[All Politics is Global] China: The Grimy Financier

Over the last two decades, China has provided record amounts of international development finance. In doing so, it has established itself as a quick choice financier for many low- and middle-income countries (LMICs) given its easy conditions and flexible rules approach. That notwithstanding, Beijing's grants and loans remain shrouded in secrecy, ambiguity, and hazardous ramifications.

According to a 2021 study carried out by Virginia-based AidData at William & Mary titled Banking on the Belt and Road, a dataset of 13,427 Chinese projects worth $843 billion USD across 165 countries was analyzed over a period of 18 years. This comprehensive and granular dataset of international development finance from China captured the following key insights.

1. China Outspends Other Major Powers

China's overseas development finance program has witnessed an extraordinary expansion during the first two decades of the 21st century. With annual international development finance commitments hovering around $85 billion USD a year, China outspends the United States and other major powers on a 2:1 basis or more according to the AidData study. This is being carried out via semi-concessional and non-concessional debt rather than aid. Since the introduction of the Belt and Road Initiative (BRI), China has maintained a 31:1 ratio of loans to grants and a 9:1 ratio of other official flows (OOF) to official development assistance (ODA).

2. Sharp Rise in "Mega-Projects"

The AidData study highlights that China's state-owned commercial banks have assumed an increasingly important role during the BRI era. This was achieved through organizing lending syndicates and other co-financing arrangements that make it possible to undertake big-ticket infrastructure projects. The number of "mega-projects" — financed with loans worth $500 million USD or more being approved each year — have tripled during the first 5 years of the BRI's implementation.

3. Energy and Natural Resources as Collateral

The increasing levels of credit risk have created pressure for stronger repayment safeguards. Chief among these safeguards is collateralization, which has become the lynchpin of China's implementation of a high-risk, high-reward credit allocation strategy. In the interest of securing energy and natural resources that it lacks, China has rapidly scaled up the provision of foreign currency-denominated loans to resource-rich countries that suffer from rampant corruption.

4. The Majority are Non-Sovereign Borrowers

The implementation of the BRI has not prompted any major changes to the sectoral or geographical composition of the country's overseas development finance program. However, it has marked an important transition in how China bankrolls infrastructure projects. Most of China's overseas lending was directed to sovereign borrowers (ie, central government institutions) during the pre-BRI era. However, nearly 70% is now directed to state-owned companies, state-owned banks, special purpose vehicles, joint ventures, and private sector institutions. These debts, for the most part, do not appear on government balance sheets in LMICs.

5. Underreported Debts

The AidData study found that Chinese debt burdens are substantially larger than research institutions, credit rating agencies, or intergovernmental organizations with surveillance responsibilities. As many as 42 LMICs now have levels of debt exposure to China in excess of 10% of their respective GDPs. As per the AidData study, it is estimated that the average LMIC government underreports its actual and potential repayment obligations to China by an amount that is equivalent to 5.8% of its GDP. Collectively, these underreported debts are worth a staggering $385 billion USD approximately.

6. BRI Implementation Problems

In all, 35% of all Chinese BRI infrastructure project portfolios have encountered major implementation problems. These include corruption scandals, labor violations, environmental hazards, and public protests.

Game-Changing Concessions

The AidData study foretells the larger story of China's politico-military strategy in the Indo-Pacific. It uses a covert policy of granting huge loans to smaller and poorer nations that are in dire need of developmental funds to improve infrastructure.

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China is replicating a pattern almost unvaryingly for handing out these loans. There are "no conditions and/or transparency measures" while issuing the loan. But as soon as the LMIC nation in question reaches a point wherein it is unable to repay the loan on time, Beijing "offers" to "waive off/relax" loan conditions in exchange for game-changing "strategic concessions." The LMIC model where the former rides on huge concessional loans/aid financing from China and is almost certain to default on payments is visible across Africa, the Indian Ocean, Asia, and the Pacific nations.

China's grimy financing requires having a pliant political regime in the target country almost as a prerequisite. This is to aid in the target nation's departure from democratic norms, and subsequent shift towards an alternative political model, in which communist Chinese practices can swoop in with ease.

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Author: Dr Monika Chansoria

Dr Monika Chansoria is a Senior Fellow at The Japan Institute of International Affairs in Tokyo and the author of five books on Asian security. The views expressed here are those of the author and do not reflect the views of any organization with which the author is affiliated. Follow her column, "All Politics is Global" on JAPAN Forward, and on X (formerly Twitter) @MonikaChansoria.