China’s development finance double US’ but issues threaten belt and road: report

·5-min read

China’s development financing has more than doubled that of the United States or any other major power, but if it wants to remain competitive its belt and road projects must address key concerns relating to debt and implementation, a new report said.

The extensive analysis published by AidData, a research lab at William & Mary college, on Wednesday showed that China spent an average US$85.4 billion a year in the five years after the Belt and Road Initiative (BRI) was launched in 2013, far outpacing the US at US$37 billion a year.

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This reflected a dramatic expansion in the gap between the world’s largest economies in development finance commitments. They had been at a similar level – around US$32 billion and US$34 billion respectively – in the decade prior.

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“Beijing’s international lending programme has soared to record levels because of domestic challenges – specifically, an oversupply of foreign currency, high levels of industrial overproduction and the need to secure national resources that the country lacks in sufficient quantities at home,” it said.

But the report said China would need to address concerns from countries taking part in its belt and road programme, including over implementation issues and Chinese debt burdens that had been “substantially larger” than previously understood. This would be critical, particularly as the belt and road faced more competition in the future. In June, the US and its allies announced their green development alternative, the Build Back Better World (B3W) initiative, at the G7 summit.

China’s belt and road has been a key initiative for Beijing in securing strategic overseas resources and is a pet project for China’s President Xi Jinping, but it has sparked concerns from countries such as the US over debt levels for developing countries and that the programme has allowed Beijing to cultivate greater influence across Asia, Africa, Latin America, Europe and the Middle East.

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In a deep examination of 13,247 global belt and road projects worth US$843 billion over an 18-year period, the AidData report found China had relied primarily on debt rather than aid in its overseas financing. The vast majority of its finance portfolio included semi-concessional and non-concessional loans and export credits, compared to the US, which mostly provided its financing through grants and highly concessional loans, or ones with more favourable terms than market loans.

Under belt and road, China’s overseas funding has also been bigger and riskier, the report found. The number of big-ticket projects – ones requiring loans of US$500 million or more – tripled each year in the first five years of the initiative, compared to the pre-BRI era. A higher proportion of China’s lending has gone to countries with lower than average rankings on the World Bank’s control of corruption index, and those that perform worse on creditworthiness. More state-owned commercial banks are taking part in the lending, and have relied on tools such as collateralisation – using an asset to secure a loan – to mitigate risks.

But the result is also greater debt burden for countries along the belt and road. The report found that 44 countries owed more than 10 per cent of their gross domestic product (GDP) to the Chinese government, including from sovereign debt exposure and levels of hidden debt exposure. This includes Laos at the top with its sovereign debt exposure at 29.4 per cent of its GDP and its hidden debt exposure at 35.4 per cent of its GDP, along with other countries such as Sri Lanka, Kenya, Ethiopia, Venezuela, Djibouti, the Maldives, Cambodia, Mongolia, Senegal and Belarus.

There were also issues with the implementation of belt and road projects, compared to other projects funded by the Chinese government outside the development scheme, the report said. Researchers found that 35 per cent of BRI infrastructure projects faced major issues, such as corruption scandals, labour violations, environmental hazards and public protests, compared to only 21 per cent for China’s non-BRI infrastructure projects. It also took an average 1,047 days to implement BRI projects, compared to 771 days for Chinese government-financed projects outside the belt and road programme.

“Beijing has witnessed more project suspensions and cancellations during the BRI era than it did during the pre-BRI era,” it said. “Host country policymakers are mothballing high-profile BRI projects because of corruption and overpricing concerns, as well as major changes in public sentiment that make it difficult to maintain close relations with China.”

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As the US and its allies push its B3W alternative to the Belt and Road Initiative, the report said Beijing would need to take new steps to reform its scheme. This could see it seek public support in BRI countries, ingratiate itself with incumbent leaders in BRI countries or seek to multilateralise its initiative by co-financing and implementing infrastructure projects with multilateral development institutions that have higher standards and safeguards.

“It remains to be seen if ‘buyer’s remorse’ among BRI participant countries will undermine the long-run sustainability of China’s global infrastructure initiative,” the AidData report said. “However, it is increasingly clear that Beijing will need to address the concerns of host countries in order to sustain support for the BRI.”

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