China has transitioned from offering loans for infrastructure like highways and bridges to offering emergency rescue assistance to previous debtors.
A construction venture in Colombo, Sri Lanka, during 2018, financed with funds from China.
A light rail project in Lagos, Nigeria, initiated in 2015, was a component of China’s Belt and Road initiative, aimed at strengthening connections with emerging nations.
ALSO READ : –Biden Unveils Fresh Investments in Passenger Rail Projects.
After disbursing $1.3 trillion in loans to developing nations, primarily for major infrastructure ventures, China has altered its focus to help these same countries cope with mounting debt burdens.
The initial loans were predominantly associated with the Belt and Road Initiative, launched by China’s top leader, Xi Jinping, in 2013, aimed at establishing robust transportation, communication, and political ties across over 150 countries.
However, the two principal Chinese state banks responsible for the majority of infrastructure financing have decreased their new loan disbursements. As per a recent report from AidData, a research institute at William and Mary University in Williamsburg, Virginia, which compiles comprehensive data on Chinese development funding, rescue loans constituted 58% of China’s lending to low- and middle-income nations in 2021, compared to 5% in 2013.
The institute stated, “Beijing is assuming an unfamiliar and uncomfortable role — as the world’s largest official debt collector.”
While the Belt and Road Initiative elevated Beijing’s geopolitical influence and supported economically beneficial projects, Chinese loans were also utilized for expensive initiatives that failed to stimulate economic growth and left countries burdened with unmanageable debt.
Most of China’s recent lending involves loans from China’s central bank to the central banks of nations that previously acquired Belt and Road Initiative loans. Another substantial and expanding portion comes from state-controlled Chinese commercial banks, collaborating with Western banking groups.
Outstanding debts owed to China are part of the billions owed by developing nations to various nations, the International Monetary Fund, and private creditors. Unsustainable debt has long been a pressing issue for poorer countries, but recent economic disruptions caused by the COVID-19 pandemic and surges in global energy and food prices due to the Russian invasion of Ukraine have exacerbated the current debt crisis.
China is adjusting its lending focus as the United States aims to emulate China’s early success in establishing strong connections with developing nations.
The United States International Development Finance Corporation, established in response to China’s Belt and Road Initiative, is set to announce a $125 million loan for shipyard modernization in Greece and up to $553 million in loans for port expansion in Sri Lanka this week, according to knowledgeable American officials who cannot speak publicly about the loans before they are officially unveiled.
China’s rapid expansion of the Belt and Road Initiative initially raised concerns among U.S. officials, who saw it as diminishing American influence. In 2018, the Trump administration and Congress combined and expanded two agencies to create the development finance corporation. The agency provided $9.3 billion in project financing in the 12 months ending on September 30, up from $7.4 billion the previous year.
Between 2014 and 2017, AidData found that China was providing nearly three times as much development financing as the United States. However, by 2021, China was outspending the United States by only 30 percent.
One of the most politically charged Chinese infrastructure projects was in Sri Lanka, where a $1.1 billion port was constructed in Hambantota, the political base of then-Sri Lankan President Mahinda Rajapaksa. The port saw limited traffic, leading to Chinese entities obtaining a 99-year lease for the port and 15,000 acres of surrounding land. (The American loan of up to $553 million is for the expansion of the busy port in Colombo, Sri Lanka’s capital.)
A significant portion of Belt and Road Initiative work has been carried out by Chinese construction and engineering companies, which deployed thousands of engineers, heavy equipment operators, and specialists across various regions.
According to AidData, China has lent $1.3 trillion since 2000, primarily in the form of loans, not grants, and with adjustable interest rates. With global interest rates rising in recent years, poorer countries found themselves facing higher payments to Beijing than anticipated.
Chinese lenders and contractors were able to expedite projects because China’s government rarely required extensive environmental studies, financial viability assessments, or checks on the displacement of local populations who had to give up their land. Developing countries’ national governments were required to guarantee repayment of loans made to local and provincial governments.
Initially, 65 percent of the loans came from China’s state-owned policy banks, such as the China Development Bank and the Export-Import Bank of China, but they reduced their lending due to problem loans. By 2021, these loans accounted for less than a quarter of lending.
Another quarter of lending comes from Chinese commercial banks with government-controlled majority stakes, mainly through Western banks with stricter lending standards when dealing with developing countries.
Chinese officials defend their current lending policies as prudent but avoid discussing previous loans directly. They emphasize the need to safeguard development with risk protection.
Emergency rescue loans from China, primarily from China’s central bank, mainly go to countries struggling to repay previous loans from Beijing financial institutions, according to Bradley Parks, the executive director of AidData. The report found that China’s average rescue loan package to heavily indebted countries was $965 million, while countries with less debt to Chinese creditors received an average rescue loan of $26 million.
The International Monetary Fund provides more rescue loans annually than China, although the gap has been narrowing. China increasingly finds itself in disagreement with the IMF and other creditors regarding who should absorb losses when alleviating debt pressure on developing countries.
Reza Baqir, a former IMF official who served as the governor of Pakistan’s central bank until 2022, stated that China’s financial rescues should not be viewed as competition for the IMF.
“Exciting news! Nyreadtime is now on twitter Channels 🚀 Subscribe today by clicking the link and stay updated with the latest news insights!” Click here!