The changing nature of foreign lending

Amidst a relative slowdown of the Chinese economy over these past few years, there has been much speculation about the changing nature and scope of China’s overseas aid and development financing model. China’s role as a major international development stakeholder became evident when the BRI was launched in 2013, aiming to link over 140 countries via a network of infrastructure projects. China has been pouring billions of dollars into most of the so-called ‘developing’ world for over a decade, so this is as good a time as any to take stock of how this experience has been unfolding.

There is no dearth of speculation concerning the impact of Chinese investments in varied African, Asian, Central Asian, European, Midde Eastern and Latin American countries. Entities like AidData have a dedicated programme which uses geotagging, IT and comprehensive datasets to understand the Chinese aid model. AidData’s recent ‘Belt and Road Reboot’ report provides interesting insights concerning China’s ongoing efforts to de-risk its global infrastructure initiative, and to keep competing with other providers of global development finance.

China has become the world’s largest individual source of development finance. China’s aid and credit flows are around $80 billion per annum. Being the world’s largest donor, China has also become the world’s largest debt collector. Giving money is easy but getting it back from countries which are already indebted is much harder. Beijing’s debt collection role comes at a particularly bad time, given that many of its largest borrowers are facing major debt crises, and struggling with lackluster economic growth.

Considered a ‘developing’ country for decades, China was a recipient of foreign aid itself. As Chinese economic influence grew, it began portraying its lending efforts as an example of south-to-south collaboration. China often renounced the use of conditionalities by Western international lenders, which are readily used to nudge borrowing countries to run their political and economic affairs according to the wishes of the US, or the Europeans. Yet, China too has used its aid as a ‘carrot’ to entice poorer countries to do its bidding, like on foreign policy matters.

China uses ‘tied aid’ too, whereby goods and services needed for implementing its large infrastructure projects are primarily sourced from home, rather than from borrowing countries. As a result, the benefits of Chinese infrastructure projects, like those of many Western-funded projects, have not been trickling down sufficiently to local communities. China has also been accused of exporting obsolete coal power generation technologies to energy-deficit poorer countries via the BRI.

As Chinese debts have continued to mount, many Western countries have begun accusing China of using ‘debt diplomacy’ to gain more influence. Moreover, Beijing’s image within poorer countries has begun to suffer.

Thus far, China has been way too focused on the expedient delivery of large-scale infrastructure projects without worrying much about their environmental or social impacts. Beijing may now be becoming preoccupied with putting in place stringent safeguards to avert the risk of default. It is disengaging from discussions of new projects in already stressed economies. More Chinese loans are being collateralised. Its state-owned creditors are introducing stronger penalties for late repayments. Even Chinese emergency rescue loans come with high interest rates and shorter repayment periods.

If these strategies are not successful, we may even start seeing China lessen use of bilateral lending instruments and give preference to provision of credit through multilateral institutions. Beijing may even begin outsourcing risk management to major international lending institutions with stronger due diligence standards and safeguard policies.

What China should do is de-risk the damaging reputational risks to BRI by giving more support to distressed borrowers and their troubled projects. Beijing needs to rethink its approach to ongoing and future BRI-related projects and make them more participatory and beneficial for the local populations. China has recognised the need to make BRI greener, but it now must take concrete steps to turn this recognition into meaningful action.