It seems like just yesterday that Chinese financing was the future of emerging market infrastructure. Chinese banks, awash with liquidity, and state-owned companies were everywhere, buying assets and announcing new multi-million-dollar energy and transport projects. By about 2011 Chinese infrastructure financing exceeded infrastructure financing from the World Bank and other multilateral institutions, and in 2013 new President Xi Jing, in two major policy speeches, announced the largest infrastructure financing ever – the Belt and Road Initiative. The future appeared to be one of endlessly increasing financial flows from Beijing, and a Chinese-enabled jump in infrastructure investment across the developing world.
Instead, it turns out that the 2013 announcement of the Belt and Road Initiative (BRI) coincided with the high-water mark in Chinese infrastructure financing. From some $40+ billion per year at its peak, Chinese financing to emerging markets has fallen to less than a quarter of this level. According to data collected by Boston University, Chinese energy-related financing, accounting for roughly one-half of these flows over the past two decades, fell to below $5 billion in 2020 – and it was not just COVID: the trend has been steadily downwards:
In a report earlier this month, the Financial Times said that Chinese overseas energy finance collapsed to its lowest level since 2008 in 2020. More than half of the low figure of overseas energy lending was accounted for by a single project (the Ajaokuta-Kaduna-Kano gas pipeline in Nigeria, funded by China Exim). One widely-watched and reported area, Chinese bank lending to energy in Latin America, in 2020 was… zero.
Where did it all go?
Before taking a stab at this question, let’s have a quick look at where the BRI has been. Total funding has been on the order of $50-100 billion per year, 2/3 of which going to energy and transport. Most of the loans have come on terms that are more generous than developing countries can get from private investors, but much more costly than funds from Western donors or the concessional windows of the multilateral development banks. In energy along, according to the Boston University database, Chinese banks have provided some $245 billion since 2000 – roughly half of this for power generation. $127 billion, slightly more than half, has gone to coal or oil-related projects. Funds have been spread widely: some $76B to Europe and Central Asia, some $68B to Asia, some $46B to Latin America, and $53B to Africa.
The aggregate numbers have been very large – far larger than the capital flows coming to emerging market infrastructure from the international development community over this period. All this during a period of recurrent calls for prioritizing funds to help developing countries improve their infrastructure, as a high-priority element of poverty reduction. Yet in spite of bringing large numbers to an area of need, the BRI has come in for plenty of criticism, centered on a few areas:
- Lack of attention to environmental and social effects
- Financing of investment projects that are low priority and/or that won’t deliver
- Driving up the debt burden of countries to unsustainable levels
1) At a project level, Chinese funding’s lesser bureaucracy and requirements, relative to those of international donor financing, has been to some degree an attractive feature for recipient countries. At a strategic level, Chinese appetite for financing coal-fired power generation has also been attractive to countries with big energy deficits and undeveloped indigenous coal reserves, like Pakistan. Over $50 billion of Chinese overseas financing has gone to support coal. Both these advantages have drawn criticism, and this criticism is increasingly in conflict with President Xi Jiping’s stated objective of China’s being seen as a leader on environment and climate issues (see Infrastructure Ideas’ previous comment on this conflict, as well as that from this month’s World Economic Forum).
2) There have been repeated headlines about “white elephants” being funded by the BRI, ahead of infrastructure projects with arguably higher development impact. One poster child of this type has been the Hambatota Port project in Sri Lanka, held up as something that suits Chinese interests far more than those of the host country. The Overseas Development Institute tracks BRI projects which run into trouble, and points to some 15 in difficulties, worth over $2 billion. More recently, there have been headlines around the cancellation of several planned coal power investments in the BRI pipeline, including the $8-10 billion Hamrawein plant in Egypt (which would have been the second largest coal-fired plant in the world). Both Bangladesh and Pakistan, traditionally short of electricity, are seeing growing concerns about potential overcapacity, which has analysts pointing to poor sector planning related to the BRI-backed projects. And one major study of over 2,500 Chinese-backed projects, led by Aid Data, concluded that BRI “economic benefits accrue disproportionately to politically-privileged regions:” 164% more projects took place in a political leader’s home province when in power.
3) Concerns about a “debt trap” brewing for countries who borrow heavily from Chinese institutions have grown significantly with the COVID-19 induced recession across many developing countries. These concerns dovetail with those about poor project selection. In the case of Sri Lanka, Foreign Policy drew a link between the large borrowing for Hambantota and the fact that the port was in the then-President’s home district.
