CHina has As long as it lends overseas, it puts a banner on its loans. The “going out” strategy in 1999 gave way to the “community of shared destiny” in 2011. Two years later, Xi Jinping’s “One Belt, One Road” vision quickly overshadowed the shadow of the “community of shared destiny”. During that time, even as the slogan changed, one category of projects still dominated: overseas infrastructure construction financed by Chinese loans. The Mecca Metro in Saudi Arabia, a $16.5 billion railway in Saudi Arabia, was built by the same construction company that laid the tracks for Mao Zedong, with the country’s banks financing everything; shiny new development in Johor, Malaysia The beginnings of Project Bandar, aimed at competing with Singapore.
By the time the covid-19 pandemic hit and lending dried up, China’s approach began to look less than ideal. According to our estimates, the world owes at least US$1.6 trillion to China’s eight largest state-owned banks, equivalent to about 2% of global debt. gross domestic product. Critics accuse China of luring poor countries into debt traps to advance geopolitical goals. Technocrats worry about how to fit China into the structures that the rich world uses to relieve the debts of poor countries. At the same time, Chinese officials are increasingly concerned that they will not be able to reap the rewards of a disturbing number of projects. With lending rising again, China is changing tack. The emerging system is leaner and more complex, but equally determined to reshape the world to benefit Beijing.
It is not the institution that changes. Poor countries borrow from the West through multilateral institutions, aid agencies, banks and bond markets. China’s overseas lenders, including the two largest, the Export-Import Bank and the China Development Bank, are state-owned, blurring the line between for-profit lending and aid. While Western lenders entrust loans to charities in the borrower or recipient country, nearly all Chinese loans finance infrastructure built by the country’s state-owned enterprises, meaning the money may never leave the country.
Early on, the system seemed to work out for everyone. In China, weak demand for certain types of construction has left the industry’s state-owned giants at a loss. State-owned banks are flooding with dollar outflows as exports soar. The bosses of both companies have not only won valuable business by looking abroad, but also cultivated ties with officials. In return, the officials courted the borrowers diplomatically. The loans have flowed especially to Africa, where there are lending governments and vast untapped resources. But the Big Eight state-owned banks lend everywhere. The stock of global loans owed to China grew from $390 billion at the end of 2010 to $1.5 trillion in 2017.
However, toward the end of the period, cracks began to appear. Xi ordered a focus on global shipping “roads” and overland “belts” linking remote China with the farthest reaches of Africa and Europe, but failed to change the lending. BRI loans continue to go to countries that are too hostile or too far away to be useful. Poor countries are struggling to repay, which means more and more projects are being abandoned. State-owned construction companies, the part of the lending system that deals most with borrowers, are barely in the game. If the loans go sour, the banks lose money and officials are embarrassed, but the builders still get a cut. According to the American Enterprise Institute (like), a think tank that closely monitors Chinese lending, new construction projects were starting to dry up even before covid hit, suggesting officials are finally taking control of lenders.
Western observers expect the brakes put in place at the start of the pandemic to last until China deals with the restructuring left over from its previous profligacy. Instead, policymakers are now directing lenders to go overseas again, with top diplomats joining them to smooth things over. China has never admitted that the pandemic has stopped, this can only be seen from the figures of the recipient countries. But those numbers are now rising.Meanwhile, the data from fdAnnouncements of new projects point to an increase in upcoming loans in the second half of 2022, according to consultancy i Markets.
The characteristics of this new era are beginning to emerge. In 2020, officials told construction companies that future Belt and Road projects should resemble “meticulous blueprints.” In a speech in 2021, Xi Jinping reminded them that “small is beautiful”. State-owned insurer Sinosure is now denying loans to countries already heavily indebted to China. Construction firms must also hold a small stake in the projects they work on.according to like, the value of the average construction project fell from $526 million in 2012-17 to $423 million in 2018-22.Another database maintained by researchers at Boston University shows that footprints are also shrinking, with an average of 90 kilometers2 2013-17 to 16 kilometers2 In 2018-2021.
Chinese policymakers are also tightening controls on spending. Before the pandemic, equity funds owned by ministries, policy banks and other sectors of the government were the fastest-growing source of overseas financing, according to Boston University data. These help officials direct state money where they want without having to go through state-owned construction companies. Some funds are Chinese-Gulf partnerships; others act in a manner similar to private equity firms. Fund managers make big decisions. So far, they have chosen to invest in fintech and greentech. Over time, China could even use these channels to invest in rich countries that are less willing to borrow.
Many next-generation projects are located in commodity hotspots that are critical to the green transition. China’s manufacturing industry used to have demand for oil and iron ore. It now produces more electric cars than anywhere else in the world, and seeks vast quantities of cobalt, copper and lithium. From 2018 to 2021, even as state-owned banks stopped lending elsewhere, they still provided billions of dollars to partnerships between Chinese state-owned companies and local metal mining companies in Latin America. That has spurred a buying spree by state-owned companies and equity funds, three of which are investing exclusively in the region.
borrow money, lose friends
In this leaner, more centralized system, money flows to two kinds of borrowers: those who have a good chance of repaying (either because the project is likely to be profitable, or because the government is rich enough), or those who have any losses The money is worth the price paid for diplomatic or military benefits. Loans to friendly countries of limited geopolitical use, such as Angola and Venezuela, have dried up. But the China-Pakistan Economic Corridor, a mega-project worth $60 billion, appears to be an exception to Sinosure’s new lending rules in a country that already owes China more than 30 percent of its foreign debt. The Center for Energy and Clean Air Research, a think tank, estimates that at least four power plants in Pakistan will be abandoned if officials stick to the recently adopted climate policy.
The territory of China’s overseas finance has thus been redrawn. Bank lending to Africa has declined. Instead, they will head to closer countries, sources of fresh goods and places where Chinese companies can avoid Western trade tariffs. Malaysia and Indonesia benefit from their proximity; Latin America because of its minerals. A small but growing number of state-owned manufacturers are heading to countries that are comfortable with both Beijing and Washington, using loans from state-run banks to connect with local governments and businesses. One such arrangement is Malaysia’s Kuantan Industrial Park, whose infrastructure will cost at least $3.5 billion, financed by a joint venture between the two countries and their state-owned firms. The Middle East, where Oman and Saudi Arabia have Chinese manufacturing clusters, offers similar access to Europe.
New era, unknown. One is about the scale of investment. Money from equity funds flows through places like Hong Kong and the British Virgin Islands, making it difficult to track. While lending from state-owned banks is shrinking, lending is also accelerating. Another unknown has to do with decoupling. In the early days, China’s overwhelming ambition was to integrate into the global economy. Now it also wants to insulate itself from America’s economic war. If relations continue to deteriorate, China may step up efforts to avoid tariffs, lock in allies and protect global supply chains. A final unknown is whether such efforts will be stymied by the country’s desire for a more sustainable approach to debt. Some question whether China’s behavior has really changed. Will it get back to building and funding large-scale projects over time, in addition to various new activities?
Previously, Chinese banks had lent money to poor countries for large-scale, useless projects. But the same banks make loans for large-scale useful projects, like dams and roads, in countries that can’t borrow money from anyone else because they can’t really pay anyone back. Consulting firm Oxford Economics estimates that between now and 2040, there will be a global “infrastructure investment gap” of $15 trillion, between what economies need to build and what is actually available. With the change in approach, China seems less likely to step in, and other countries are equally keen. China’s new era of borrowing will be more centralized and better serve its own public finances. Some countries, especially in Africa, still have nostalgia for the old way of doing things. ■
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