The China Debt Trap – USA Gov Policy

You’ve probably heard of the movie, Money Pit, in which Tom Hanks and Shelley Long, playing his wife, purchase a country home in need of repair for a very low price, only to find out later on it is a financial trap, and not a great deal. Sri Lankan government officials in Colombo must not have seen the movie before they met with officials from a consortium led by Chinese state-owned enterprise (SOE), China Merchant Port Holdings Company, in 2011. They were presented with a financial offer they could not refuse, to develop the Colombo International Container Terminal and in another, funds to develop the port at Hambantota.

Sri Lanka is a small island nation that lies off the south east tip of India. Most Americans would have trouble pointing it out on a map. Fewer still would recognize it as a strategic asset sitting between India and China. Beijing, however, is keenly aware of the country and its importance to China’s maritime Belt & Road Initiative (BRI) linking the Asian communist giant to Western markets. A Chinese consortium agreed to initially invest $500 million in a Sri Lankan project to build the first state of the art deep water terminal in South Asia, in exchange for 85% ownership of the facility. The port also is critical to India as 40% of transshipped container cargo heading to that country passes through the nation.

A twin Sri Lankan project that China Harbor Engineering Company (CHEC) is developing is the $1.4 billion Hambantota Port on the southern tip of the island, along with additional land reclamation that eventually will add up to a $13 billion investment to build a world-class financial and trade center, according to Jamestown Foundation’s May 7, 2021, China Brief. The port facilities at Hambantota, which quickly proved unprofitable, were handed over to China when Sri Lanka defaulted on its debt payment to China. Under the foreclosure agreement China received a 99-year lease on the port.

Sri Lankans today are concerned about China’s rapidly growing influence in the area. Other countries also are worried about what China plans militarily in the Indian Ocean region. Sri Lanka easily fell into China’s “debt trap” when its SEO consortium intentionally loaned the country more money than it knew the island nation could afford to repay. Presumably, Beijing did so with the intention of eventually foreclosing on Hambantota and using it as a naval facility. The top CCP leadership, including President Xi Jinping, see the port as a key link in its maritime BRI. It will potentially provide China with a maritime presence in the Indian Ocean and an increased ability for intelligence operations overseeing US activities at the American naval facility on Diego Garcia. China’s navy also could use it to launch patrols of the Indian Ocean shipping lanes.

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Last year China used its so-called “maritime BRI” to import 542 million tons of crude oil. Over 53% of China’s crude originates in the Middle East and is carried on tankers through the Indian Ocean to ports in China. Xi Jinping views it as a national security issue since other nations currently control the maritime route. Recognition of the concern was formalized first in a 2015 Defense White Paper linking the route to national economic and security issues. According to www.gov.cn, a Chinese government web site, “The traditional mentality that land outweighs sea must be abandoned, and great importance has to be attached to managing the seas and ocean and protecting maritime right and interests.” The Sri Lankan ports are part of China’s long-term “String of Pearls” strategy for creating military and economic links across the world in support of its hegemonic goals.

While Sri Lanka has not yet granted Chinese submarines permission to dock there since 2014, China did give its navy a gift of a frigate in 2019 further linking the two countries, according to a Jamestown Foundation report. In the case of the Sri Lankan debt equity swap, local government officials have grown wary of Chinese intentions and want to renegotiate the deal. It has not transpired. By 2019 China surpassed India in cumulative infrastructure investment in the country equivalent to 14% of the country’s GDP. This top-down prioritization of investment in Sri Lanka stems from Beijing’s 40-year effort to make military and economic inroads in the region. This pattern of coercive overseas investment is found in many countries of strategic importance to China. The Chinese debt trap strategy is proving to be an effective top down policy for the CCP.

DARIA NOVAK served in the United States State Department during the Reagan Administration, and currently is on the Board of the American Analysis of News and Media Inc., which publishes usagovpolicy.com and the New York Analysis of Policy and Government. Each Friday, she presents key updates on China.

