Hambantota sits on the southern tip of Sri Lanka, its natural harbour close to international shipping routes. In ancient Sri Lanka, the area — which had an operational port as far back as 250 BCE — was crucial to the economy. In those days, Chinese and Arabian merchants used it as part of the maritime silk route. In modern times, however, Hambantota, the main town in a province badly affected by the 2004 tsunami, is underdeveloped.

In 2008, construction started on a new maritime port. It was the brainchild of Mahinda Rajapaksa, then prime minister, who dreamed of turning this area — his ancestral home — into a tourism and business hub. He and his allies insisted that the port would ease the pressure on the highly successful port in the commercial capital, Colombo. There was little evidence to support this claim. The Hambantota Port had failed numerous feasibility studies. India, a regional power and one of Sri Lanka’s key allies, declined to finance it. China, however, stepped up.

The port opened in 2010; China funded 85 percent of the estimated $361 million price tag (all dollars in US currency).

Predictably, the port was a failure. Although it is next to one of the world’s busiest shipping lanes, Hambantota drew only 34 of the tens of thousands of ships that passed by in 2012. In December 2017, struggling to make repayments, the Sri Lankan government agreed to lease the port and 1,500 acres of surrounding land to China, for 99 years.

Hambantota was one of many Chinese investments in Sri Lanka. In the rush of development that followed the end of the civil war in 2009, Rajapaksa borrowed around $8 billion from China to fuel a series of ambitious infrastructure projects, with varying levels of success.

Large-scale Chinese funding is not unique to Sri Lanka. Beijing’s interests in Bangladesh are estimated to be worth up to $35 billion. China has funded more than 20 projects in the Maldives, with the largest three projects alone worth nearly 40 percent of Maldivian GDP. The China-Pakistan Economic Corridor is a $62 billion network of motorways, railways and power plants that will link China’s Xinjiang region to Gwadar Port in southern Pakistan. Pakistani politicians claim it will create up to one million jobs. Other major infrastructure projects include a high-speed rail link in Indonesia and a massive industrial park in Cambodia — and these are just a handful of the transformative projects that China is funding around the globe.

This work comes under one broad banner: the Belt and Road Initiative. Through this immensely ambitious international development program, China is seeking to boost trade and stimulate economic growth across Asia and beyond. It is the signature foreign policy of President Xi Jinping, involving around 65 percent of the world’s population and the transportation of about one-quarter of global goods and services. The consultancy firm McKinsey has said it could overshadow America’s post-World War II Marshall Plan.

Commentators have expressed concern about “debt trap diplomacy,” suggesting that China’s generous loans are illustrative not of largesse but instead of imperialist ambitions.

The Belt and Road Initiative, which consists of infrastructure projects connecting China to countries around the globe, has two main strands. The first is the Silk Road Economic Belt, a series of overland corridors connecting China with Europe via Central Asia and the Middle East. The second is the Twenty-First Century Maritime Silk Road, a sea route linking China’s southern coast to East Africa and the Mediterranean. The costs involved are dizzying. By some estimates, China plans to pump $150 billion into such projects each year. In a report released in early 2018, the ratings agency Fitch said that a remarkable $900 billion in projects were already planned and underway.

Yet, for all the fanfare, the Belt and Road Initiative has proved difficult to conclusively define.

“It is an enormous, overarching, nebulous concept that doesn’t really have a single existence and has come to encompass all kinds of different drivers and interests in the Chinese context,” says Sam Geall, executive editor of chinadialogue.net and an associate fellow at Chatham House.

Some experts have suggested that “Belt and Road” is more of a slogan than a policy, encompassing all Chinese investment overseas. Although the Belt and Road Initiative was launched in September 2013, it has brought an array of international projects under its umbrella, including some, like the Hambantota Port, which long predated its official launch.

