GLOBAL FINANCIAL ARCHITECTURES (PART THREE): CHINA AS A GLOBAL CREDITOR- THE BELT AND ROAD INITIATIVE AND OTHER PROGRAMS
posted by Karim Pakravan on March 13, 2024 - 3:29pm
“When you give roses to others, their fragrance lingers on your hand” Chinese President Xi Jin Ping
This is the third article in a series about global financial developments analyzing the changing Global Financial Architecture in the age of confrontation between the West and the Global South. In the first article, we presented the presents the background of the emergence of challenges to the Western-dominated Global Financial Architecture. The second one focused on the BRICS. This piece analyzes China’s direct lending through the Belt and Road Initiative and its role as Lender of Last Resort.
Over the past two decades, China has become one of the largest international creditor nations. The projection of China’s financial might has had twofold objectives. First, China is endeavoring to challenge the Global North’s global financial architecture’s construct. Second, these initiatives are an integral part of the country’s long-term objective of consolidating its leadership position in the Global South by championing economic development. In the process, not only China has become a major provider of development finance, but it has also taken on the role of lender of last resort (LOLR) for many of the weakest emerging market developing economies (EMDE).
The Belt and Road Initiative (BRI) is by far the most ambitious and extensive element of GFA 2.0. The BRI, which celebrated its 10tn anniversary on October 2023 is a bilateral investing financing program set up by China in 2013. It is designed to provide massive amounts of infrastructure and development finance across Asia, Africa and Latin America.
The BRI, which focusses on the development of transportation infrastructure, mining and agriculture, is a major component of China’s long-term program of developing trade routes and providing access to primary mining and agricultural resources needed for China’s long-term growth. The BRI also provides major business opportunities for Chinese state-owned enterprises and markets for Chinese companies goods and services. Moreover, it is an important instrument for Chinese political clout in the Global South.
So far, China has committed close to $1 trillion dollars in BRI financing. The bulk of the financing comes from Chinese policy and commercial banks, including the China Development Bank and the China Export-Import Bank, which between them contributed $331 billions of funding over the 2013-21 period. The bulk of the projects are in energy (particularly coal-powered plants, transportation infrastructure and natural resources. Through this program, China provides to many of them low-income EMDEs access to financial resources without the kind of constraints that come with the Western sources of finance. At the same time, that access has not been cost-free.
However, the BRI has severe limitations. First of all, the financing comes mostly in the form of loans from the major Chinese banks at commercial credit conditions, adding to the debt burden of already heavily indebted emerging market countries. Second, many of the projects are poorly designed, leading to cancellations and forcing renegotiation of loan terms—about 15% of the $966 billion BRI loans are non-performing--with the Chinese banks generally resisting offering concessions to delinquent borrowers and/or seizing the projects put up as collateral. Given the weak balance sheets of the Chinese banking system already saddled with massive domestic non-performing loans, the Chinese creditors are in no position to offer significant loan write-offs, resorting instead on refinancing the loans at even higher interest rates. Third, a heavy reliance of fossil fuels in BRI financed projects contributes to global warming and pollution. Fourth, poorly designed projects also endanger biodiversity and native population resources.
In addition to BRI financing, China has also emerged as a major international lender of last resort. This financing has used several vehicles. First, swap lines between the Peoples Bank of China (PBOC, the Chinese central bank); second, balance of payment loans from Chinese banks; third, rollovers of existing debt service; and fourth, commodity prepayments. The PBOC has swap arrangements with 40 central banks, to be drawn down in situations of financial and macroeconomic distress. So far, 13 central banks have drawn down these lines, for a total of $170 billion. Bailouts of BRI loans and rescue loans totaled another $70 billion.
Chinese lending has focused by and large on debt-distressed countries, often adding to their debt burden. Furthermore, Chinese lending has been opaque and fragmented. More need to be done to coordinate and cooperate with other multilateral and bilateral lenders. While China has participated in the G20 Debt Service Suspension Initiative (DSSI), it is not yet on board with the so-called G20-Common Framework. Both programs were aimed at the 78 low and middle income countries suffering debt distress. The DSSI, which was set up during the first two years of COVID and ended in mid-2021, allowed for the suspension of debt service for the participating countries. The Common Framework, which involved both bilateral and multilateral lenders is an agreement to coordinate and cooperate on the treatment of debt of the participating countries. However, this may be changing, as China agreed this February to join the official creditors in a major restructuring of Zambia’s debt.
Furthermore, the BRI program has been criticized for being a new form of colonialism by China, giving the country a major tool to project Chinese diplomatic and political influence around the globe and allowing it to gain control over natural resources by supporting unsavory and corrupt regimes in Central Asia, Africa and elsewhere in the Global South. Chinese-supported projects are also seen as mostly benefitting Chinese companies and workers at the expense of local companies and populations.
The emergence of China as a major player is global finance has not been without difficulties for China itself, and it can be said that China is on a steep learning curve. Moreover, the major Global North countries have responded to the BRI with programs of their own, like the European Union Global Gateway, the G7 Partnership for Global infrastructure and the US India-Middle East-Europe Corridor. However, at the end of the day, the issue should not be global rivalries, but the promotion of economic development and social change in the EMDEs, as well as debt relief for the debt-distressed countries, in the context of the global generational issue of climate change. China can improve its track record by shifting from high-volume to high-impact projects and adopting global best practices regarding environmental and labor standards, as well as stransparency. At the same time, cooperation and coordination between China-centered institutions and the financial infrastructure of the Global North can be a first step toward the reform of the Global Financial Architecture.
Bibliography:
Boston University (2023): “The Belt and Road Initiative at Ten: Maximizing Benefits and Minimizing Risks” Global Development Policy Center
Horn S., et al (2023): “China as an International Lender of Last Resort” NBER Working Paper 31105
Financial Times: “Ten Years of the Belt and Road: What Has $1 trillion Achieved” FT, 10/21/2023
