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Author: Yunnan Chen
The transformation of China from aid recipient to a major development donor has challenged existing development regimes. Traditional donors are increasingly realigning their development finance to serve strategic purposes against the backdrop of geopolitical rivalries, while debt restructuring is one of the most pressing challenges for developing countries. G20 partners should establish clear timelines for the debt relief process and massively scale up development finance.
China’s transition from a recipient of aid and financial support to a provider of aid and finance to lower-income countries has partly been a consequence of its own economic boom. By the year 2020, China had become a significant bilateral creditor to lower-income countries, with over half of its aid budget directed towards Africa. Commodity-exporting countries on the continent had become crucial resources for Chinese industries (State Council 2021).
However, this official finance goes beyond aid and extends to substantial lending and investment, usually long-term loans from Chinese banks. In Africa alone, Chinese contractors and Chinese policy bank lending provided over 150 billion US dollars in loan commitments from 2000 to 2020. Much of this was targeted towards infrastructure investment in the energy and transport sectors, which was often constructed in collaboration with Chinese contractors or suppliers. The loans support the export of Chinese technologies, help state-owned enterprises to win large infrastructure contracts and enter new markets.
This model has been a defining feature of the Belt and Road Initiative (BRI), which was announced in 2013 and absorbed many pre-existing projects. The BRI can be seen as a “grand strategy” and has been portrayed as China’s contribution to global public goods, but it was also a means to offshore domestic capacity in heavy industries. In the period following the global financial crisis, it was also a way to channel Chinese capital towards more productive uses overseas and build international influence.
In addition to supporting projects through bilateral finance, China sought to increase its contributions to multilateral development banks (MDBs) which eventually culminated in the creation of the BRICS New Development Bank and the Asian Infrastructure Investment Bank (AIIB). China aims to increase its influence in these institutions. However, in the World Bank and across the MDB landscape, the shareholding held by China remain far below its economic size (Humphrey & Chen 2021).
The geopoliticisation of development finance and debt
The rise of Chinese finance in the developing world has been a challenge to the institutions established under the Organisation for Economic Co-operation and Development (OECD). Over the last 50 years, the OECD has established deep-seated norms governing concessional finance, aid for poverty reduction and developmental purposes and export credits used to promote national exports. China’s lending model, meanwhile, is a hybrid of both, bypassing these regimes. Main-taining its status as a developing country, China has not joined the OECD Development Assistance Committee or the Paris Club, which governs and coordinates donors and official creditors in development finance and debt restructuring.
As geopolitical tensions with China have deepened, traditional donors are realigning their development finance to serve strategic and developmental purposes to compete with China’s influence in the developing world. This can be seen in the restructuring of the US’ and UK’s national development finance institutions, and in the launch of new infrastructure initiatives under the G7 and the EU’s Global Gateway, which implicitly serve as a counter-offer to China’s BRI (Chen 2022). Western criticism of China’s BRI has also coalesced around the narrative of China’s “debt-traps” and the use of opaque lending terms to indebt and gain leverage over sovereign governments. Despite the debunking of many of these “debt-trap” cases (Brautigam 2020), China’s contribution to sovereign debt burdens of lower income countries has been an escalating point of contention in the wake of COVID-19 pandemic, which has tipped 60 per cent of low-income countries — most in Africa — into a high risk of debt distress.
The arena of debt relief cooperation within the G20 Common Framework has been significantly impacted by geopolitical tensions between the US and China, with Zambia a prime casualty. The US has accused China of hindering debt relief efforts, while China has countered by demanding the inclusion of MDBs in debt relief. This last point is a product of China’s previous gripes around representation in these institutions, but enacting it would undercut China’s preferred creditor status that underpins the development banks. Following several major diplomatic and multilateral efforts, including a Global Sovereign Debt Roundtable in April and a June Paris summit on a “New Global Financial Pact”, an agreement has finally been reached for Zambia.
Reforming the debt architecture
Debt restructuring is one of the most pressing challenges for developing countries that grapple with ensuring economic recovery after the COVID-19 pandemic, Russia’s war in Ukraine and the challenges of climate change. Significant investment for energy transitions and adaptation against future climate shocks are needed. Facilitating this will be challenging in a high-interest rate environment and amid fiscal constraints of repaying costly external debts.
Donors, creditors and borrowers alike, have a common interest in a predictable and equitable debt regime. There are still many technical and coordination challenges facing all creditors, but making the Common Framework work better should be a priority. As part of this, G20 partners should first establish clear timelines for the debt relief process. The creditors’ committee, in good faith, should also establish clarity around transparency and data-sharing between creditors — even if on a limited basis — and cooperate to establish technical agreement with respect to the World Bank-IMF debt sustainability analyses.
Beyond immediate debt restructuring needs there is also a need for a massive boost to de-velopment finance: developing countries will require an annual investment of 1.7 trillion US dollars to support climate infrastructure investments (UNCTAD 2023). Current commitments and the new G7 and EU initiatives come nowhere close to this. Development partners from north and south should support the ongoing reforms of the MDBs that will expand their capacity to provide this finance and recapitalise them. Global development and climate-aligned development cooperation is not only a common interest. It can also be a “safe space” for collaboration, despite the frays of geopolitical rivalry.
Author: Yunnan Chen is a Research Fellow in Development and Public Finance at the Overseas Development Institute (ODI) in London, where she works on China’s outward development finance.
References:
- Brautigam, Deborah (2020): A Critical look at Chinese “debt-trap diplomacy”: the rise of a meme. Area Development and Policy, 5(1), 1–14.
- Chen, Yunnan (2022): Old wine in new bottles? China, the G7 and the new infrastructure geopolitics, ODI,
- odi.org/en/insights/old-wine-in-new-bottles-china-the-g7-and-the-new-infrastructure-geopolitics/.
- Humphrey, Chris & Chen, Yunnan (2021): China in the multilateral development banks: evolving strategies of a new power, ODI, odi.org/en/publications/china-multilateral-development-banks.
- State Council (2021): China’s international development cooperation in the new era, Beijing: State Council Information Office of the People’s Republic of China.
- UNCTAD (2023): World Investment Report 2023: investing in sustainable energy for all, United Nations Conference on Trade and Development, unctad.org/system/files/official-document/wir2023_en.pdf.
