VSHina has plastered slogans on its loans for as long as it lent abroad. The “Going Out” strategy in 1999 gave way to the “Community of Common Destiny” in 2011, which was quickly eclipsed by Xi Jinping’s “Belt and Road” vision two years later. Throughout this period, even as the slogans changed, one type of project dominated: overseas infrastructure financed by Chinese loans. The country’s banks have financed everything from the Mecca Metro, a railway in Saudi Arabia being built at a cost of $16.5 billion, by the same construction company that once laid the tracks for Mao ; at the start of Bandar, a shiny new development in the Malaysian state of Johor, an attempt to establish a rival in Singapore.
By the time the covid-19 pandemic hit and lending dried up, China’s approach had begun to look unsatisfactory. By our estimates, the world owed China’s eight largest state-owned banks at least $1.8 billion, or more than 2% of the global market. gdp. Critics have accused China of luring poor countries into a debt trap to advance geopolitical goals. Technocrats worried about how to fit China into the structures the rich world used to provide debt relief to poor countries. Chinese officials, meanwhile, grew increasingly concerned about not getting feedback on an uncomfortable number of projects. As lending rises again, China is changing course. The emerging system is leaner and more sophisticated, but equally determined to reshape the world to Beijing’s advantage.
It is not the institutions that have changed. Poor countries borrow from the West through multilateral organizations, aid agencies, banks and bond markets. Chinese overseas lenders, including the two largest, Exim and China Development Bank, are state-owned, blurring the lines between for-profit lending and aid. While Western lenders outsource loans to borrowers or charities in recipient countries, nearly all of China’s loan fund infrastructure is built by the country’s state-owned enterprises, which means that the money can never leave the country.
In its early days, the system seemed to benefit everyone. In China, weak construction demand has left state-owned industrial giants on the sidelines. State-run banks had a surplus of dollars due to soaring exports. The bosses of both countries have not only won valuable business by looking abroad, but they have also scored with officials. In return, these officials gained diplomatic traction on the borrowers. Loans flowed to Africa, in particular, which was home to responsive governments and a wealth of untapped resources. But the eight big public banks were lending everywhere. The stock of global loans owed to China fell from $390 billion at the end of 2010 to $1.5 billion in 2017.
However, cracks began to appear towards the end of this period. Mr. Xi’s orders, to focus on a “road” of global shipping lanes and a “belt” of land routes linking faraway China to the farthest reaches of Africa and Europe, n failed to transform the loans. Belt and Road loans continued to flow to countries too hostile or too remote to be useful. Poor countries have struggled to repay, meaning more and more projects have been abandoned. State-owned construction companies, the part of the lending system that dealt most with borrowers, had little skin in the game. If a loan went sour, banks lost money and the officials were embarrassed, but the builders still got their share. According to the American Enterprise Institute (aei), a think tank that monitors China’s lending, new construction projects began to dry up even before the pandemic hit, suggesting authorities have finally gotten lenders under control.
Western observers expected the brake applied at the start of the pandemic to last until China manages the restructurings left over from earlier debauchery. Instead, policymakers are now asking lenders to travel abroad again, and senior diplomats are accompanying them to facilitate the process. China has never acknowledged the halt to the pandemic, which was only visible in the figures of recipient countries. But those numbers are now on the rise. Meanwhile, data from fdi Markets, a consultancy, is posting announcements of new projects, which indicate upcoming loans, rising in the second half of 2022.
The characteristics of this new era are beginning to take shape. In 2020, officials told construction companies that future Belt and Road projects should look like “meticulous drawings”. In a speech in 2021, Xi reminded them that “small is beautiful”. Sinosure, a public insurer, is now refusing to grant loans to countries already heavily indebted to China. Construction companies must also take a small stake in the projects they work on. According to aeithe value of the average construction project has fallen from $459 million in 2018 to $407 million in 2022. Another database, maintained by researchers at Boston University, shows that footprints are also shrinking, from an average of 90 km2 in 2013-17 at 16km2 in 2018-2021.
Chinese policymakers are also controlling disbursements more. Prior to the pandemic, equity funds held by ministries, political banks and other parts of government were the fastest growing source of overseas funding, according to University data. from Boston. These help officials direct state money where they want it, without having to go through state-owned construction companies. Some funds are partnerships between China and the Gulf countries; others act in a manner akin to private equity outfits. Fund managers make the big decisions. So far, they have chosen to invest in fintech and green technology. Eventually, China could even use these channels to invest in rich countries reluctant to go into debt.
Much of the new generation of projects is in commodity hotspots that are crucial for the green transition. China’s manufacturing industry used to demand oil and iron ore. Today, it manufactures more electric vehicles than anywhere else in the world and searches for huge amounts of cobalt, copper and lithium. From 2018 to 2021, even as state-owned banks stopped lending elsewhere, they sent billions of dollars to partnerships between Chinese state-owned companies and local metal mining operations in Latin America. This has spurred a buying spree by state-owned companies and investment funds, three of which are specifically dedicated to the region.
Lend your money, lose your friend
In this leaner and more centralized system, the money goes to two types of borrowers: those who have a good chance of repaying (either because the projects are likely to generate profits, or because the governments are rich enough) or those for whom any lost money is a price worth paying for diplomatic or military advantage. Loans to friendly countries with limited geopolitical use, such as Angola and Venezuela, have dried up. But the China-Pakistan Economic Corridor, a label for $60 billion worth of megaprojects in a country that already owes more than 30% of its external debt to China, appears to be an exception to Sinosure’s new lending rule. The Center for Energy and Clean Air Research, a think tank, estimates that there are at least four power plants in Pakistan that would have been scrapped had officials stuck to recently adopted climate policies. .
This is how the map of Chinese finance abroad is being redrawn. Banks offer less loans to Africa. Instead, they are heading to closer countries, sources of fresh produce and places where Chinese companies can dodge Western trade tariffs. Malaysia and Indonesia benefited from their proximity; Latin America with its minerals. A small but growing number of state-owned manufacturers are heading to countries that agree with both Beijing and Washington, using loans from state-owned banks to set up shop with local governments and businesses. One such arrangement is Malaysia’s Kuantan Industrial Park, the infrastructure of which cost at least $3.5 billion and was funded by a joint venture between the countries and their state-owned companies. The Middle East, where Oman and Saudi Arabia host Chinese manufacturing clusters, offers similar access to Europe.
The new era presents unknowns. One concerns the scale of the investment. Equity fund money goes through places like Hong Kong and the British Virgin Islands, making it difficult to track. Although loans from public banks are decreasing, they are also being distributed faster. Another unknown concerns decoupling. In earlier times, China’s overwhelming ambition was to connect to the global economy. Now he also wants to insulate himself from the American economic war. If relations continue to deteriorate, China could step up its efforts to dodge tariffs, lock up allies and secure global supply chains. A final unknown is whether these efforts will be hampered by the country’s desire to take a more sustainable approach to debt. Some wonder if China’s behavior has really changed. Eventually, will it return to the construction and financing of megaprojects, in addition to its various new activities?
Previously, Chinese banks lent to poor countries for massive and unnecessary projects. But the same banks also lent for massive and useful projects, such as dams and roads, in countries that couldn’t borrow from anyone else, because they couldn’t really repay anyone. Oxford Economics, a consultancy, estimates that by 2040 there will be a $15 billion global “infrastructure investment gap” between the construction finance that economies need and that which they need. will actually be available. With its change in approach, China seems unlikely to intervene, and other countries are no more enthusiastic. China’s new era of lending will be more targeted and better for its own public finances. Some countries, especially in Africa, will nevertheless regret the old way of doing things. ■