Financier of first resort: China’s bid to be lender of choice for the developing world
In a new book published today, we examine how Beijing proactively seeks investment opportunities for its excess capital overseas to advance its national interests.
During his 2019 State of the Union address President Trump cited the ongoing trade war between the US and China. Yet, a more enduring challenge for US leadership may not be the terms of bilateral trade agreements with China, but rather the USD $3 trillion in foreign currency reserves that Beijing is using to bankroll development in other countries—including its signature Belt and Road Initiative (BRI). In a new book published today by the National Bureau of Asian Research, Strategic Asia 2019: China’s Expanding Strategic Ambitions, we examine how Beijing since 1999 has proactively sought investment opportunities for its excess capital overseas to advance its national interests.
In our chapter, we specifically look at how China uses official finance—a basket of grants, concessional loans, non-concessional lending, and equity investments all directed by the Chinese government—to win friends and allies around the world. Here, we share a few insights from that broader work to answer key questions, namely: What is Beijing trying to achieve? How are these overtures are perceived in recipient countries? And what does the future hold in the Belt and Road era?
What is Beijing trying to achieve with its official finance?
China often bundles different financial instruments together when negotiating an assistance package with its partner countries, from grants and low-interest loans to export credits and loans at competitive market rates. But Beijing’s ability to achieve its objectives depends on the extent to which it can effectively convert official finance (regardless of the terms) into greater influence.
Let’s examine what this looks like in practice in one geographic region, the East Asia and Pacific (EAP). Between 2000 and 2016, China directed $48 billion of its official finance towards 25 EAP countries—95% of which was squarely focused on the infrastructure sector. There was a huge spike in official finance in 2016, which coincides with the implementation of BRI.
Beijing awarded a greater share of its official finance to countries that were large markets for Chinese imports, such as the fast-growing and populous economies of Southeast Asia, which claimed a whopping 89% of these outlays between 2000 and 2016. Meanwhile, countries that were less willing to vote with China in the UN General Assembly tended to attract less official financing. In other words, Beijing maximizes the returns from its official finance through doubling down in countries that offer high-value market opportunities and those that reliably vote with China in international organizations.
How is Chinese official finance perceived?
Do countries that receive a greater share of this largesse perceive China more favorably? Generally, that seems to be the case. Respondents to the Asian Barometer, a public opinion survey, from countries that received a higher amount of Chinese official finance between 2000 and 2016 were more likely to say that Beijing had: the most influence in the region, a net positive influence in their country, and a development model to which they aspire.
Nonetheless, there were notable exceptions. Fewer than 30% of citizens in Mongolia and the Philippines viewed China’s influence as a positive trend, despite these countries receiving moderately large infusions of official finance: an estimated $2.3 and $1.1 billion, respectively. In Myanmar, citizens rated China as highly influential, but did not see this as a net positive for their country despite sizable contributions from Beijing ($1.9 billion). Conversely, Thailand received relatively little in official finance commitments ($14.4 million) and yet 93% of Thai citizens surveyed consider China’s influence to be a net positive.
Public perceptions are important to China’s desire to bolster its reputation and may ultimately shape government policy if these attitudes persist. But when it comes to winning economic and security concessions, policymakers in recipient country governments are the real gatekeepers. So, in the face of Beijing’s checkbook diplomacy, do these leaders compartmentalize and trade concessions on more distant concerns in exchange for proximate financial rewards? There is some truth to this popular narrative. Leaders were more likely to vote with Beijing in the UN General Assembly when they were from countries that received a greater share of concessional lending from China and financing for infrastructure projects that were less visible to the public, ostensibly the pet projects of leaders. Drawing on in-depth interviews with 76 policymakers in three countries, we saw similar patterns and elicited specific examples of the types of concessions Beijing has been able to extract.
What does the future hold for Chinese official finance in the BRI era?
There is good reason to believe that China has the means and political will to continue its present course to become the lender of choice for the developing world. This trajectory could be problematic for other foreign powers, as they may find it increasingly difficult to sway foreign leaders and publics that are beholden to Beijing. Nonetheless, China’s ability to convert official finance into economic, security and reputational gains is neither straightforward, nor permanent. Electoral cycles and government turnover can bring about decisive and rapid changes in Beijing’s access to leaders. China must overcome long-standing skepticism and distrust among publics in some countries. Meanwhile, China’s outsized influence with leaders from infrastructure-hungry economies is at least partly driven by the relative absence of alternative capital sources, which makes its influence conditional, rather than deterministic.
On the other hand, Beijing may be experiencing a catch-22 when it comes to the future of BRI and its overseas official finance more generally. To quell growing discontent and accommodate slowing growth, China must demonstrate that investing foreign currency reserves abroad delivers tangible benefits at home: jobs for its citizens, financing for public services, and progress on issues of national pride. These domestic dynamics could incentivize the Chinese government to push countries to borrow more from Beijing at closer to market rates. But if Chinese leaders succumb to pressures at home, this could put Beijing at a distinct disadvantage abroad with foreign publics that are becoming increasingly vocal about the dangers of indebtedness to China and will argue for better terms.