Beijing's Lending: Crucial Funding for Development or a Strategic Geopolitical Move?
The emergence of China as a global superpower has been an unprecedented expansion with the nation experiencing decades of sustained rapid economic growth as the economy transitions towards a market-based approach. As China has become a key player on the geopolitical stage they have sought to increase their influence and connections overseas with the potentially trillion-dollar investment project, the Belt and Road Initiative (BRI) being at the heart of recent plans to increase China’s global presence.
Beijing’s vision for the BRI is a plan to “construct a unified market” and “make full use of international and domestic projects”. They intend to do this through a series of infrastructure projects spanning Asia, Africa and Europe. Initially announced by president Xi Jinping in 2013 the BRI is estimated to involve over 60 countries that between them account for 30% of global GDP, 62% of the global population and 75% of all known energy supplies.
The road element of the BRI refers to the maritime ‘road’ of shipping networks connecting China, South East Asia, East Africa and Southern Europe. The belt element refers to the ‘belt’ of land-based road networks from China through Southern and Central Asia, the Middle East, Russia, Turkey and Europe.
A lot remains unknown about the true funding of the project with Beijing remaining opaque about exactly how much they are currently lending and how much they will lend in the future – estimates for the value of the project vary wildly from $1tn to $8tn. Currently it is known that $440bn of loans have been issued as part of the BRI, the key lenders being two state-backed banks - Chinese Development Bank (CDB) and the Export-Import Bank of China (EXIMBC). Between them, CDB and EXIMBC have issued $339bn of loans for approximately 2400 projects.
Africa has benefited heavily from the BRI with China pledging to assist development in the region through the project. A major development has been in Kenya which has seen the building of a $3.2bn railway connecting the port city of Mombasa to capital Nairobi, reducing the journey time by two-thirds. Alongside infrastructure advances there has been pledges to help support the stability of the continent, with Beijing promising to support Senegal with anti-terror and peacekeeping missions in order to maintain social stability as part of the BRI deal agreements.
There are however concerns amongst the international community about the BRI with some viewing it as a strategical move from Beijing to gain control over global supply chains. There have also been accusations that China have created debt-traps for other countries as they have lent heavily in financing projects that yield poor returns and thus leave the debtors in positions where they struggle to repay and are forced to hand over assets.
Hambantota Port, Sri Lanka. Source: AFP
When the Chinese Merchants Port (CMP) seized control of the Sri Lankan port in Hambantota these concerns materialised. Sri Lanka sought financing for the building of the port in 2007 and production began in 2008 following an estimated $307m loan from EXIMBC. Other creditors refused to finance the project as they didn’t believe it was economically viable and in order to obtain the loan Sri Lanka were forced to hire Chinese state-backed firms and Chinese workers for the construction of the port, hence not creating jobs for their own labour force.
However, the port failed catastrophically to attract clients, with only 34 ships using the port in 2012. This meant the investment yielded little return for the Sri Lankan government. As the port continued to struggle Sri Lanka’s debt began to mount, they were struggling to meet interest payments, let alone the scheduled repayments on the project. With the Sri Lankan government in an unsustainable level of debt – estimates at over $5bn to China across a range of projects – they were forced to relinquish control of the port as collateral on the debt in 2017. The CMP took an 85% stake in the port (leaving 15% to the Sri Lankan government) which is strategically placed on both a commercial and military waterway. As part of the deal military use by the Chinese is prohibited – but there are question over how long will this remain the case with Sri Lanka still not liberated from Chinese debt traps.
China continue to insist there is no ulterior motive to the BRI with Beijing claiming “BRI is not and never will be neo-colonialism by stealth” and more recent BRI investments have been recognised as being “far more open, green and sustainable” by HSBC. Despite this concerns in the west still persist – the development of the Hambantota port and whether it begins to see military use will serve as a good indicator as to whether these concerns are justified.
The BRI is far from the only investment project China is running with billions being lent globally in recent years. China is estimated to have invested $305bn in projects in Sub-Saharan Africa between 2005-2019. This has led to China being the largest foreign investor for many nations in the region and whilst this has assisted Africa in becoming the fastest urbanising region on the planet there are fears of overreliance on Chinese funds.
China has been willing to lend to nations that have traditionally struggled to access loan markets, some argue this is due to Chinese firms being more willing to engage in corruption and their more relaxed approach regarding environmental and labour standards. The main reason however is likely Beijing’s desire to obtain access to the natural resources available in Africa. Some major projects have seen resource access as a condition of the loan or in some cases as collateral. For example, a deal for China to finance a $2bn rail-road bridge in Ghana also included the condition of access to 5% of Ghana’s bauxite (a source of aluminium) reserves. The strategy has also been employed in Guinea where $20bn of loans from China will grant them access to bauxite reserves.
Bel Air bauxite mine, Guinea. Source: Alufer Mining
Resource-backed loans (RBL) have been a key technique in Chinese lending, they are loans that are collateralised by natural resources and are generally only taken by nations who are deemed high-risk and have struggled to raise debt through conventional methods in the international markets. However, whilst the loans have enabled African nations to access finance and pursue various projects they would’ve been unable to it has led to them taking on high levels of debt and due to variations in commodity prices risking collateral worth far more than the loan itself. It is estimated that $66bn worth of RBL have been issued in Sub-Saharan Africa since 2004, with 53% of these coming from CDB and EXIMBC.
The spread of COVID-19 could have a devastating impact on the financial situations of many of China’s debtors, particularly African nations who have drawn of significant levels of debt. The crisis has caused collapses in prices of commodities such as oil and copper – these commodities are primary sources of revenue for many of China’s debtors. In order to address this the IMF and World Bank have called for debt moratoriums for the poorest countries – and this has been agreed on by the G20 (which includes China) meaning that loan servicing payments for the poorest countries have been frozen until the end of year.
Without this aid the timeline of defaults would have rapidly accelerated in the region forcing a number of African nations to restructure their debts and giving Beijing have the option restructure these loans to their advantage and gain significant control over state-owned assets. Many in the west fear this ‘debtbook diplomacy’ approach from Beijing in which they use strategic loans to gain political leverage and control of resources in debtor nations. And although this issue has been addressed in the short-term debt traps will persist as the world moves out of the crisis.
Chinese investment initiatives have improved infrastructure and development throughout Africa, however they themselves have benefitted heavily from the projects with improved trade routes and influence in the region. Whilst there are fears over the RBL issued and the ability they give China to seize control of vast natural resources they have provided funds for nations who had previously struggled to access capital which has aided crucial development in Sub-Saharan Africa. China’s lending has allowed for dramatic improvement in infrastructure, however, there appears a strategic element to the projects as Beijing continues to grow its influence over the region.