China’s ‘chequebook diplomacy’ at a crossroads

Having grown into the world’s largest trading nation and fastest-growing foreign investor since President Xi Jinping came to power in 2012, China also became the world’s largest lender in 2017. The country has surpassed both the World Bank and the International Monetary Fund. But what makes the prognosis on China’s lending pregnant with system-shaking possibilities is not its quantity or global reach. Instead, it is the rapid transformation in its sourcing and substance, as well as the spatial distribution of its surplus finance, suspected of defying well-established global norms and conventions.

The first such anomaly is the persistent opacity of its transactions. China does not publicly share the details of its lending. At the recipients’ end too, they remain restrained by confidentiality clauses. China is not a member of the Paris Club or the OECD Export Credits Group, and thus is not subject to their standard disclosures.

Also, most of China’s external lending is official — operating through government departments, state-owned banks and enterprises. This makes even accessing any information impossible, let alone devising corrective strategies. The lack of transparency accentuates the politically charged US-China engagement with its shrill rhetoric making headlines, while studies on China’s lending remain largely speculative.

It is against this backdrop that a recent report by the AidData team of the Virginia-based state-funded William & Mary University presented a groundbreaking exhaustive analysis on the last 20 years of China’s lending in its 20,985 projects worth $1.34 billion in 165 countries. 

Disquieting revelations

China has been a lender since the 1950s. Initially, its lending was limited to its ‘brother nations’ in the Communist International (or Comintern) and a few insurgencies in Southeast Asia. These loans were insignificant and ignored by major powers that did not even recognise the People’s Republic of China. It is from the 1990s that China emerged as a dominant global lender, disrupting the grip of major powers on global decision-making.

China's ‘Going Global’ strategy initiated in 1999 formalised this major upsurge in its foreign investments in infrastructure, energy and mining. More recently, the last decade of the lending spree under China’s Belt and Road Initiative (BRI) has not just created new fault lines, but also major difficulties for recipient nations’ debt servicing. China has thus earned the wrath of both its competitors, Western lenders, and also from some of its recipient nations.

The AidData report reveals that the growing amount of money that nations owe to China has resulted in increasing debt defaults, triggering a quick rethink in Beijing. An increasing number of cancellations, suspensions and the redesign of infrastructure projects have exposed the lack of their commercial, environmental and financial viability. The blame rests equally on recipient nations that have opted for China’s turnkey mega projects without caring for such indices. Worse, the inability to pay back has seen them transfer the management of such strategic assets to China, thus upsetting regional balances.

The pandemic was another unforeseen calamity that derailed most economies. The resulting economic deceleration in China has made the nation weary of these debt defaults. Lately, in addition to patchy industrial output, rising unemployment, tumultuous retail sales, a struggling real estate market and above all, purges in top leadership, these debt defaults have further revealed the vulnerabilities affecting China’s early economic recovery.

The first major course correction in China’s lending in the recent past has been its shift from infrastructure building to the recovery of its lending. This has witnessed China’s infrastructure lending shrinking from 60 to 30% between 2015 and 2021 and its penalties for late payments rising from 3 to 8.7%. Low-income nations are now borrowing for debt servicing, which defeats the very purpose of China’s lending.

Second, starting with its entry into the global trade and financial system in 2001, China has invested in nearly 5,000 projects the world over. President Xi’s BRI has involved investments of $1.5 trillion and counting. But China’s external lending which peaked in 2016 at $136 billion shrunk to $80 billion in 2021. This seems counterintuitive to China’s political rhetoric and its expanding economic footprint.

Third, spatially as well, China’s lending has lately drifted towards assuring better per dollar returns. This has seen the destinations of Chinese lending changing. Between 2018 and 2021, Africa’s share fell from 31% to 12% while Europe’s share rose from 6% to 23%. Today, China has come to be a major investor in some of the industrialised G7 countries which, ironically, also see China as their main adversary.

Four, both the source and focus on China’s lending have changed as well. In 2013, when President Xi launched his BRI, policy banks accounted for half of China’s global lending. Today, the People’s Bank of China (the central bank) and the State Administration of Foreign Exchange (which manages China’s foreign currency reserves) account for half of its total lending; all controlled directly by China’s apex leadership and almost all of it being bailout lending.

Finally, China’s expanding global financial outreach has encouraged it to account for structural changes in the global economy. China’s lending is now increasingly made in its own currency: Chinese lending in Renminbi has overtaken the US dollar since 2020. This has coincided with China-led debates on de-dollarisation of trading currencies. Thus, while it has won Beijing new allies among developing countries, China’s lending has increasingly drawn blowback from the West, and occasionally some displeasure from its allies.

At odds with alternatives

Driven partly by geopolitics, Western debates on China’s wolf warrior and chequebook diplomacy remain overcast in noting that Chinese lending has led to debt traps for recipient nations and unfolding its debt-into-equity strategy, suspect of ulterior motives. But one must separate the chaff from the seed.

The truth is that China’s overcapacity in several infrastructure sectors, trained workforce and its current account surplus, facilitated by official policies, make Beijing too competitive for multi-party western democracies. Conversely, the world’s persistent infrastructure and financial deficit make China attractive to most developing countries — Chinese lending comes without too many questions about the nature of their domestic politics.

The truth also is that the initial enthusiasm for China’s lending has begun to erode due to recipients’ debt defaults and China seizing assets of recipient countries. This has seen other emerging economies like India step in as an alternative. Sri Lanka presents one such case of the consequences of China’s unproductive lending and India’s response to its debt crisis. 

China’s response to such a transition has also been disconcerting. The lender’s mega projects in Sri Lanka had contributed to its economic decline and political chaos, with multiple debt defaults creating a race against time to defer or reschedule its debt. In May this year, 17 nations formed an ‘official creditor committee’ to extend loans to Sri Lanka. However, its largest bilateral lender, China, decided to sit in as an observer, refusing to join the group’s pledges on rescheduling, preferring bilateral channels.

In September, however, China did strike a bilateral debt restructuring deal with Colombo, but it was primarily aimed at allowing Sri Lanka to unlock the flow of the promised $3 billion from the IMF.

As history teaches us, rising economies invariably use state lending to tap into new markets abroad, secure strategic imports or further their global ambitions. The massive post-World War II Marshall Plan remains one apt example of such US lending. Today, China is the one seen buying bonds and equity and investing in infrastructure projects in advanced countries. But geopolitics often triumphs over economic logic, which means that China will continue to face headwinds. China, however, must remain sensitive to others’ concerns and develop agility to become both acceptable and attractive as a lender.

(Swaran Singh is professor of International Relations at Jawaharlal Nehru University, New Delhi.)