The impact of the BRI lies somewhere between the positives of large flows to infrastructure and the criticisms of the initiative. Certainly from a climate perspective, extensive Chinese backing for coal-fired generation is a big problem, and it may increasingly be a problem at a sector level for some recipient countries. The data on project-level environmental issues is more inconclusive. The massive Aid Data study already cited found no clear links to poor environmental outcomes. And the same study, comparing BRI and World Bank Group projects, concluded that the outcomes of the Chinese-backed projects are not inferior in terms of impact on growth; data from the OECD DAC produces similar results. The ODI numbers of 15 projects in trouble, worth about $2.4 billion, translates to around 1-3% of projects supported by China. While difficulty knowing when projects underperform imply these numbers are likely understated, problem project rates of 1-3% would be warmly welcomed by any infrastructure investors or lenders. Meanwhile another study, by the Center for Global Development, was muted in its views of the impact of the BRI on debt sustainability in recipient countries.
It is also of interest to note that the bulk of the reduced Chinese capital for infrastructure in 2020 flowed, actually, to the region that needs help the most – Sub-Saharan Africa – even though the BRI geography is not obvious. Aside from Nigeria, Chinese lending in 2020 also funded hydropower projects in Ivory Coast (US$286 million) and Rwanda (US$214 million), as well as a solar project in Lesotho (US$70 million).
So why the big decline since 2015?
For the driving forces, look to macroeconomics, credit concerns, and a change of instruments.
1) For the Chinese government, the past decade has been a favorable period for lending to developing countries globally, with low global interest rates and excess domestic reserves in China. The combination of repeated calls by the donor community for more infrastructure financing and the failure of donors, the US, or international agencies to respond with substantial increases in financing also opened an important strategic door for the BRI. As growth in emerging markets levelled off – well before the COVID recession – this led both to credit risks and to reputational issues. From a policy perspective, large-scale flows to emerging market infrastructure is aimed at producing impressive economic results, for which China can then take credit. The lack of emerging market growth, after two decades of ramped up lending and seven years of the BRI, dims the attraction of the strategy.
2) As the Center for Global Development’s Scott Morris has pointed out, the massive scale up in lending by China always carried risks, and – concerns about debt repayments have grown. China’s largest overseas exposure is to Venezuela, a country unlikely to make good on its debts. Growing calls for debt relief surely are a significant factor in the major retrenchment in China’s overseas lending. The same sovereign credit risks are likely to have an impact on the balance sheets of the Chinese government’s large external lenders. Large scale write offs may become inevitable, limiting the lending capacity of these institutions.
3) The large numbers in flows from China over the past two decades have come almost entirely from loans. Loans have the advantage of creating large, publicity-friendly headline numbers. Loans have the disadvantage that at times they fail to adequately recognize and price risks. Arguably this dynamic has become more visible for China with the BRI, and China’s state-owned banks have gone through a similar cycle with domestic lending. One important development which has been not so visible in recent years has been the turn towards the use of Chinese-backed equity financing for overseas infrastructure. In Latin America, for example, where 2020 Chinese lending fell to zero, Chinese-led equity funds had a busy year, highlighted by China Three Gorges’ acquisition of Peruvian utility Luz del Sur, backed by the Chinese-Latin America Industrial Cooperation Investment Fund (CLAI). CLAI, along with the China-LAC Cooperation Fund, are examples of emerging new approaches to infrastructure by the Government of China. They will generate fewer headlines, smaller numbers, but may yet achieve more strategic objectives going forward than large-scale BRI lending. Time will tell.
Chinese financing has become one of the big stories in emerging markets infrastructure. The eye-grabbing numbers of capital flows of 2010-2015 may become a thing of the past, and it may be that this financing does not take emerging markets infrastructure to a whole new level, as many thought and some hoped it would. The BRI will not be the magic wand that solves this development problem once and for all. But, Chinese financing is adapting, as the greater recognition of credit risks and turn to equity show. More adaptations will likely follow.
Undoubtedly, the Chinese National People’s Congress taking place this week, the vehicle for setting five-year national strategies in many areas, will have this on the agenda. Look for the BRI to be reaffirmed, for headline capital flow number objectives to be tempered, for a “greening” of the BRI, and for China to continue to be a large factor in this area for years to come.
2 thoughts on “Where did all the Chinese money go?”
Thanks Bernie for a very evidence based, in depth and fair assessment of the interesting trend in China’s infrastructure investments in EM. The pause after the initial years of rapid expansion is clearly felt in our interactions with the counterparts too. Externally there is more push back stronger criticism and less willingness to cooperate given the increasing rift in today’s geopolitics, and internally the strategy has been refocusing on China’s domestic consumption and greener more technological drive economy. I would not underplay the role of COVID on the 2020 numbers – most of the BRI institutions (CDB, China Econ, silkroad fund etc) decisions are made centrally. When it is almost impossible to do any international travels, clearly deals would significantly slowdown just from a practical standpoint. Watching the space being discussed at the two sessions taking place this week, but the fact that it is no longer front and center in the first few days of discussion means it is probably put on the back burner at least in the near term.