economic Cooperation and Development) lender, and near-matching the World Bank in Africa. Along with growing trade and Foreign Direct Investments (FDI), these capital flows from China, accelerating under the Belt and Road Initiative (BRI), have been met with consternation from the US and western media outlets.

These trends have raised fears over Chinese lending as a geostrategic and coordinated tactic, deliberately indebting African countries in order to gain control over key assets, in what has become a meme of “debt-trap diplomacy”. This asserts that Chinese loans are collateralised by strategically important assets, from mineral resources to port projects, and the debt is used deliberately to leverage or extract strategic advantages from poor indebted countries — including asset seizures — when they are unable to meet debt obligations.

The archetypal ‘debt-trap’

The case of Hanbantota port in Sri Lanka has been the single most-widely cited case of China’s “predatory lending”. In 2017, the Chinese-built port was granted through a 99-year concession to China Merchants Port Holding Company (CM Port) at a time when the government found itself struggling to meet its external debt service. The funds gained were used to service Sri Lanka’s very real balance of payment issues — however, the claims of ‘debt-trap’ were pure hyperbole. This was not a debt-equity swap, and the port lease was not tied to any clearance of the debt, which would still have to be repaid; moreover the equity leased to the company was a lease — the ultimate ownership structure of the port was unchanged. The debt struggles Sri Lanka faced were overwhelmingly due to its private bondholders.

Despite the nuanced reality of the Hanbantota project, the perceived ‘debt-trap’ it represented has added to long-standing “China threat” and “rogue donor” perceptions in media and political discourse, and has fuelled fears that the Belt and Road Initiative, particularly in port and other infrastructure projects in East Africa, may lead to similar ‘debt-traps’ in Africa. This has been particularly pronounced in the case of Djibouti. The construction there of a new multipurpose port and naval base is seen as a sign of China’s “string of pearls” strategy for military expansion in the region.

Much of these fears are overblown. A study by the Centre for Global Development found that the Belt and Road Initiative has not contributed to debt-distress in most of the countries involved in the initiative — only 8 of the 68 BRI-identified countries were found to be at risk of debt-distress from BRI borrowing. Djibouti is one of the eight at risk, but there has been no evidence of asset seizure or ownership transfer resulting from its debt-situation, and the Djiboutian government retains ownership of the constructed infrastructure. If it can be called an ‘asset-seizure’, the Sri Lanka port case still remains the sole case.

Debt in Africa: patterns of practice

In contrast to perceptions of predation, another aspect of China as a creditor is one of far greater flexibility and leniency in dealing with debt. One prominent example is the recent case of Ethiopia’s Chinese-financed railway from Addis Ababa to Djibouti, the Ethiopian government was allowed to defer interest payments in 2018, when it faced foreign exchange shortages; the government was then able to renegotiate the terms of the loan, extending the repayment period to 30 years from the original 15, significantly increasing its flexibility. A study from Rhodium Group found that debt renegotiations are common: despite its economic weight, its leverage over borrowers was “limited”.

This flexibility of China as a creditor has been a boon to borrower countries, but this does not entail that Chinese infrastructure loans are a universal good — in many large infrastructure projects, including the railways in Ethiopia and Kenya, expected revenues and economic returns of the project have not met the expectation that justified the significant debts incurred to finance them. Chinese state-owned contractors continue to operate and manage the railway projects on limited 6-year contracts, but ownership lies with the state.

Arguably, the association of the BRI to these projects, and their symbolism to China-Africa cooperation also creates a political imperative to make them work, requiring continued engagement and capacity-building from Chinese contractors.

Dealing with debt in the COVID-19 era

The fraught history with debt and the shadow of HIPC (Heavily Indebted Poor Countries) initiatives of the early 2000s hangs over many sub-Saharan countries. Even prior to the impacts of the COVID-19 pandemic, debt distress has been a growing risk across much of Africa, following the collapse of commodity prices in 2014. As of April 2020, 19 African countries are now at high risk of, or in debt distress. Around 20% of that external debt is estimated to be owed to Chinese institutions, though in some countries this ratio is much higher.

Past behaviour offers indications for how China will respond to the current crisis. A recent study by SAIS-CARI finds a pattern of flexible response to debt, including limited write-offs (applying only to zero-interest loans), and in some cases, delaying payment, rescheduling or restructuring. They find zero cases of ‘asset seizure’, nor the use of penalties or enforced payments — in contrast to OECD lenders. In the current crisis, China’s participation in the G20 debt suspension initiative and its write-off of zero-interest loans is consistent with the former pattern.

Asset seizures remain unlikely, though the recent announcement of Angola offering preferential investment access to oilfields to Chinese oil companies during a period where it is seeking debt relief from China has inflated these fears. Such an offer, if it were to go through, would not be a seizure of assets or a direct exchange for reduced debt, but it highlights the pressure and weak bargaining position that indebted African countries find themselves in vis-à-vis their international creditors. The irony of the debt-trap narrative is now, the optics of a perceived ‘debt-trap’ have made debt-equity swaps politically unfeasible for both Chinese and African governments, even in cases where they could apply.