Recently, China’s official news agency Xinhua described the Belt and Road Initiative as “a Chinese solution to global economic blues.” Meanwhile, commentators have expressed concern about “debt trap diplomacy,” suggesting that China’s generous loans are illustrative not of largesse but instead of imperialist ambitions. Some nations that find themselves unable to pay back loans agree.

On December 9, the Sri Lankan flag over Hambantota Port came down, and a Chinese flag went up. It lasted just a week, taken down after protests led by a local Buddhist monk who likened the Chinese takeover of the port to a colonial invasion. The lease of the port to China prompted alarm both inside Sri Lanka and internationally. Within the country, it angered locals, who fear that Sri Lanka is caught in a debt trap and will be forced to lease more assets in the future. Internationally, it alarmed policy makers who suspect that China has gained a strategic foothold in the Indian Ocean along an important commercial and military waterway. This August, the US granted Sri Lanka $39 million to boost maritime security.

A Sri Lankan protester hurls a stone at government supporters during a protest in Ambalantota, Sri Lanka. The government has signed a framework agreement for a 99-year lease of the Hambantota Port. (AP Photo/Eranga Jayawardena)
A Sri Lankan protester hurls a stone at government supporters during a protest in Ambalantota, Sri Lanka. The government has signed a framework agreement for a 99-year lease of the Hambantota Port. (AP Photo/Eranga Jayawardena)

Rajapaksa, the prime minister who had championed the port, was voted out of office in 2015, but Sri Lanka’s new government is facing the consequences of the debt he took on.

“The debt trap has had a very real impact on the day-to-day living conditions of the people,” says Amantha Perera, a Sri Lankan journalist based in Colombo. “The currency came under pressure, and people started seeing fuel prices going up, vehicle prices going up. Policy makers blamed the debt trap, and people started realizing that some not-so-sound investments have been made.” Most of the negative public response, however, has been targeted against the Sri Lankan government rather than against the Chinese.

While the Hambantota Port attracted the most international attention, it was just one part of a much larger program of Chinese investment in the country. Some of these investments were fruitful: an expansion of the existing port at Colombo, which is now among the world’s most successful harbours, and improvement of highways around the country. Others were not, particularly those on the southern coast.

For example, in 2017, a mere 50,000 people passed through the new airport in the Hambantota district; it was built to handle one million passengers each year. Since it opened four years ago, it has become known as the emptiest international airport in the world.

“In the south, we’ve seen a string of vanity projects,” says Perera. “The airport is constructed where there was absolutely nothing other than shrub jungle and villages. One of the main inhabitants of the area, according to an environmental impact report, is elephants. You go in and build an airport and connecting roads. But beyond that, what is there?”

There is some anxiety — particularly in India — that the scale of Sri Lanka’s debt crisis (the country has a debt-to-GDP ratio of 77 percent) could lead to further concessions, such as letting China use Hambantota as a military base. It is a widespread theory that China is deliberately trapping countries in debt in order to gain concessions and military advantage. However, it is debatable whether this is an explicit strategy, with some experts arguing that unsustainable debt is a by-product of inadequate planning. “I can’t believe people were concertedly looking at what turned out to be a very poorly planned port project and saying, ‘This is not going to make any money, so it’ll be a good investment because it’ll default and we’ll get a 99-year lease,’” says Geall. “I think it speaks more to accelerated, fragmented and perhaps rash decision making in overseas investment on the Chinese side, rather than a concerted effort to entrap countries through debt.”

“I think it speaks more to accelerated, fragmented and perhaps rash decision making in overseas investment on the Chinese side, rather than a concerted effort to entrap countries through debt.”

— Sam Geall, associate fellow at Chatham House

Why, then, does China keep investing in outlandish projects? A recent study by the Center for Global Development found that the risk of debt distress is rising in 23 countries with Belt and Road funding. Eight of these countries — Pakistan, Djibouti, the Maldives, Laos, Mongolia, Montenegro, Tajikistan and Kyrgyzstan — already have unsustainable levels of sovereign debt. This means poor returns on loans for China, as well as potentially disastrous economic outcomes for the countries involved. The affected nations are among the poorest in their respective regions and will soon owe more than half of all their foreign debt to China.

