cHina has it It plasters logos on its loans as long as it lent abroad. The “Going Out” strategy in 1999 gave way to the “Community with a Shared Future” in 2011, which was overshadowed by Xi Jinping’s “Belt and Road” vision two years later. Throughout this period, even as slogans changed, one type of project dominated: offshore infrastructure financed with 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 paved the tracks for Mao. At the start of Bandar, a shiny new development in the Malaysian state of Johor, in an effort to establish a rival to Singapore.
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By the time the covid-19 pandemic hit and lending dried up, China’s approach was beginning to look unsatisfactory. By our estimates, the world owes the eight largest state-owned banks in China at least $1.6 trillion, which is about 2 percent of global banks. gross domestic product. Critics have accused China of luring poor countries into a debt trap to achieve geopolitical goals. The technocrats worried about how to fit China into the structures the rich world uses to relieve the debt of poor countries. Meanwhile, Chinese officials were increasingly concerned that they had failed to obtain return for an uncomfortable number of projects. With lending on the rise again, China is changing course. The emerging order is leaner and more sophisticated, but it is determined to reshape the world in Beijing’s favour.
It is not the institutions that have changed. Poor countries borrow from the West through multilateral institutions, 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 lending for profit and aid. While Western lenders entrust loans to borrowers, or charities in recipient countries, most lending in China funds infrastructure built by the country’s state-owned enterprises, meaning the money may never leave the country.
The system seemed to benefit everyone in its early days. In China, weak demand for some types of construction eventually left state-owned giants in the industry. State-run banks have surplus dollars from rocket exports. Not only did the presidents of both countries win valuable business by looking abroad, but they also scored points with the officials. In exchange, these officials obtained a diplomatic withdrawal of the borrowers. Loans flowed into Africa, in particular, which was home to receiving governments and a wealth of untapped resources. But the eight big state-owned banks lent everywhere. The stock of global loans to China has grown from $390 billion at the end of 2010 to $1.5 trillion in 2017.
However, cracks began to appear towards the end of this period. Xi’s orders, to focus on a “route” of global shipping lanes and a “belt” of land routes connecting distant China to the farthest reaches of Africa and Europe, have failed to change lending. Belt and Road loans continued to flow to countries too hostile or too far away to benefit. Poor countries struggled to pay off, which meant more and more projects were abandoned. State-owned construction companies, the part of the lending system that deals with borrowers, have not had much influence in the game. If the loan defaults, the banks lose money and the officials get embarrassed, but the builders still get their cut. According to the American Enterprise Institute (aei), a think tank that monitors Chinese lending, new construction projects began to dry up even before Covid hit, suggesting officials were finally getting the lenders under control.
Western observers expected the brakes applied at the start of the pandemic to continue until China dealt with the restructuring left over from earlier profligacy. Instead, policymakers are now instructing lenders to go abroad again, and top diplomats are going with them to smooth the process. China never acknowledged stopping the epidemic, which was only evident in numbers from the recipient countries. But those numbers are now on the rise. Meanwhile, data from fDri Markets, a consulting firm, is showing announcements of new projects indicating upcoming loans, which were raised in the latter half of 2022.
The characteristics of this new age are beginning to emerge. In 2020, officials told construction companies that future Belt and Road projects should resemble “exact drawings”. In a speech in 2021, Mr. Xi reminded them that “small is beautiful.” Sinosure, a state-run insurance company, now refuses to allow loans to countries already heavily indebted to China. Construction companies also have to take a small stake in the projects they work on. According to the aeiAverage construction project value decreased from $526 million in 2012-17 to $423 million in 2018-22. Another database, maintained by researchers at Boston University, shows that footprints are shrinking, too, from an average of 90 km2 In 2013-17 to 16 km2 in 2018-2021.
Chinese policymakers are taking more control of the exchange, too. Before the pandemic, equity funds owned by ministries, policy banks and other parts of state bodies were the fastest-growing source of outside financing, according to Boston University data. These officials help direct state money where they want it, without having to go through state-owned construction companies. Some of the funds are partnerships between China and the Gulf states; Others behave in a manner similar to private equity groups. Fund managers make the big decisions. So far they have chosen to invest in financial technology and green technology. Over time, China can use these channels to make investments in rich countries that have little appetite for debt.
Many of the new generation of projects are located in commodity hotspots that are critical to the green transition. China’s manufacturing industry used to demand oil and iron ore. It now makes more electric cars than anywhere else in the world, and is seeking massive amounts of cobalt, copper and lithium. From 2018 to 2021, even as state-owned banks stopped lending elsewhere, they sent billions of dollars into partnerships between Chinese state-owned companies and local mining operations in Latin America. This led to a buying spree by state-owned companies and equity funds, three of which are specifically for the region.
Lend your money, lose your friend
In this smaller, more centralized system, the money goes to two types of borrowers: those with a good chance of being repaid (either because projects are more likely to turn a profit or governments are rich enough) or those for which any money missing has a price worth paying for the advantage. diplomatic or military. Loans to friendly countries with limited geopolitical use, such as Angola and Venezuela, have dried up. But the China-Pakistan Economic Corridor, a poster child for megaprojects worth $60 billion in a country that already owes more than 30 percent of its foreign debt to China, appears to be an exception to Senoger’s new lending rule. The Center for Research on Energy and Clean Air, a think-tank, believes there are at least four power plants in Pakistan that would have been scrapped had officials stuck to recently adopted climate policies.
Thus, the map of Chinese financing abroad is being redrawn. Banks give less loans to Africa. Instead, they are turning to nearby countries, sources of new commodities and places where Chinese companies can avoid Western trade tariffs. Malaysia and Indonesia benefited because of their proximity; Latin America because of its minerals. A small but growing number of state-owned manufacturers are heading to countries that do business with both Beijing and Washington, taking advantage of state-run bank loans to set up shop with local governments and businesses. One such arrangement is the Kuantan Industrial Park in Malaysia, the infrastructure of which cost at least $3.5 billion and was financed through a joint venture between states and state-owned companies. The Middle East, where Oman and Saudi Arabia host Chinese manufacturing clusters, offers similar access to Europe.
The New Age presents the unknowns. One is related to the size of the investment. Funds from equity funds pass through places like Hong Kong and the British Virgin Islands, making it difficult to trace. Although loans from state-owned banks are shrinking, they are being distributed faster. Another unknown separation fear. In the previous era, China’s overwhelming ambition was to connect itself to the global economy. Now it also wants to isolate itself from the US economic war. If relations continue to deteriorate, China may step up efforts to avoid tariffs, lock down allies and secure global supply chains. A final unknown is whether these efforts will be hindered by the country’s desire for a more sustainable approach to debt. Some question whether China’s behavior has really changed. With the passage of time, will she return to building and financing mega projects, in addition to her various new activities?
Previously, Chinese banks lent to poor countries for huge, useless projects. But the same banks also lent huge and useful projects, like dams and roads, to countries that couldn’t afford to borrow from anyone else, because they couldn’t really repay anyone. Oxford Economics, a consultancy, estimates that between now and 2040, there will be a $15 trillion “global infrastructure investment gap,” between the construction financing that economies require and what will actually be available to them. With its change of approach, China seems unlikely to get involved, and other countries aren’t any more careful. China’s new era of lending will be more focused and better for its public finances. However, some countries, especially in Africa, will miss the old way of doing things. ■
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