Competing or complementary? Chinese loans and international bonds in Sri Lanka's default

Abstract Many see China as offering sovereign borrowers an alternative development model, competing with the West's neo-liberal model. Specifically, China's infrastructure loans are often contrasted with sovereign borrowing on bond markets, generating debates over which of these caused the global South debt crisis. We argue, first, that global South regimes view Chinese loans and international sovereign bonds as complementary and harness both to pursue their ruling coalitions' interests. Second, we argue that the two are not independent alternatives, but interactive: Chinese lending ultimately depends on borrowers' US dollar income, which often requires bond-market lending, deepening borrowers' international financial subordination. We demonstrate these claims via the pivotal case of Sri Lanka. Sri Lanka's government, under Mahinda Rajapaksa, borrowed heavily from China and international bond markets to serve different aspects of the needs and strategy of Rajapaksa's ruling coalition. Chinese lending helped finance infrastructure megaprojects, which were directed towards Sinhala majority areas. Eurobonds provided short-term fixes for problems arising from Rajapaksa's political and ideological agenda. Both compounded Sri Lanka's vulnerability to US monetary policy shifts. From 2013, the rising debt burden and US monetary tightening fractured Rajapaksa's coalition. Subsequently, Sri Lanka's political elites have struggled to combine building durable domestic coalitions with meeting their external financing needs, leading to default.