China has one of the biggest global development footprints in the world. The only country with bigger official international finance flows is the United States.
Still, Washington spent over four times more than Beijing on Official Development Assistance. The lion’s share of China’s official money flows falls under Other Official Finance and is mostly spent on loans for projects in infrastructure, energy, and communications.
These projects are part of the Belt and Road Initiative (BRI), China’s main vehicle for spurring development both at home and abroad. Through infrastructure investments, Beijing aims to better connect China to other parts in the world and to increase trade along the road. Five years after President Xi Jinping announced his plans for the BRI, China has spent about $25 billion on related infrastructure projects.
But to what extent do recipient countries profit from these Chinese investments? At least eight countries are at particular risk of debt distress because of project lending associated with China’s BRI, the Center for Global Development (CGD) reported in March 2018. Critics fear that China is using the loans to create dependency and gain political influence.
The China Model of Lending
Chinese money fills a gap in international infrastructure funding. So why is it causing debt and debate? For one thing, most BRI funding is based on state-to-state structures. This can create challenges for sovereign debt, with possible implications for bilateral ties.
Usually, loans are guided by standards determined by multilateral institutions like the World Bank, the International Monetary Fund, or multilateral mechanisms like the Paris Club. But China is not a member of the Paris Club, so it doesn’t need to inform members on its credit activities and it doesn’t have to follow any standards.
“Without a guiding multilateral or other framework to define China’s approach to debt sustainability problems, we only have anecdotal evidence of ad hoc actions taken by China as the basis for characterizing the country’s policy approach,” the CDG report concludes.
Instead of universal standards, “China generally follows local laws when it lends for development projects,” Scott Morris explains. Morris is one of the authors of the CDG report on debt among BRI countries. “This can mean high standards when local laws are strong and very low standards when laws are weak.”
The difference with loans from institutions like the World Bank, is that these institutions assess local laws and will impose their own protections if local laws are too weak. China leaves this responsibility with partner-governments and “follows whatever local laws say,” Morris says.
“China is also not as sensitive to debt sustainability issues, such as that lending terms are not strictly aligned with the country’s debt risks,” he adds. To what extend recipient countries benefit from Beijing’s loans therefore strongly depends on their own standards.
Price for Beijing
The debt problems among the BRI countries also come at a price for China. Between 2000 and 2014, Beijing spent $13 billion on actions relating to debt. With debt rescheduling it mitigates risks by extending the terms on loans.
China also carries significant risk itself when lenders default on their loans, according to Morris. Although “debt is essential for infrastructure investment,” Morris says, “large amounts of debt carry significant risks and need to be carefully managed by lenders and borrowers.”
Most importantly, the international critique is also creating a “huge problem in China,” Rudyak says. “The Chinese general public is highly critical of Chinese aid and Chinese loans.” China is not getting its money back and the country is being criticized by the international community. So why, an increasing number of Chinese ask, doesn’t Beijing spend this money on the poor at home?
Intentions and Politics
The Bretton Woods institutions “are a mirror of post-1945 and the world has changed,” Rudyak says. “But now of course the problem with the reform is that many of the countries that want to have a bigger say are not liberal democracies.”
Morris and his co-authors argue that Beijing should multilateralize the BRI in order to streamline China’s increasing efforts in international development funding and minimize debt problems. “China has valued its engagement with the multilateral institutions and as a result it’s an influential relationship. I think these institutions stand the greatest chance of convincing and helping China to improve its project and lending standards,” according to Morris.
China’s recent step to open a joint Capacity Development Center with the IMF, to train experts on policy and economics so countries can better decide whether to take up loans, is therefore an encouraging move.