Some analysts suggest that China’s investment in projects with poor economic prospects comes down to a scattershot approach and a failure to do due diligence. “The cautionary tale from Sri Lanka is that before borrowing, you must do your homework really well, because the Chinese are not going to do it,” says Perera. “If conditions are not met, they’ll renegotiate the terms, and that’s unlikely to be in favour of the government that is borrowing.”

Visitors walk through a plot of land off the coast of Colombo, Sri Lanka that was reclaimed from the ocean as part of the Belt and Road Initiative. (AP Photo/Eranga Jayawardena)
Visitors walk through a plot of land off the coast of Colombo, Sri Lanka that was reclaimed from the ocean as part of the Belt and Road Initiative. (AP Photo/Eranga Jayawardena)

China has an excess capacity in key industries such as steel, and Belt and Road projects allow it to export expertise, manpower, factories and machinery. Most Belt and Road Initiative projects involve Chinese engineers being flown in to carry out the work. The investment creates new economic markets for Chinese industry. Chinese firms are engaging in construction work around the world on an unparalleled scale: to date, Chinese companies have secured more than $340 billion in construction contracts along the Belt and Road.

“Economic power does tend to intersect with military and geopolitical interests, but I wouldn’t say this is unique to China,” says Geall. “I tend to think the only genuinely consistent underlying driver that sums up the Belt and Road Initiative is excess industrial capacity. Overwhelmingly, that’s an economic driver to create new markets.”

Although the underlying aims of the Belt and Road Initiative are disputed, it is clear that China’s seemingly endless loans do not come without strings attached. Around the world, including in countries that were previously extremely enthusiastic, a pushback has begun. Malaysia, a big recipient of Belt and Road Initiative investments, cancelled about $3 billion-worth of pipeline projects this year. Kuala Lumpur had already suspended another $20 billion in Belt and Road schemes. Pakistan is in a payment crisis, in part brought on by the scale of its borrowing from China. This October, Pakistan asked the International Monetary Fund for a bailout. A spokesperson for the US State Department said the request would be closely examined, as “part of the reason that Pakistan found itself in this situation is Chinese debt.” (Two years ago, Sri Lanka also requested — and received — an IMF bailout to avert a balance of payments crisis).

"If you want to expand railways and road networks, [China] is the only power making this kind of large investment in this region. You don’t have a lot of options.”

— Amantha Perera, Sri Lankan journalist

Despite the widespread payment hardship felt by the Belt and Road countries, governments — even those already struggling with debt crises — continue to turn to China. Sri Lanka, which owes its debt crisis in no small part to its borrowing for Belt and Road infrastructure projects, is asking China for a further $1.25 billion in funds to finance its liabilities. Pakistan, too, is seeking to further loans worth somewhere between $1 billion and $2 billion from China to help alleviate its economic crisis. Notably, this ramping up of Chinese funding for Pakistan comes as the United States cuts aid to its occasional ally. The United States has led efforts to have some Pakistani interests placed on the global terror-financing watch list, which could have serious economic ramifications.

There may be a simple reason behind indebted countries’ repeat requests for Chinese funding: there likely aren’t other sources of financing on such a scale readily available.

From 2009 until 2015, when Rajapaksa left office, Sri Lanka did not have access to traditional global, Western-backed money lenders, due to Western pressure over human rights abuses in its civil war. “No money was going to come in from the traditional lenders in the West,” says Perera. “So if you don’t take Chinese money, where is the money coming from? You have Delhi, but it doesn’t have such deep pockets as Beijing. If you want to expand railways and road networks, [China] is the only power making this kind of large investment in this region. You don’t have a lot of options.”

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The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.
  • Samira Shackle

    Samira Shackle a freelance British journalist, writing mainly on politics, terrorism, and gender, with a particular focus on the Indian Subcontinent. She is currently based in London.

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