Is Beijing really seeking to buy political influence abroad?
China has one of the biggest global development footprints in the world. The only country with bigger official international finance flows is the United States.
Still, Washington spent over four times more than Beijing on Official Development Assistance. The lion’s share of China’s official money flows falls under Other Official Finance and is mostly spent on loans for projects in infrastructure, energy, and communications.
These projects are part of the Belt and Road Initiative (BRI), China’s main vehicle for spurring development both at home and abroad. Through infrastructure investments, Beijing aims to better connect China to other parts in the world and to increase trade along the road. Five years after President Xi Jinping announced his plans for the BRI, China has spent about $25 billion on related infrastructure projects.
But to what extent do recipient countries profit from these Chinese investments? At least eight countries are at particular risk of debt distress because of project lending associated with China’s BRI, the Center for Global Development (CGD) reported in March 2018. Critics fear that China is using the loans to create dependency and gain political influence.
China’s “Debt-Trap Diplomacy”
“Some believe China engages in ‘debt-trap diplomacy’ through the BRI, ensnaring developing countries with debt dependence and then translating that dependence into geopolitical influence,” says Paul Haenle, former U.S. government adviser and director at the Carnegie-Tsinghua Center, summarizing much of the critique.
“Particular concerns around China’s actions in Sri Lanka, Pakistan, and Malaysia are central in the debt trap debates. China acquired 99 years of operating rights for the Hambantota Port in southern Sri Lanka after costs for the project spiraled out of control, forcing Colombo to give up control of the port in return for a Chinese bailout,” Haenle explains.
Finding alternatives to payment when countries cannot afford to pay back their loans is not a new practice for China. Back in 2011, China reportedly wrote off Tajikistan’s debt in exchange for 1,158 square kilometers of disputed territory, the CDG report says. But last year “the debt-trap argument gained further credence after Malaysian Prime Minister Mahathir Mohamed cancelled $23 billion in BRI projects and warned China against falling prey to ‘a new version of colonialism,’” according to Haenle.
Some Western nations were quick to play into this sentiment. Rex Tillerson, the U.S. secretary of state at the time, warned against the Chinese development approach in a speech at George Mason University in Virginia. According to Tillerson, China’s strategy “encourages dependency using opaque contracts, predatory loan practices, and corrupt deals that mire nations in debt and undercut their sovereignty, denying them long-term, self-sustainable growth.”
Frans-Paul van der Putten has been following China for 12 years now at Clingendael, a Dutch international relations think tank. He considers it unlikely that creating debt among its Belt and Road partners is a deliberate and thought-through Chinese strategy, with the intention to swap debt for resources or diplomatic support later. But Beijing isn’t doing much to prevent this from happening either. This fits China’s usual pragmatic approach, according to van der Putten: “it doesn’t really matter whether those countries can pay back later, because if they can’t, we’ll find another way to benefit.” China is not afraid to use the debts as leverage and it deals with its debtors in an ad hoc and case-by-case manner.
China Always Wins
With its idea of “win win-cooperation,” Beijing always has something to gain from its funding as well. If political leverage is merely a useful side-effect, what does China have to gain from the billions of dollars it spends on infrastructure abroad?
China’s model of development is based on trade. Better infrastructure is meant to increase trade, which spurs development. The BRI aims to connect and develop China’s western regions, but it also aims to develop other markets to its own advantage. The West has reached its growth potential and is not going to buy more from China. But Africa, with its large, young and growing population, is the continent with the real growth potential. By spurring development in African countries, China wants to develop and open up a new market on the continent.
Moreover, infrastructure development projects are “an investment in a better relationship between the Chinese government and the government of the recipient country,” van der Putten explains. “By handing out the loan, there is a diplomatic gain already, because it tightens the ties with that particular country. That is a gain for China that cannot be expressed in money.”
What can be expressed in money is the work that China provides for its own construction companies through BRI projects. Often Chinese policy banks make money available for a particular project in a recipient country on the condition that Chinese companies execute the project. “So, for a large part, the money flows from Chinese policy banks to Chinese construction companies,” van der Putten explains. “The railroad is being built, the highway is being built. Maybe it will never be used, but those construction companies reached their goal.”
Filling the Infrastructure Gap
Still, just because China benefits doesn’t automatically mean the recipient country doesn’t. Chinese infrastructure projects are filling a serious need — the Asian Development Bank estimates that Asia alone needs about $26 trillion of investment in infrastructure until 2030 in order to sustain current growth rates. According to the International Monetary Fund, a lack of adequate infrastructure is one of the single biggest hurdles for growth and development in Africa and Latin America. So, according to Haenle, the BRI’s focus on developing infrastructure could bring about “a clear ‘win-win’ situation.”
“There is nothing inherently wrong about infrastructure investment or promoting global connectivity in the developing world,” Haenle argues.
There is “a huge gap in the money that is needed for development and the money that is out there. Particularly in the infrastructure,” Marina Rudyak says. Rudyak has worked in development for years and is now finishing her Ph.D. on Chinese development cooperation at Heidelberg University in Germany. Multilateral institutions and current donors cannot fund all necessary development projects, so there is still plenty of space for China besides the traditional donors: “It is not the question of American or Chinese money, EU or Chinese money. Africa needs all of that.”
Van der Putten explains that international development banks, like the African Development Bank and the World Bank, have limited funds available. This is not enough to finance all necessary infrastructure development. Western commercial banks cannot provide risky loans anymore since the economic crisis. “China’s role is crucial here,” van der Putten says. “Not only is it an alternative source of financing, it is also a really big one.”
