By Chris Devonshire-Ellis November 16, 2023
China’s financial institutions have lent US$1.34 trillion to developing countries from 2000 to 2021, according to a new report by the U.S. research facility AidData. In this article I unpack what AidData have said – and combine that with China’s own statistics and personal opinion. It indicates that in fact, China’s BRI will repay the lending in trade growth terms within a decade and that it is already likely highly profitable.
What AidData’s research shows is that when the Chinese President Xi Jinping launched the Belt and Road Initiative (November 2013) to build infrastructure across the developing world, China’s policy banks accounted for over 50% of its total lending. Their share started falling from 2015 and was 22% by 2021.
This analysis means that both the sources, and the focus of China’s overseas financing, have changed. Today, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE), which manages China’s foreign currency reserves, account for more than half of China’s lending in 2021, with the emphasis changing to loan restructuring. To be fair to China, the amount of risk associated with BRI loans increased after many had already been made, as a result of the covid pandemic – projects which were scheduled to be completed and start generating cash flow returns to repay the original capital investment were delayed. That pushed some lenders into difficulties just at the same time when their economies were stagnating.
This is why the onus on BRI loans has now switched to greater China scrutiny – the PBOC is the Central Bank, SAFE the forex administrator, while behind the scenes other Chinese institutions, such as the Ministry of Foreign Affairs and the Ministry of Commerce are working behind the scenes to evaluate and determine the best way forward for errant lenders.
China is generally quite pragmatic when it comes to clear and obvious distress, and is prepared to extend loan terms, provide additional time, and renegotiate terms. It plays hard ball however when obvious corruption and mis-management have created problems – Sri Lanka’s Colombo Port City (CPC) being emblematic of this. China invested a great deal of capital on reclaiming land to build property and hoped to exit, profitably, once the vertical build had manifested itself. But the Rajapaksa administration at the time had diverted funds away from the CPC build, leaving, just at the time covid hit, a barren piece of reclaimed land with no buildings nor investment capital left to construct any. Beijing was not amused.
The eventual outcome has ultimately been the removal of the Rajapaka’s as a political force, and after some initial wrangling, a re-structuring of Sri Lanka’s debt under a new administration.
Such debt will take time to work through the system. However, the business of banking is essentially risk-management in the knowledge that problems will eventually arise. Debts arising from China’s Belt and Road Initiative largesse therefore should not be any surprise.
That doesn’t mean that China has stopped making new loans – it committed to almost US$80 billion of loans and grants in 2021. As we noted in our recent article China’s Outbound Investment: Recent Developments, Opportunities, and Challenges, to maximize the opportunities and mitigate political, cultural, legal, and financial risks, a measured approach from Beijing is necessary. And that is exactly what has been happening.
Overseas finance has won Beijing allies across the developing world, although it has drawn criticism from the West and in some recipient countries, including Sri Lanka and Zambia, that infrastructure projects it funded saddled them with debt they were unable to repay. But in the latter cases, these have been easy political fingers to point once China’s capital was already misspent – often by the very same local politicians who subsequently blamed China for their problems in their domestic media outlets.
Ten years ago, I recall the US business community – and numerous government agencies – licking their lips at the thought of China coming to the rescue to invest in America’s degraded infrastructure. They were sadly mistaken – I pointed out back in 2015 that China was already investing more in Latin America than they were in the United States. It is a policy that has continued – as the World’s largest economy, the United States ought to be responsible for funding its own infrastructure development gap. But Beijing knew it would both never be thanked for doing so, nor gain much political mileage from it.
Instead, Beijing has been funding infrastructure development throughout the emerging global economies – 165 countries have received BRI funding. It is hardly surprising then that China’s debt levels as concerns BRI loans have also risen. It is a normal aspect of risk – the more you lend out there, the more the potential risk. That isn’t actually the issue. What is the issue is how this is handled once it manifests itself.
This is where the AidData analysts begin to draw inaccurate conclusions, with comments such as “Beijing is navigating an unfamiliar and uncomfortable role — as the world’s largest official debt collector.” That implies Beijing doesn’t know how to handle the situation and had not planned for it. That seems completely unlikely. A great deal of planning goes into China’s state policies, including – and especially – when it comes to extending loans worth an estimated US$1.34 trillion.
