Several reports published over the past two weeks shine a light on China’s lending practices abroad, in the context of an ongoing international debt crisis along parts of the BRI. The reports trace the evolution of BRI loans and debt-relief negotiations, and paint a picture of how China is adapting to a new chapter in its financial relationships with overseas partners.

This week, the China-Africa Research Initiative at Johns Hopkins University released a report assessing China’s participation in the G20’s Debt Service Suspension Initiative (DSSI), a multilateral debt-relief mechanism created to help the world’s poorest countries weather the pandemic. The authors of the report, Deborah Brautigam and Yufan Huang, explained that the DSSI offered a unique pathway for China to work with the Paris Club in providing debt relief, and that China’s participation improved the DSSI’s performance:

China fulfilled its role fairly well as a responsible G20 stakeholder implementing the DSSI in the challenging circumstances of the COVID-19 pandemic. In the 46 countries that participated in the DSSI, Chinese creditors accounted for 30 percent of all claims, and contributed 63 percent of debt service suspensions. The perception that other creditors – private and multilateral banks — were free-riding on Chinese suspensions reinforced Chinese banks’ later resistance to providing debt reductions in the Common Framework. On the other hand, Chinese disbursements dropped significantly in countries requesting DSSI relief, but remained steady for other creditors. The terms of the moratorium did not include instructions on how creditors should act in a situation that closely resembled a default. [Source]

The debate around China’s provision of debt relief has continued into the G20’s Common Framework, the successor to the DSSI, where negotiations have stalled. China has been sparring with Western-led multilateral development banks (MDBs) over who should take write-downs on their loans in the process of restructuring debt for countries in fiscal peril. China’s position as the largest state creditor to half of the 38 countries that the World Bank considers at risk of default makes Chinese cooperation essential, but geopolitical rivalries have made compromise difficult. The longer the deadlock lasts, the larger the challenges for both debtors and creditors.

A current snapshot of China’s international lending looks very different from the early years of the BRI. A new report from Aid Data, a research lab at William and Mary College in the U.S., shows that China has dispersed hundreds of billions of dollars worth of bailouts to BRI countries struggling to pay back earlier loans, making China a “lender of last resort.” Jason Douglas from The Wall Street Journal summarized this change and noted that China’s bailouts equaled about one quarter of all financing pledged under the BRI:

The financial assistance, which the authors describe as “bailouts along the Belt and Road,” have steadily grown in recent years as debt problems in low- and middle-income countries have gotten worse. China’s emergency support for borrowers reached $40 billion in 2021—up 32% from 2020 and more than 40 times the amount of similar aid extended in 2011. 

[…] In 2011, China extended $1 billion in rescue financing in the form of loans, loan rollovers and swap agreements, rising to $9 billion by 2014. By 2020, it was $30.7 billion. In all, China extended some $232 billion in emergency help in the 10 years through 2021, the authors found, with $172 billion of that total through People’s Bank of China swap lines and another $60 billion in rescue loans and loan rollovers from Chinese banks. 

The bailouts are equivalent to around a quarter of the roughly $1 trillion of infrastructure financing pledged under the Belt and Road program, and a fifth of the sums the International Monetary Fund lent to troubled countries during the same 10-year period through 2021. [Source]

Those indebted to China are low- and middle-income countries across the globe. Pakistan, Angola, Ethiopia, and Kenya are some of the countries with the largest debts to China. Some BRI countries such as Zambia, Ghana, and Sri Lanka have defaulted on their debt, although each owes varying amounts to China.

Commenting on Aid Data’s report, CNN’s Jessie Yeung described some of the key differences between Chinese and Western lending practices:

For one, China’s loans are far more secretive, with most of its operations and transactions concealed from public view. It reflects the world’s financial system becoming “less institutionalized, less transparent, and more piecemeal,” the study said.

China’s central bank also doesn’t disclose data on loans or currency swap agreements with other foreign central banks; China’s state-owned banks and enterprises do not publish detailed information about their lending to other countries.

[…] China’s bailouts don’t come cheap. The PBOC requires an interest rate of 5%, compared to 2% for IMF rescue loans, the study said. [Source]

Some analysts see China’s new position as a lose-lose tradeoff. “You make friends when you provide loans. You don’t make friends when you insist on full payment, when conditions have changed and full payment is nearly impossible,” Council on Foreign Relations fellow Brad Setser told Foreign Policy, adding, “China has put itself in a difficult position because the financial interests of its key policy banks really do now trade off against its diplomatic interests.” However, China-Global South Project’s Cobus van Staden noted that this dynamic is not entirely negative for China, whose willingness to issue emergency financing may be an “acknowledgement that the belt and road initiative is as much about relationship-building as it is about infrastructure…This lending will cement these relationships and make China even more central to [developing countries’] future economic trajectories.”

With this new phase of China’s international lending, the BRI is taking a new form. Christoph Nedopil Wang, the founding director of the Green Finance & Development Center and associate professor at Fudan University, wrote for Panda Paw Dragon Claw about the BRI’s key takeaways from 2022 and projects for 2023:

For 2023, with China’s COVID-related lockdowns fully lifted, an acceleration of BRI investments and construction contracts seems possible. Chinese developers can again travel to negotiate, plan and implement new projects. There is also a clear need for investments to boost growth in the post-COVID19 world supported by global financial institutions, including developing finance institutions (such as the World Bank, Asian Development Bank, AIIB), from which Chinese contractors can benefit.

We do not expect Chinese BRI engagement to reach levels as in 2018-2019, however. This is also a recognition of the Chinese Ministry of Commerce (MOFCOM), which put a break on fast overseas expansion in its 14th Five-Year Plan (FYP) for 2021 to 2025: it plans for China to invest USD550 billion (that includes non-BRI countries), down 25% from USD740 billion in the 2016-2020 period.

This does not necessarily mean that the deal number is decreasing. As we have been seeing in 2021 and early 2022, many smaller projects have been financed even in more difficult economic circumstances.

Two types of large projects will continue to attract Chinese engagement: strategic engagements (such as in strategic transport infrastructure in the region), and resource-backed deals (such as in mining, oil, gas). [Source]

Local actors along the BRI can chart a sustainable path forwards. W. Gyude Moore argued in his Africa Project blog that African voices such as the African Union can play an important role in establishing a middle ground on the debt-restructuring debate between China and the Western MBDs, using a targeted approach to loan write-downs. As for future Chinese financing of BRI projects, greater collaboration with local actors appears to enhance infrastructure-project success and achieve more sustainable performance, according to a report published this week by Boston University’s Global Development Policy Center. The authors Yangsiyu Lu, Cecilia Springer, and Bjarne Steffen found a positive link between cofinancing and project outcomes in Chinese development finance:

Cofinancing correlates with higher infrastructure project completion rates, as cofinanced projects are 3.3-7.0 percentage points less likely to be canceled or suspended than non-cofinanced ones. 

Cofinancing with certain partners suggests specific benefits: 

• Cofinancing with partners from the host country is associated with more localized implementation.
• Cofinancing with international partners has demonstrated improved environmental performance, with a 2.7 percent lower CO2 emissions intensity power generation units and lower biodiversity risk. [Source]