China’s Bailout Strategy: A New Form of Debt Trap Diplomacy?


China has been lending billions of dollars to countries in financial trouble, especially those that are part of its ambitious Belt and Road Initiative (BRI). However, unlike the US or the IMF, which are well-established global lenders, China has been rescuing mainly low-and-middle income group countries that have either geopolitical significance, such as a strategic location, or lots of natural resources. Many of them have been borrowing heavily from Beijing for years to pay for infrastructure or other projects.

China’s Emergency Loans: A Lifeline or a Trap?

According to a new study by American and European experts who drew on statistics from AidData, a research institute at William and Mary, a university in Williamsburg, Va., China has provided $240 billion of emergency financing in recent years. In 2021, China gave $40.5 billion in such loans to distressed countries while the IMF lent $68.6 billion to similar nations. The figures show that China’s emerging position as a “lender of last resort” reflects its evolving status as an economic superpower at a time of global weakness.

China’s Bailout Strategy: A New Form of Debt Trap Diplomacy?
China’s Bailout Strategy: A New Form of Debt Trap Diplomacy?

However, China’s bailouts are not cheap. China’s central bank has extended loans at adjustable rates and is charging fairly high interest rates from countries like Pakistan, Laos, Nigeria and Suriname. China’s state-owned banks face losses if Beijing does not bail out their borrowers but may profit if other countries manage to stay current on their debt payments. The country charges an interest rate of 5% for emergency credit to middle-income countries in distress, compared to 2% for IMF rescue loans, the study said. The US Treasury charged almost the same interest rate as China — 4.8% — when it made rescue loans to middle-income countries in the 1990s through 2002.

Some analysts have argued that China’s emergency loans are a way of ensuring that its BRI partners do not default on their existing debts, which could jeopardize China’s strategic and economic interests. Others have warned that China’s bailouts could create a new form of “debt trap diplomacy” that is saddling countries with excessive debt for construction projects carried out by Chinese companies. Furthermore, most of the loans are extended only to middle-income countries considered more important to China’s banking sector, leaving out the poorest and most vulnerable nations.

China’s Bailout Recipients: Who Are They and Why Do They Need Help?

The study identified 16 countries that received emergency loans from China between 2010 and 2021. They are:

  • Angola
  • Argentina
  • Belarus
  • Ecuador
  • Egypt
  • Ethiopia
  • Iran
  • Laos
  • Mongolia
  • Nigeria
  • Pakistan
  • Sri Lanka
  • Suriname
  • Turkey
  • Venezuela
  • Zimbabwe

Most of these countries are either resource-rich or strategically located along the BRI routes. They also have a history of borrowing from China for infrastructure or other projects. However, many of them have faced economic and political crises in recent years, due to factors such as low commodity prices, currency devaluation, sanctions, corruption, civil unrest, or the Covid-19 pandemic. As a result, they have struggled to repay their debts to China and other creditors, and have sought emergency assistance from Beijing.

Some examples of China’s bailout recipients are:

  • Pakistan: Pakistan has been one of the largest recipients of Chinese loans, with an estimated $62 billion worth of projects under the China-Pakistan Economic Corridor (CPEC), a flagship of the BRI. However, Pakistan has also faced a balance of payments crisis, a fiscal deficit, and a currency depreciation, which have made it difficult to service its debts. In 2018, Pakistan received a $6.2 billion emergency loan from China, followed by another $1 billion in 2019. In 2020, China also agreed to defer $1.8 billion of debt payments from Pakistan.
  • Sri Lanka: Sri Lanka has been another major beneficiary of Chinese loans, with over $8 billion worth of projects, mostly in the port and energy sectors. However, Sri Lanka has also faced a debt crisis, a political turmoil, and a tourism slump, which have reduced its foreign exchange reserves and increased its debt burden. In 2018, Sri Lanka handed over the strategic Hambantota port to China on a 99-year lease, after failing to repay its loans. In 2020, Sri Lanka received a $500 million emergency loan from China, followed by another $700 million in 2021.
  • Venezuela: Venezuela has been one of the largest oil suppliers to China, and has received over $60 billion in loans from Beijing since 2007. However, Venezuela has also faced a severe economic and humanitarian crisis, due to the collapse of oil prices, hyperinflation, US sanctions, and political unrest. Venezuela has defaulted on most of its debts, including those to China, and has received little support from Beijing. In 2020, China agreed to defer some of Venezuela’s debt payments, but did not provide any new loans.

China’s Bailout Implications: What Are the Risks and Opportunities?

China’s bailout strategy has raised several questions and concerns, both for the recipient countries and the international community. Some of the risks and opportunities are:

  • Risks: China’s bailouts could increase the debt vulnerability and dependency of the recipient countries, and limit their policy space and sovereignty. China’s bailouts could also undermine the efforts of other creditors and institutions, such as the IMF, the World Bank, and the G20, to provide debt relief and restructuring to the needy countries. China’s bailouts could also create moral hazard and encourage irresponsible borrowing and lending practices, without adequate transparency and accountability.
  • Opportunities: China’s bailouts could provide a lifeline and a cushion to the recipient countries, and help them avoid default and stabilize their economies. China’s bailouts could also foster deeper economic and diplomatic ties between China and the recipient countries, and enhance China’s global influence and reputation. China’s bailouts could also create opportunities for cooperation and dialogue with other creditors and stakeholders, and contribute to the global recovery and development.


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