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China and Greenland: Debunking the ‘Debt Trap’ Scenario

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China and Greenland: Debunking the ‘Debt Trap’ Scenario

Postulating a Chinese debt-trap scenario for Greenland runs counter to existing evidence, including Greenland’s trade interests, Denmark’s ongoing policies, and the growing role of the US.

China and Greenland: Debunking the ‘Debt Trap’ Scenario
Credit: Depositphotos

In the recent Diplomat article “Is China’s ‘Debt-Trap Diplomacy’ in Greenland Simply on Ice?” a claim is made that Greenland is at “high risk” of falling into a Chinese debt trap as Beijing continues to expand its economic interests in the Arctic. In addition to the overall concept of Chinese “debt-trap diplomacy” being subject to considerable dispute and reconsideration based on recent research, an examination of Greenland’s political and economic status, as well as the present state of Chinese investment on the island, offers negligible evidence that Greenland is at all vulnerable to present or future predatory Chinese loan practices.

First, Greenland has a very low debt-to-GDP ratio – in fact Greenland would have the fourth-lowest debt-to-GDP ratio in the European Union, if Greenland was a member – and sound public finances with a subsidy from Denmark of about 20 percent of Greenland’s GDP.

The notion of debt traps, including in relation to China, relates to countries that struggle to gain access to regular funding, and Greenland does not fit into that category. Greenland today is nowhere near being vulnerable to such a scenario. Greenland’s gross debt, counting both national, municipal, and government-owned company debt was at 27 percent of GDP in May 2021, and the net debt at 3.7 billion Danish krone ($563 million), which equates to 18 percent of GDP. For comparison, Denmark has a gross debt representing 42.1 percent of GDP and the European Union has a combined 90.1 percent of GDP. Internationally, Greenland has a very low debt to GDP ratio.

The initial article had asked whether an independent Greenland could reject Chinese funding and thus avoid falling into a Chinese debt trap. In answering that question, the article claimed that “a majority” of Greenland’s GDP is financed by Denmark. Yet, as the latest figures (2020) detail, direct subsidies from Denmark amounted to 3.959 billion krone, equating to 19.67 percent of the total Greenlandic GDP at 20.123 billion krone. One could argue that the actual number is closer to 25-30 percent of GDP, counting indirect expenses as well, based on an estimation made on the 2014 reportTil Gavn for Grønland” (“To the Benefit of Greenland”) from the University of Copenhagen, but that is still far from being a majority, and this distinction is essential when asking whether Greenland is vulnerable to future external debt trauma after independence.

Second, Greenland’s current politics need to be carefully considered when evaluating the possibilities for future Chinese investments. After the April 2021 Greenlandic elections, Inuit Ataqatigiit formed a coalition with Naleraq, ousting the social democratic Siumut party. After having led government coalitions since 2013, Siumut had promoted the construction of three international airports, (two large and one smaller), in Ilulissat, Nuuk, and Qaqortoq, with the aim of allowing direct flights into regions that could develop tourism and allow for the export of high-quality fresh fish products straight to larger urban markets. Siumut and its allies had voted in 2013 to allow uranium mining to increase the prospect of generating larger incomes to the Greenlandic Resource Fund, which would allow Greenland to rapidly become financially and subsequently politically independent.

IA has favored a more cautious approach on both airports and mining, and during the election campaign the party mainly focused on the ambition of banning the rare earth element and uranium mining project at Kuannersuit close to the city of Narsaq. This project was overseen by an Australian firm, in cooperation with China’s Shenghe Resources, but it is now in abeyance. As well, the decision by the IA-led government to halt oil and gas surveys in Greenland has meant that the possibility of Chinese fossil fuel investment there has also faded. The only major extraction project left in Greenland involving a Chinese partner is the planned zinc mine at Citronen Fjord, but its timetable remains undecided, and even that project seems to pivoting toward the renewed American investment interest in Greenland. China’s economic footprint in Greenland has shrunk considerably just over the past two years, which has reduced the possibility of Beijing assuming a greater say over Greenland’s economic affairs in the near term.

Claims that the funding controversy over the Chinese Communication Construction Company (CCCC) was due to CCCCs offer to fund the airport construction projects are misleading at best. The reality is more complicated, as the Greenlandic government prequalified CCCC for the airport projects, which led to Danish and U.S. worries that said bid would include a funding pledge. Yet CCCC never made a funding bid, nor did CCCC state that they planned to do so. Then-Danish Minister of Defense Claus Hjorth Frederiksen had even stated that CCCC could build the airports without Danish interference, if funding was from Danish and Greenlandic sources. Ultimately, CCCC decided not to present a bid in June 2019 after the Danish government offered its own financial support for the projects.

Third, the argument that the mitigation of climate change would be a financial burden to Greenland also requires a second look. Climate change has two potential costs for Greenland. One cost involves thawing permafrost, which may bring an increasing need for housing construction, but the overall cost would be financed through rent for government or municipally funded housing or would be privately held, as people build new homes based on mortgages. The other cost is socioeconomic. When fish stocks migrate northwards with increasing ocean temperatures, making a living off coastal fishing becomes harder for certain areas, while others benefit. This cost can be mitigated through relatively inexpensive political measures such as re-educating unemployed people to work in tourism instead after the construction of the new airports or through increased economic redistribution. However, increasing ocean temperatures also bring new species into Greenlandic waters, allowing for more open ocean fishing, which brings new income to Greenland. Thus, climate change is absolutely going to complicate Greenland’s economic mosaic in the coming years, but it does not track that one outcome will be the greater need for risky Chinese funding.

In sum, the scenario of current Greenlandic finances leading to a cash-strapped independent Greenland in the future does not sufficiently consider either economic realities or political interests. Of the parties that favor Greenland independence, almost all of them state that political independence from Denmark requires prior financial independence. That is why Greenlandic elections ever since Greenland and Denmark passed the 2009 Self-Rule Act, granting Greenland self-determination, have centered on financial independence. There is no question that most Greenlanders vote for pro-independence parties, but almost all the parties promote a responsible path toward complete self-government via first developing solid finances. That is also why mining at Kuannersuit has been a divisive issue between historical coalition partners Siumut and IA, with the Chinese firm Shenghe ultimately getting caught in the middle.

Postulating a Chinese debt-trap scenario for Greenland not only runs counter to existing evidence, it also does not consider Greenland’s trade interests, (including its current policy in being “open for business,” seeking a variety of different economic partners), Denmark’s ongoing policies of shielding Greenland from perceived threats (including from Beijing) to its economic sovereignty, and the growing role of the United States, which for the past two years has also sought to engage Greenland more directly, including potentially as an independent state. Given the current political (and environmental) state of the Arctic, it is important to avoid tropes and suppositions in understanding the challenges facing its populations, including in the case of Greenland.