The Dragon's Debt Gambit

China is considered as one of the oldest civilizations in the world, with its history dating back to the early dynastic periods (2100–1600 BCE). It has evolved to be one of the most developed and powerful nations in the world in the last seven decades. With its growing influence and economy, China is investing its money in foreign nations by either building infrastructure or lending funds. But the question is: Why is China investing in nations that don’t have the capacity to pay it back?

They say that to understand more about something, we have to go back to where it all started. China, as a civilization, began in the early dynastic periods with the Xia Dynasty (c. 2100–1600 BCE), which is often regarded as the first Chinese dynasty. It was during this time that the creation of a centralized government and the establishment of hereditary rule were started, where leadership was passed down through familial lines, which in the modern world is also known as monarchy. Yes, China was a monarchy until 1912. Here’s a brief timeline of the history of the rulers in China:

After the fall of the Han Dynasty in 220 CE, China entered a period of fragmentation, also known as the Three Kingdoms Period. During this time, the unified empire of China got divided into three rival states: Wei, Shu, and Wu. The period of the Han Dynasty began with the Yellow Turban Rebellion (read here: https://en.wikipedia.org/wiki/Yellow_Turban_Rebellion) and saw the rise of warlords like Cao Cao, Liu Bei, and Sun Quan. Cao Cao's son, Cao Pi, established the Wei Dynasty by usurping the Han throne, and Liu Bei and Sun Quan founded the Shu and Wu states, respectively. To know deeply about the Three Kingdoms and the unification of China, refer here: https://pandaist.com/blog/en/three-kingdoms-period-of-china-epic-era-full-of-le cause we will move on to our main topic :)

The modern China we see today is different from imperial China. This is because the last imperial dynasty of China, known as the Qing Dynasty, expanded China's borders to their greatest extent, incorporating Tibet, Xinjiang, Mongolia, and Taiwan. Later on, due to the pressures of Western Powers, internal rebellions, and subsequent unequal treaties, the Qing Dynasty weakened, which eventually led to its downfall and also the end of imperial China, along with the establishment of the Republic of China in 1912 with Sun Yat-sen, a revolutionary, as its provisional president. Hence, at this point, China became a Republic.

But the journey to China’s freedom doesn’t end here. During the rule of provisional president Sun Yat-Sen, China entered a period known as the Warlord Era. The regional military leaders, known as warlords, seized control of different parts of the country, which lead to fragmentation and instability, internal conflicts, civil wars, and struggles for power within the country and soon after, in 1937, Japan invaded China, also known to us as the beginning of the Second Sino-Japanese War. This conflict escalated into a major threat of World War II in the Pacific.

After the end of World War II in 1945, the Chinese Civil War resumed between the Nationalists and the Communists. The Nationalists wanted to unify China under a centralized government and the Communists wanted to overthrow the Nationalists and establish a socialist state. The Communists garnered support from peasants, workers, and rural populations, advocating for agrarian reform and social equality. On October 1, 1949, Mao Zedong, head of Chinese Communist Party proclaimed the establishment of the People's Republic of China (PRC) in Beijing, marking the beginning of what we know as Communist rule in China today. (Now, I had no intentions of giving a history lesson but it’s important sometimes)

In the early years of the PRC, China’s international aid and lending were primarily driven by ideological considerations. During the decades 1950s and 1960s, China provided support to various newly independent countries in Asia and Africa. This support was part of China's broader strategy to counter Western influence during the Cold War, which seemed reasonable and a plan to protect themselves.

The real surge in China’s international lending began in the early 2000s, when China started growing rapidly. China established the Export-Import Bank of China (Exim Bank) and the China Development Bank (CDB) to facilitate large-scale international lending to finance infrastructure projects in developing countries. Approximately more than 70% of all direct cross-border lending between 2000 and 2017 happened through these two banks. One major initiative, known as the Belt and Road Initiative (BRI), was launched in 2013, under which China provided billions of dollars in loans for infrastructure projects across Asia, Africa, Europe, and Latin America.

But was China giving loans to help out the countries in need? Or was the reason behind this more sinister? China is popularly known for its notorious mastermind and the strategic plans they play out. One such example is its infamous "Debt Trap Diplomacy." By providing loans and investments to developing countries, China positioned itself as an indispensable partner in their growth, but these financial agreements often come with stringent terms and high interest rates, making repayment difficult (well, almost impossible) for the borrowing nations.

To present you with some facts and figures- Pakistan owes a substantial debt of $26.60 billion to China. Sri Lanka owes $8.84 billion debt to China. Bangladesh owes $6.05 billion debt to China. Egypt’s debt to China amounts to $5.21 billion and Angola’s debt to China is $20.98 billion. China is officially the largest creditor to the developing world surpassing The World Bank and IMF, the organisations that were created to help the developing countries. These scenarios raise alarms about the potential for debt-trap diplomacy, where excessive borrowing from China could lead to the loss of sovereign assets.

And when these countries inevitably struggle to meet their debt obligations, China steps in with offers of debt restructuring. But this assistance comes at a price (ofc, everything comes at a price) - control over the nation’s critical infrastructure and strategic assets. This pattern allows China to secure long-term leases on ports, railways, and other key facilities, effectively extending its reach and influence across continents, which it can use at any time, maybe to attack a nation or be prepared in the case of a war, we don’t know that yet.

One such interesting hypothesis “The string of pearls” emerged for the first time in 2004. It states that China has been building a network of Chinese military and commercial facilities in the Indian Ocean region where each Pearl represents some form of permanent Chinese military installation in a series of locations along a string. In places such as Kenya, Dijbouti, Pakistan, Sri Lanka, Bangladesh, Myanmar, the Strait of Malacca, and the and the South China Sea, China has made important strategic investments. In Dijbouti, a country in East Africa, China built a military base in the Indian Ocean in 2017. If you notice, there is a pattern here- these countries encircle the Indian territory or have close proximity with the Indian subcontinent.

In Sri Lanka, the Sri Lanka's Hambantota Port, which was funded by China, fell into Chinese hands on a 99-year lease when Sri Lanka couldn’t repay its massive debt. In Pakistan, the failure to repay debt resulted in the creation of the China-Pakistan Economic Corridor (CPEC), which is a flagship project of China’s Belt and Road Initiative (BRI). These are not just an isolated incidents but rather part of a broader strategy. By locking countries into debt, China is gaining a significant leverage, enabling it to exert political and economic pressure. However, the question is, “Is this just coincidential that it is around the Indian territory or is it a well-planned-out strategy to target India in the future?” Could it be that this is part of China’s master plan for targeting India? And if so, what is India going to do about it?