New Delhi: China, often accused of debt-trap diplomacy through its overseas lending programmes, has shifted its focus from lending for big ticket infrastructure projects in low- and middle-income countries to bailing out distressed economies. Beijing has focussed on establishing robust guardrails to ensure that the largest borrowers are able to pay debts owed to Chinese institutions as a part of its evolution of the Belt and Road Initiative (BRI).
China has lent $1.34 trillion to 165 low- and middle-income countries between 2000 and 2021 across 20,985 projects, a report by AidData published 6 November found. AidData, a research lab at the college of William and Mary in the US, has built a granular data set of international development finance from China.
As a result of its lending policies, total outstanding debt owed to Beijing by these countries is at least $1.1 trillion and could go as high as $1.5 trillion — this amount includes principal but excludes interest — AidData has found.
At least 80 percent of China’s lending portfolio to the developing world is currently supporting economies in financial distress. President Xi Jinping’s BRI — touted as the “project of the century” — envisages new trade routes connecting Beijing with the rest of the world and included the construction of ports, airports, roads, railways, hydroelectric power projects and other infrastructure.
Launched in 2013, the BRI has gone through two distinct phases — BRI 1.0 from 2014-2017 and BRI 2.0 from 2018-2021 — according to the report by AidData. During BRI 1.0, China lent heavily to infrastructure projects. As early as October 2016, it says, there was a major rethink within the Chinese polity. Signalling a change in its approach to the BRI lending, an official of the country’s National Development and Reform Commission said to a London-based newspaper, “these days we need viable projects and a good return. We don’t want to back losers”.
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BRI 2.0 & G7 competition
In April 2019, Xi announced BRI 2.0 at the second BRI forum for international cooperation, stating that it would be “open, green and clean”.
Between 2014 and 2021, Beijing has outspent its closest competitor for international aid — Washington D.C. — 2:1. It spent $680 billion in comparison to the US’ $319 billion, the AidData report says.
However, the G7 countries have attempted to compete with China in recent years, with the announcement of financing for economic corridors such as the India-Middle East-Europe Economic Corridor (IMEEC) and the Lobito Corridor in Africa. The US Monday announced $125 million for the modernisation of the Elefsina shipyard in Greece via its International Development Finance Corporation (DFC).
The DFC announced Wednesday a $553 million investment in the expansion of the Port of Colombo in Sri Lanka, a project led by the Indian conglomerate Adani Ports and Special Economic Zones Limited (APSEZ).
“The investment further demonstrates the United States’ enduring commitment to Sri Lanka’s economic growth and its regional economic integration, including with India,” said the US Embassy in Colombo in a statement, highlighting the efforts of the US’ increasing overseas investments in projects. Interestingly enough, Sri Lanka is also home to Hambantota Port, a project that a Chinese company owns a 99-year lease on.
Reputational, repayment risks
While China has been able to build clout and soft power through the BRI, especially as it promotes it as a South-South cooperation instrument, Beijing’s reputation has plummeted from 56 percent in 2019 to 40 percent in 2021 in the low- and middle-income countries, according to the report.
It also faces the risk of repayment of its loans, with the report noting that, “Beijing is navigating an unfamiliar and uncomfortable role—as the world’s largest official debt collector.” 55 percent of its loans to low- and middle-income countries have entered its principal repayment periods and this will increase to 75 percent by 2030, AidData has found. This has led to China fundamentally altering the composition of its overseas lending portfolio.
It has begun ramping up renminbi yuan (RMB) denominated emergency rescue lending to financially distressed borrowers, while ramping down USD denominated infrastructure project lending.
It has stopped lending via its state-owned policy banks (Export-Import Bank and China Development Bank) and increased lending via state-owned commercial banks such as the Industrial and Commercial Bank of China and the Bank of China, while also increasing penalty rates for late repayments from 3 percent to 8.7 percent.
One of the key changes, however, is the collateralisation of loans. In 2000, only 19 percent of Chinese development funding was collateralised, while the figure now stands at 72 percent, the report notes.
Cash collateral & lending safeguards
The most significant safeguard China has introduced is cash collateral — the creation of escrow accounts with an agreed minimum balance in foreign currencies. An escrow account is a type of a contractual agreement that allows the creation of an account held by a third party that disburses money based on conditions agreed by the contracting parties.
For example, the report notes, Angola, a country that has received $42.6 billion in loans from China — a quarter of all Chinese lending in Africa — has set up an escrow account containing $1.5 billion in cash at all times. In the event that Angola misses repayments, Beijing is allowed to unilaterally debit money from the escrow account.
But there’s another method by which China ensures repayments through the escrow accounts — it creates a revenue account where all project revenues in the borrowing country are deposited into, which then replenishes the escrow account automatically, AidData notes.
As ThePrint reported earlier, China attempted to create such an account in Nepal, where revenues from all airports in Nepal, not just Pokhara — which was built through Chinese financing — would be deposited into. These revenues would then replenish the escrow account, ensuring repayments to Chinese lending institutions, regardless of the economic conditions of the borrowing country, Nepal in this case.
(Edited by Smriti Sinha)
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