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China hands out at least twice as much development money as the US and other major powers, new evidence shows, with most of it coming in the form of risky high-interest loans from Chinese state banks.
The sheer amount of Chinese lending is startling. Not too long ago China received foreign aid, but now the tables have turned.
Over an 18-year period, China has granted or loaned money to 13, 427 infrastructure projects worth $843bn across 165 countries, according to the AidData research lab at William & Mary, a university in the US state of Virginia.
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Much of this money is linked to Chinese President Xi Jinping's ambitious Belt and Road strategy. Starting in 2013, it leverages China's expertise in infrastructure projects, and ample foreign currency, to build new global trading routes.
And that's news even to Chinese officials themselves. The AidData researchers - who have spent four years tracing all of China's global lending and spending - say that Chinese government ministries are regularly going to them for information on how Chinese money is being used overseas.
We hear from public officials in China all the time, saying 'Look, you're in the only game in town', explains Brad Parks, executive director of AidData. They say: 'We can't get our hands on this data internally'.
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A twisting railway running between China and the neighbouring country of Laos is often touted as a prime example of China's off-the-books lending.
However, engineers warned the cost would be prohibitive: tracks would need to run through steep mountains, requiring dozens of bridges and tunnels. Laos is one of the poorest countries in the region and couldn't afford even a fraction of the cost.
Enter China's ambitious bankers: with backing from a group of Chinese state companies and a consortium of Chinese state lenders, the $5.9bn railway is set to begin operations in December.
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However, Laos had to take out a $480m loan with a Chinese bank to fund its small part of the equity. One of Laos' few sources of profit, the proceeds of its potash mines, were used to back the massive loan.
The loan that China's Eximbank made to cover part of the equity really showcases the urgency of the Chinese state to push through the project, explains Wanjing Kelly Chen, research assistant professor at the Hong Kong University of Science and Technology.
Most of the line is owned by the Chinese-dominated railway group, but under the murky terms of the deal, the Laotian government is ultimately responsible for the railway's debt. The imbalanced deal has led international creditors to downgrade Laos' credit rating to junk status.
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In September 2020, on the brink of bankruptcy, Laos sold a major asset to China, handing over part of its energy grid for $600m in order to seek debt relief from Chinese creditors. And this is all before the railway has even begun operations.
The Laos railway is far from the only risky project that Chinese state banks have funded - and yet, AidData says China remains the financier of first resort for many low and middle income countries.
In an average year, China's international development finance commitments amount to about $85bn. And by comparison, the US is spending about $37bn in any given year to support global development activities, says Brad Parks.
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China has vastly outpaced all other countries in development financing, but the way in which Beijing has reached that level is extraordinary, AidData says.
In the past, Western countries were guilty of dragging African countries in particular into debt. China is lending differently: instead of financing projects by granting or loaning money from one state to another, almost all the money it's handing out is in the form of state banking loans.
Such loans don't show up in official accounts of government debt. That's because central government institutions aren't named in a lot of the deals struck by Chinese state banks, keeping such deals off government balance sheets and hidden by confidentiality clauses that can prevent governments from knowing exactly what has been agreed behind closed doors.
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Many Chinese state developments loans also demand unusual forms of collateral. Increasingly, Chinese loans appear to require borrowers to promise hard cash earned from selling natural resources.
A deal with Venezuela, for example, demands the Venezuelan borrower deposit the foreign currency earned by selling oil directly into a bank account controlled by China. If a debt payment is missed, the Chinese lender can immediately withdraw the cash waiting in the account.
It really seems like kind of a bread-and-butter strategy they use to signal to their borrower that 'We're the big boss around here', Brad Parks explains. Their message is: 'You're going to repay us before anyone else because we're the only ones asking for this prized possession'.
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[That is] income for these very poor countries, dollars and euros, to lock those up in an offshore account that's controlled by a foreign power.
Is China being smart? wonders Anna Gelpern, a Georgetown law professor who was involved in an AidData study earlier this year examining Chinese development loan contracts. I think our conclusion is that they were being muscular and sophisticated in these contracts. They're very much protecting their interests.
Countries can be difficult borrowers, Gelpern explains, and it's not practical to expect them to hand over a physical asset like a port if they're unable to pay their debts.
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China might soon face some international lending competition. At a G7 meeting in June, the US and its allies announced the G7 adopts spending plan to rival China's influence, which promises to fund global infrastructure projects that are financially and environmentally sustainable.
I'm sceptical that Western initiatives will make much of a dent in the Chinese programme, says David Dollar, senior fellow at the Brookings Institution and the former US Treasury representative in China.
[Those new initiatives] will not have enough real money to address the scale of infrastructure needs in the developing world. Also, working with Western official financiers is bureaucratic and subject to long delays.
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The AidData researchers found that the Belt and Road project is facing its own issues. BRI projects were more likely to be associated with corruption, labour scandals or environmental issues than other Chinese development deals.A 1999 survey of more than 600 private Chinese enterprises revealed that they relied primarily on self-financing. For China's private sector to thrive, firms will need increased access to external loan and equity financing.
China's economy has undergone a fundamental change over the past decade, from complete reliance on state-owned and collective enterprises to a mixed economy where private enterprises play a strong role. By 1998, the domestic private sector had grown to about 27 percent of GDP, making it second only to the state sector in economic importance. (The other sectors are the foreign, collective, and agriculture sectors.) Despite its growing importance, at the end of 1999, the private sector accounted for only 1 percent of bank lending, and only 1 percent of the companies listed on the Shanghai and Shenzhen stock exchanges were nonstate firms. The discrepancy between the dynamism of the private sector and its limited use of intermediated financing suggests that the private sector may not be able to sustain its current rate of growth unless it can increase its access to financing.
A survey of private firms in Beijing, Chengdu, Shunde (Guangdong), and Wenzhou (Zhejang), conducted in 1999 by the International Finance Corporation (IFC), the private sector arm of the World Bank Group, revealed that about 80 percent considered their lack of access to finance to be a serious constraint. They relied heavily on self-financing for both start-up and expansion. More than 90 percent of their initial capital came from the principal owners, the start-up teams, and their families (see table). In the case of post-start-up investments, the sample firms continued to depend overwhelmingly on internal sources (Chart 1), with at least 62 percent of their financing coming from the principal owners or out of retained earnings. Among external funding sources, informal channels, credit unions, and commercial banks were about equally represented. Outside equity, including public equity, and public debt markets played an insignificant role.
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Source: Neil Gregory, Stoyan Tenev, and Dileep M. Wagle, 2000, China's Emerging Private Enterprises: Prospects for the New Century (Washington: International Finance Corporation).
The relative importance of different sources of financing among surveyed firms depends on firm size. Internal sources tend to become less important as firms grow larger. External sources for the smallest firms are mainly informal channels, but their share tends to decrease as firms grow bigger, while the share of commercial bank loans increases with firm size. Commercial banks are the second most important source of funds for the largest firms, after retained earnings. This seems to indicate that banks provide more support for larger and relatively successful private firms. But, on average, Chinese banks tend to play a relatively small role in financing private firms. Only 29 percent of surveyed firms had secured loans in the previous five years.
Chinese firms rely more on internal sources of financing than do firms in transition and developed economies. A recent World Bank survey on the business environment in transition