Illustration: Pixabay

Quick Analysis

Russia Expanding Aggression

President Putin is using more than one pathway to enter Europe and undermine the West. While most of the world watches the conflict he initiated in Ukraine, the Russian government is actively pursuing a second front in a little noticed campaign in Cyprus. Although the corrupt Cypriot government ended its issuance of “golden passports” in 2020, Russian intelligence is functioning quietly there to transform this EU country into a Russian beachhead of illicit economic activity aimed at penetrating the capitalist West, according to Paul Goble of the Jamestown Foundation. Cyprus is not a member of the North Atlantic Treaty Organization (NATO) nor does it receive as much attention as those countries who are member states. That adds to its allure as a prime location for Russia to attempt to gain a European foothold. Last week a NATO report, cited in the European Daily Monitor, noted that Russian intelligence agents have been plotting to destroy European infrastructure across the continent to disrupt states supporting Ukraine. It further suggests that Putin’s immediate goal is to lay the framework for a future move against the security organization’s members. Hungary, in particular, is another country garnering Moscow’s attention as it opposes the Western response to Russian aggression. Russia is focusing its intelligence efforts on other European, non-NATO member countries in addition to Cyprus, including Austria, Malta, and Ireland. The NATO report suggests that Moscow has had success in disseminating the Russian political narrative in these states to advance its campaign against the West. The island of Cyprus is proving to be a good target for Moscow as it is an ethnically divided island that is part of the EU since 2004. Northern Cyprus, officially called the Turkish Republic of Northern Cyprus (TRNC), is a de facto state that is only recognized by Turkey. The division precludes it from joining NATO. As Goble suggests, “it offers Russia troubled waters in which to fish.” Over the last 20 years, he points out, Cyprus’ challenges have opened it to a massive influx of Russian citizens, who now comprise approximately 10 percent of the island state’s population. Over 2,900 residents are Russians who entered until the “golden passport” program that allowed wealthy or well-connected Russians to move to Cyprus. It also provided them with documentation to travel freely throughout Europe! Although less visible on the world’s radar than the war in Ukraine, Moscow is also being helped by Cyprus’ banks opposition to seizing Russian assets and its support in evading Western sanctions. Russia has placed tens of billions of US Dollars there for money laundering. It has been more than two years since a single Russian “diplomat” has been deported and, in fact, the Embassy has grown to over 300 staffers on this tiny island state of only 1.2 million people. The Russian embassy in Nicosia has advanced communications antennae on its roof and opened a consulate on the northern end of the island. Moscow’s Ambassador, Mura Zyazikov, is a lieutenant general in the FSB with no diplomatic experience. The FSB, SVR (Russia’s Foreign Intelligence Service), and GRU are actively using the island as a base of operations against NATO Member states, Israel, and other Western allies. Moscow backs pro-Russian political parties who in turn influence Cypriot decisions on education, language, and other issues. “Dmitry Khmelnitsky of the Dossier Center says that its findings should be of concern not only to Cyprus but to the West as a whole. Those who ignore what Moscow is doing because Cyprus does not follow the EU sanctions regime are missing something critical,” says Goble. “Cyprus does not seek to get rid of Russian agents and does not interfere with their work,” Khmelnitsky concludes, “despite the fact that what the Kremlin is doing is so clearly visible.” This has an impact not only on the small island but on the EU, NATO, and the West in general. Earlier this year the Moscow Times reported that when the FBI became more interested in Russian business and oligarchs in Cyprus, at least 10 of the major Russian businesses operating there left. Despite the government of Cyprus’ vow to implement plans for new sanctions against Russia, it continues to ignore Putin’s atrocities in Ukraine and to shield the wealth of the 50,000 wealthy Russian citizens and oligarchs residing there. Daria Novak served in the U.S. State Dept. Illustration: Pixabay