China’s development banks, such as the China Development Bank and the China Exim Bank, make project financing available against normal tariffs. “This is not development aid,” van der Putten emphasizes, but it has some of its characteristics. “These are risky loans to developing countries, meant to improve their infrastructure.”
The China Model of Lending
Chinese money fills a gap in international infrastructure funding. So why is it causing debt and debate? For one thing, most BRI funding is based on state-to-state structures. This can create challenges for sovereign debt, with possible implications for bilateral ties.
Usually, loans are guided by standards determined by multilateral institutions like the World Bank, the International Monetary Fund, or multilateral mechanisms like the Paris Club. But China is not a member of the Paris Club, so it doesn’t need to inform members on its credit activities and it doesn’t have to follow any standards.
“Without a guiding multilateral or other framework to define China’s approach to debt sustainability problems, we only have anecdotal evidence of ad hoc actions taken by China as the basis for characterizing the country’s policy approach,” the CDG report concludes.
Instead of universal standards, “China generally follows local laws when it lends for development projects,” Scott Morris explains. Morris is one of the authors of the CDG report on debt among BRI countries. “This can mean high standards when local laws are strong and very low standards when laws are weak.”
The difference with loans from institutions like the World Bank, is that these institutions assess local laws and will impose their own protections if local laws are too weak. China leaves this responsibility with partner-governments and “follows whatever local laws say,” Morris says.
“China is also not as sensitive to debt sustainability issues, such as that lending terms are not strictly aligned with the country’s debt risks,” he adds. To what extend recipient countries benefit from Beijing’s loans therefore strongly depends on their own standards.
Price for Beijing
The debt problems among the BRI countries also come at a price for China. Between 2000 and 2014, Beijing spent $13 billion on actions relating to debt. With debt rescheduling it mitigates risks by extending the terms on loans.
China also carries significant risk itself when lenders default on their loans, according to Morris. Although “debt is essential for infrastructure investment,” Morris says, “large amounts of debt carry significant risks and need to be carefully managed by lenders and borrowers.”
Most importantly, the international critique is also creating a “huge problem in China,” Rudyak says. “The Chinese general public is highly critical of Chinese aid and Chinese loans.” China is not getting its money back and the country is being criticized by the international community. So why, an increasing number of Chinese ask, doesn’t Beijing spend this money on the poor at home?
China and Multilateral Lending
In a multilateral context, China does work according to World Bank standards. The Asian Infrastructure Investment Bank (AIIB) “totally” fits the rules set in the Bretton Woods system, Rudyak says. “If you look at the real work they are doing, other than that it was founded or proposed by the Chinese and that it sits in Beijing, next to all other Chinese policy banks, it’s a normal, boring, multilateral bank.”
The AIIB channels a lot less money than China’s other policy banks, such as the China Development Bank or the China Exim Bank. Some critics argue that China wants to build a separate system next to the current dominant order or Bretton Woods institutions such as the World Bank and the IMF. With its own policy banks, Beijing can circumvent the current order and the standards and regulations that go hand in hand with it.
Van der Putten doesn’t think China wants to replace the World Bank. “When it comes to development funding and infrastructure funding, China just uses all means available,” he says. But Beijing can use its growing lending clout to gain more influence in the World Bank.
“It is inevitable that China will also seek to have its global stature and influence commensurate to its relative power,” Haenle says. In institutions like the World Bank, Beijing still doesn’t have the level of influence it would like to have. “Beijing is taking on greater leadership in the Bretton Woods institutions and United Nations, but also forging its own institutions that it believes are better adapted to the realities of today.”
This view is shared more and more by other world leaders as well. In calling for efforts to modernize institutions in order to reflect the current balance of power, rather than create new ones, German Chancellor Angela Merkelindirectly spoke to China. “From our part of the world, influenced by Western values, we should be ready to look at established institutions and see the balance of power realistically reflected with them,” she said at the World Economic Forum in January 2019. “We have to accept new realities and reforms, and a new approach that will address those who harbor doubts about the international system.”
By setting up new institutions, “China does not want to upend the international order, it wants to revitalize it,” Haenle believes. “I have had one Chinese friend compare Beijing’s view of the international system to that of temples. They’d like to build new temples, repair old temples, but they don’t want to knock any temples down.” It wouldn’t be logical for China to overturn the international system either, as “China has been one of the greatest beneficiaries of the global order over the past four decades.”
Intentions and Politics
The Bretton Woods institutions “are a mirror of post-1945 and the world has changed,” Rudyak says. “But now of course the problem with the reform is that many of the countries that want to have a bigger say are not liberal democracies.”
Morris and his co-authors argue that Beijing should multilateralize the BRI in order to streamline China’s increasing efforts in international development funding and minimize debt problems. “China has valued its engagement with the multilateral institutions and as a result it’s an influential relationship. I think these institutions stand the greatest chance of convincing and helping China to improve its project and lending standards,” according to Morris.
China’s recent step to open a joint Capacity Development Center with the IMF, to train experts on policy and economics so countries can better decide whether to take up loans, is therefore an encouraging move.
“The fact is that China has a lot of development knowledge to share. From going to poverty to being where China is now, is something none of us in the West did in the same way and on the same time scale,” Rudyak argues. Criticism of China is often based on its political system. This is not to say that there is nothing there to criticize about the political system, but “inside this system, there are many people who are genuinely passionate about what they do and who really want to share their knowledge with the world.”
Instead of blanket criticisms of “debt trap diplomacy,” we should better deconstruct what specific projects are going wrong or right and why. “The reason is not that simple [as saying it’s] because the Party wants it,” Rudyak says. When we only talk about the Party, “we are neglecting those who genuinely want to change something, [those] who came out of poverty and now say: I want to help others to be less poor.”