Debt or Diplomacy? Inside China’s Controversial Loans to Sri Lanka, Laos, and Malaysia

In recent years, much of the discussion around China’s “debt-trap diplomacy” has come from U.S. media and political hawks. In May 2019, then-U.S. Secretary of State Mike Pompeo accused China of using this approach, particularly through its Belt and Road Initiative (BRI), an infrastructure project aimed at expanding China’s influence across Asia, Africa, and beyond. According to Pompeo, China uses opaque practices, corruption, and predatory loans to saddle countries with unsustainable debt, thereby undermining their sovereignty and seizing control of critical infrastructure, such as ports or power plants.

Beyond political rhetoric, foreign policy experts have also weighed in on the matter, suggesting that China deliberately targets countries that are unlikely to repay their loans. The argument is that when these countries default, they are forced to cede key assets like energy facilities, ports, or railways, thus extending Beijing’s influence over strategic infrastructure globally.

However, recent studies indicate that the reality of China’s debt diplomacy is more nuanced than commonly portrayed. While it’s true that China has lent vast sums to countries with questionable creditworthiness, many of these nations willingly accept such risky terms. In most cases, no country has completely forfeited its infrastructure to China, except in the partial example of Laos (more on that below). More commonly, nations have leased portions of their infrastructure to Chinese firms for extended periods, rather than surrendering outright ownership.

Several cases are frequently cited when discussing China’s debt diplomacy: Sri Lanka, Laos, and Malaysia. These examples shed light on how China’s strategy plays out in practice.

Sri Lanka 

Sri Lanka is perhaps the most widely discussed case, particularly concerning the development and subsequent leasing of the Hambantota port. This project, located on the southern coast of Sri Lanka, is closely associated with former Prime Minister and President Mahinda Rajapaksa. 

Between 2007 and 2012, Rajapaksa secured loans worth over $1 billion from China’s Exim Bank to finance the construction of the port, despite widespread doubts about the project’s profitability. Sri Lanka initially approached other potential creditors, including India and the Asian Development Bank (ADB), but failed to secure financing due to concerns over the port’s viability. Ultimately, the Rajapaksa government turned to China, which offered loans at significantly higher interest rates – around 6.3 percent, compared to the 3 percent the ADB would have charged.  

Once the port was completed, it failed to generate sufficient revenue, confirming earlier concerns about its lack of profitability. In 2017, after Rajapaksa had left office, the Sri Lankan government leased a majority stake in the port to China Merchants Port Holdings for 99 years, receiving $1.12 billion in return. 

However, Sri Lanka used this money to pay off other creditors, primarily from the West, because those debts had come due. Its debt to China remained largely unchanged.

Laos 

Laos represents another complex case of Chinese influence. The Lao government, driven by the desire to modernize its aging infrastructure, undertook several large-scale projects, including the construction of the $6 billion Boten-Vientiane railway linking China and Laos. The bulk of this project was financed by China, with Exim Bank once again playing a major role. 

In addition, the Lao government borrowed approximately $600 million from Chinese creditors to build over 20 hydropower plants. In total, Chinese-backed projects in Laos amounted to $6.7 billion.

The country became a notable example of debt diplomacy in 2020 when, amid discussions to restructure its debt, China acquired a 90 percent stake in Électricité du Laos Transmission Company, responsible for Laos’ electricity grid. This move granted China strategic control over the country’s energy infrastructure, and in theory, the ability to cut off electricity supplies to Lao households. 

This acquisition is often cited as a rare case where China gained significant influence over critical infrastructure in exchange for debt relief.

Malaysia 

Malaysia also found itself entangled in China’s orbit, particularly through the construction of the East Coast Rail Link (ECRL). The key figure here was former Prime Minister Najib Razak, who sought Chinese investment to fund infrastructure projects, partly to cover debts incurred by the scandal-ridden 1MDB fund, which he founded in 2009. Najib has been convicted for siphoning billions from the fund, which left Malaysia with a debt of nearly $13 billion. 

In a bid to settle this debt, Najib offered China inflated contracts on infrastructure projects, including the ECRL. Initially estimated to cost between $6 and $9 billion, Malaysia eventually signed a deal with China for $16.5 billion.

Following a change in leadership, the new Malaysian government renegotiated the terms, reducing the overall project cost to $11 billion. Under the revised agreement, the railway will be managed by a joint Chinese-Malaysian venture, with each side holding a 50 percent stake. This episode suggests that, despite the predatory narrative often associated with debt-trap diplomacy, China is sometimes willing to renegotiate terms and settle for less than total control.

Conclusion

While these cases highlight some of the risks associated with Chinese lending, they also complicate the narrative of a predatory China seeking to systematically seize control of infrastructure in debtor countries. Critics often overlook the fact that the governments of these nations bear significant responsibility for their situations. In many instances, leaders act in their own political or personal interests, ignoring warnings from their political opponents, independent experts, and studies on project feasibility. 

Furthermore, it’s no coincidence that China’s debt diplomacy primarily targets developing countries with authoritarian tendencies and high levels of corruption.

Ultimately, debt diplomacy requires the cooperation of at least two parties. If one doesn’t deceive the other or force them into an agreement, then both are accountable for the outcome. While it’s tempting to portray China as a predator exploiting weak economies to gain control of strategic assets, the reality is far more complex. In many cases, as seen with Malaysia (and also Kenya), China has shown a willingness to renegotiate loan terms, which wouldn’t align with the behavior of a predatory lender intent on seizing assets.

China’s approach to lending may be more aggressive than that of Western institutions, but the responsibility also lies with the borrowing nations that knowingly enter into risky agreements. As with all international relationships, the truth lies somewhere between the extremes of exploitation and mutual benefit.