China lends billions to countries in financial trouble

After lending $1.3 trillion to developing countries, mainly for major infrastructure projects, China has shifted its focus to bailing out many of those same countries from piles of debt.

The initial loans were largely part of the Belt and Road Initiative, which Xi Jinping, China’s top leader, launched in 2013 to build stronger transportation, communications and political ties in more than 150 countries.

But now the two main Chinese state-owned banks that provided the most infrastructure loans have reduced their new lending. According to a new report from China, bailout loans rose to 58 percent of China’s lending to low- and middle-income countries in 2021 from 5 percent in 2013. Auxiliary dataa research institute at William and Mary, a university in Williamsburg, Virginia, that collects extensive information on Chinese development finance.

“Beijing fills an unknown and uncomfortable role as the world’s largest official debt collector,” the institute wrote.

While the Belt and Road Initiative gained geopolitical influence for Beijing and helped finance economically useful projects, Chinese loans were also used to build expensive projects that have failed to stimulate economic growth and saddled countries with debt they can now no longer repay.

A large portion of Beijing’s recent borrowing has been loans from China’s central bank to the central banks of countries that have taken out Belt and Road Initiative loans. Another large and growing share comes from state-controlled Chinese commercial banks, which partner with groups of Western banks.

Unpaid debts to China are part of the billions that developing countries owe to other countries, to the International Monetary Fund and to private lenders. Unsustainable debt has long been a problem for poorer countries. But recent economic shocks caused by the Covid pandemic and a global surge in energy and food prices due to Russia’s invasion of Ukraine have made the current cycle particularly acute.

China is shifting the focus of its lending as the United States seeks to emulate China’s previous success in building strong ties with developing countries.

The United States International Development Finance Corporation, created by the Trump administration and Congress in response to the Belt and Road Initiative, plans to announce this week a $125 million loan for the modernization of shipyards in Greece and up to $553 million loans for port expansion in Sri Lanka. Lanka, said U.S. officials with detailed knowledge of the plans, who were not authorized to speak publicly about the loans before they were announced.

China’s early, rapid expansion of the Belt and Road Initiative alarmed U.S. officials, who saw the program would erode U.S. influence. The Trump administration and Congress in 2018 merged and expanded two agencies to create the Development Finance Agency. The agency provided $9.3 billion in project financing in the 12 months ended September 30, up from $7.4 billion the year before.

Between 2014 and 2017, AidData found, China provided nearly three times as much development financing as the United States. But in 2021, China had spent only 30 percent more than the United States.

Sri Lanka was the site of one of China’s most politically charged infrastructure projects: the construction of a $1.1 billion port in Hambantota, a city about 210 kilometers southeast of Colombo that was the political base of Mahinda Rajapaksa, then president of Sri Lanka. The port attracted little traffic. When the project defaulted on its debts, Chinese entities were granted a 99-year lease for the port and 15,000 hectares of land surrounding it. (The U.S. loan of up to $553 million would go toward expanding the busy port in Colombo, Sri Lanka’s capital and main city.)

Much of the work for the Belt and Road Initiative has been done by Chinese construction and engineering companies, which have sent thousands of engineers, heavy equipment operators and other specialists across Asia, Africa, Latin America, Eastern Europe and the Pacific .

AidData calculated that China had lent $1.3 trillion since 2000, almost all of it to Belt and Road Initiative countries.

China provided the money almost entirely in the form of loans rather than grants, and the loans generally had adjustable interest rates. As global interest rates have soared over the past two years, poor countries owe much higher payments to Beijing than they expected.

Chinese lenders and contractors were able to build projects quickly because the Chinese government rarely needed extensive environmental studies, financial viability assessments, or controls on the displacement of local populations forced to give up land. National governments of developing countries had to guarantee the repayment of loans to their local and provincial governments.

In the early years, 65 percent of loans were made by Chinese state-owned banks, mainly the China Development Bank and the Export-Import Bank of China, AidData found. But because they were faced with many problem loans, they cut back, and in 2021 those loans represented less than a quarter of lending.

Chinese commercial banks that are listed on the stock exchange but in which the government still has a majority stake, now represent a quarter of lending. But they mainly provide loans to developing countries through Western banks that apply stricter credit conditions.

Chinese officials defend their current lending policies toward developing countries as sensible, while avoiding direct discussions about past loans.

“Development must be ensured with protection against risks,” Guo Lei, the vice president of global finance at the China Development Bank, said at the International Finance Forum in Guangzhou, China, in late October.

Emergency loans from China, mostly from China’s central bank, are going mainly to countries struggling to repay previous loans from financial institutions in Beijing, said Bradley Parks, executive director of AidData.

The institute’s new report shows that the average Chinese bailout loan package in recent years to countries already heavily indebted to China was $965 million. By comparison, countries that didn’t owe much to Chinese creditors received an average of $26 million in bailout loans, AidData found.

The International Monetary Fund is providing more bailout loans each year than China, though the gap is narrowing. Beijing is increasingly at odds with the IMF and other creditors over who will accept losses in easing debt pressure on developing countries.

Reza Baqir, a former IMF official who became governor of Pakistan’s central bank until 2022, said at the forum in Guangzhou that China’s bailouts should not be seen as competition for the IMF.

“I see it very much as complementary, and not as a trade-off between going to the IMF,” he said.