In fact, Beijing has built-in risk protection, which is probably why AidData – bearing in mind they represent the US viewpoint – feel somewhat uncomfortable with it. As AidData also point out, one way China is managing repayment risk is through foreign currency cash escrow accounts it controls. The arrangement is controversial because it gives China debt seniority, meaning other lenders, including multilateral development banks, could get paid second, after China, during any coordinated debt relief. Good for China, not so good for the Western-financed policy banks. It should also be noted that much of China’s debt restricting is denominated in RMB Yuan, with loans in the Chinese currency overtaking U.S. dollars in 2020.
Here we should recall that Beijing instigated the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB) precisely because they wanted to break the monopoly of the World Bank and IMF, which Beijing felt were not adequately addressed emerging market concerns.
But AidData are also a little naughty in some of their terminology. Their report stated that “Almost 80% of the BRI loans support countries in financial distress. This makes China the world’s largest debt collector.” What that actually means is not that China pushed these countries into financial distress – but that it has actively taken on a role to assist them. This is where there is a fundamental difference in China’s risk assessment and that of the West. The more uncreditworthy you are, the less money is on offer and the higher the interest rate. China is taking a more pragmatic view. Beijing will assess the bigger picture, taking into account political stability, (and if necessary supporting pro-Beijing governments), the social and humanitarian aspect, the natural resources, and the value of a China vote at the UN and other international institutions. The West’s ability to lend beyond the interest rate yield and financial risk looks unimaginative in comparison.
China is now seeking to “de-risk the BRI”, the report said, citing that it is “becoming an increasingly adept crisis manager”. It also said that China is bringing its lending practices more in line with international standards.
China is now working more with multilateral lenders and the West’s commercial banks. Half of China’s non-emergency lending in 2021 was syndicated loans, 80% of that alongside Western banks and international financial institutions. That implies that despite the BRI often being seen as a truly China play, it is already part of the established global – and Western – mechanism for global infrastructure development.
That is also having an effect. Chinese loan commitments to Africa fell from 31% of the total in 2018 to 12% in 2021, while lending to European countries has quadrupled to 23%. This also implies that some rapprochement between China and the EU will take place. The EU has been somewhat battered by its experience with Ukraine; and could subsequently be more receptive to China supply chain development and investment than in recent years. The overall fear from Brussels has been that it doesn’t want its markets flooded with cheap Chinese goods. But that was never likely to happen – the EU itself makes the rules over import standards, meaning much of the negative China rhetoric has been political. In fact, the opportunity is within China – McKinsey estimates that by 2030, China is expected to expand its consumption growth to US$5 trillion. That’s quite a European supply chain heading in China’s direction if Brussels can motivate its exporters properly.
Yet among the AidData concern about China’s positioning itself as a creditor above the West’s policy banks are some admiring glances, rendering the report slightly schizophrenic. “China is now seeking to “de-risk the BRI”, the report said, citing that it is “becoming an increasingly adept crisis manager.”
But at the same time, the report states China is introducing “stringent safeguards” to ensure that it does not risk not being paid back. China is allowing key BRI lenders to pay themselves principal and interest due by “unilaterally sweeping” borrowers’ foreign currency reserves held in escrow. That just sounds like sensible risk management, although AidData complain “These cash seizures are mostly executed outside the immediate reach of domestic oversight institutions… in low- and middle-income countries. The ability to access cash collateral without borrower consent has become a particularly important safeguard in China’s bilateral lending portfolio.” the report pointed said. That’s somewhat unfair – if it is being collected “without borrower consent” then why was the money placed in an escrow account with China managing it to begin with?
In fact, according to AidData, more than 50% of China’s loans have entered their principal repayment period – and will rise to 75% by 2030. This implies that the countries that Beijing lent BRI funding too will have repaid three-quarters of their debts in just 17 years. We can compare that with US Treasury bonds – they repay small amounts over 20-30 years.
China is also the largest global lender – with Beijing committing aid and credit amounting to about US$80 billion a year, while the United States has provided about US$60 billion a year. The total outstanding debt — including principal but excluding interest — from borrowers in the developing world to China is now estimated at about US$1.1 trillion.
But the real measure is how this manifests itself. Spending on infrastructure and calculating risk and debt is all very well; but hides the true impact. Here, AidData are somewhat silent.
But the World Bank isn’t – it has previously said that China’s Belt & Road Initiative will contribute to the total exports of BRI countries increasing by up to US$135 billion per annum. Handily, that figure is 10% of China’s total BRI spending. Assuming the infrastructure it paid for lasts more than a decade, China’s BRI can be expected to be rather more lucrative than the West has generally imagined – with China’s SOEs and related investors retaining equity stakes and subsequent dividend payments far beyond that.
Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates. He can be reached via asia@dezshira.com