China is the world’s largest sovereign creditor in overseas development finance. According to AidData’s latest estimates, the country’s annual financial commitment to international development projects amounts to around $85 billion. In 2000–12, China’s average annual development finance commitment to the rest of the world was below that of the US. However, since 2013, this amount has soared and reached more than double that of the US in 2013–17. China’s lending has tapered off in recent years, partially due to its own economic slowdown and the COVID-19 pandemic. China provides development finance via both bilateral and multilateral channels. The bilateral channel – that is, overseas development projects funded by Chinese financial institutions and implemented by Chinese SOEs as the main contractor(s) – processes considerably more funds than the multilateral channel does. The multilateral channel refers to Chinese participation in numerous multilateral development finance institutions (MDFIs) as a creditor and its efforts in co-establishing new MDFIs, such as the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB).
China provides development finance via both bilateral and multilateral channels. The bilateral channel – that is, projects funded by Chinese financial institutions and implemented by Chinese SOEs as the main contractor(s) – processes considerably more funds than the multilateral channel does.
China is pursuing several aims through bilateral development lending: to mitigate overcapacity in industries such as construction, energy and transport; to facilitate the expansion of Chinese enterprises in the global market; to stimulate trade with recipient countries; and to increase Chinese influence in the developing world. A number of domestic financial institutions are central to these objectives, especially the China Development Bank (CDB) and Export-Import Bank of China (CHEXIM), the four biggest state commercial banks, and several state-owned investment funds and corporations. The two policy banks – CDB and CHEXIM – are by far the largest players in their field; they have provided more financing to the developing regions than all of the Western-based MDFIs combined in recent years. CDB is the most active creditor of energy and infrastructure projects under the Belt and Road Initiative (BRI); CHEXIM also provides concessional loans and credit for export buyers in addition to normal loans.
Chinese national development finance institutions differ from their Western counterparts and MDFIs in several aspects: they mostly fund infrastructure and energy projects; they lend large amounts to bundles of projects that involve multiple Chinese actors; they have less strict control on the social and environmental impacts of their operations; their loans often do not impose policy conditions; and they lend to different regions compared to Western development finance institutions. Although the Chinese institutions complement Western efforts in development finance by providing extra funds and supporting different regions, they also pose several challenges. For example, Chinese loans without policy conditions attached have become more attractive to many developing countries than Western loans. The fact that China’s SOEs have a significant advantage in securing contracts in Chinese-funded projects, which often do not include open tendering, is considered by many to be a violation of international market rules.
Moreover, Chinese creditors endorse building multiple large-scale infrastructure projects simultaneously, sometimes based on anticipated demand – a development approach described as ‘Big Push industrialization’ – in preference to ‘micro interventions in human capital, the environment and institutional reform’. In addition, frustration at not being able to hold Beijing accountable for its debt sustainability has been voiced by members of the Paris Club – a multilateral framework that coordinates the resolution of general sovereign illiquidity or unsustainable external debt of developing countries; China is not a member of the Paris Club. These differences and challenges have generated much scepticism and criticism of China’s rising role in the global governance of development finance.
However, China’s overseas development finance may be less ‘statist’ than many in the West suppose. The majority of its finance is not subsidized. The policy banks raise much of the funds from capital markets through bond auctions. Since their fundraising processes are driven by profit-oriented market incentives, they need to fulfil their commercial interests, rather than the government’s political interests, to survive. Thus, it is easy to understand why Chinese policy banks tend to offer loans at normal market interest rates. However, the state does play an important role here, not so much as the regulator but as the guarantor. It provides credit guarantees for the bonds issued by policy banks, to ensure that the banks can afford to make ‘expensive loans’ to fund long-term, large-scale public development projects. Although the state does not lend directly, it does bear significant risk if the loans cannot be repaid, which has happened in several BRI projects. In these instances, the Chinese government has the dilemma of either wiping the debt, which hurts the commercial interests of Chinese banks; extending the loan terms; or requiring repayment in other asset forms, which may be criticized as a form of debt-trap diplomacy.
Indeed, China’s bilateral overseas development finance faces increasing challenges. The returns on capital have been eroded by the volatile political, economic and security conditions in some borrower countries in combination with Chinese creditors’ ‘non-interference’ mode of lending. Moreover, Chinese-funded projects are often criticized for their negative environmental and social governance impacts, which create tension between project operators and project-affected communities in developing countries. Furthermore, China’s massive bilateral development lending, especially under the ambitious BRI, often causes uneasiness among its geopolitical competitors and systemic rivals, including the US, Japan, India and EU countries. The resistant and sometimes hostile reactions from these countries have created significant hurdles for China’s overseas development lending.
MDFIs can handle such issues more deftly. They have some advantages in allocating and coordinating resources for development projects compared to bilateral lending: they provide economic and technical expertise and better monitoring of project spending; their business models allow multiple creditors to share financial risks; they manage the relationship with civil groups, media and project-affected communities more skilfully; and they alleviate the geopolitical tensions that are often seen in bilateral interactions between states. In addition, engaging in multilateral institutions helps China to gain influence in setting rules and norms. This allows the country to shape the global governance of development finance based on its own preferences and experience, which are more state-coordinated and infrastructure-focused.
This explains why Beijing has continued to contribute to various MDFIs and established new multilateral institutions like the NDB and the AIIB, despite the boost that bilateral lending gives to Chinese national economic interests. Beijing adopts a ‘multi-front’ approach to engaging with MDFIs. It collaborates with numerous existing MDFIs, from dominating players such as the World Bank and the Asian Development Bank (ADB) to smaller institutions that are marginally linked to China such as the International Fund for Agricultural Development. China has also established new MDFIs, particularly the AIIB, which better reflect Beijing’s interests in development finance. In turn, the AIIB’s institutional and operational innovations, along with China’s ambitious bilateral lending, have resulted in institutional and policy changes in traditional MDFIs like the World Bank and the ADB.
China is currently the third-largest shareholder in the World Bank and the ADB, and is pursuing further influence in both institutions. Although Beijing is dissatisfied with some aspects of these two banks, established under the Bretton Woods system and Western leadership, China acknowledges the strategic and knowledge gains from collaborating with them. In recent years, China has increased knowledge cooperation with both banks, through which it can share its development experience with the banks’ other members. It has intensified innovative financial collaboration with the International Finance Corporation (IFC), especially on green bonds and blue bonds. Moreover, China has managed to gain support from the World Bank and the ADB for its ambitious overseas investment projects, including energy cooperation in Africa and the BRI. China is also active in smaller MDFIs, such as the African Development Bank and the Inter-American Development Bank, in order to engage with the MDFIs of the regions in which it has invested heavily.
China has managed to gain support from the World Bank and the ADB for its ambitious overseas investment projects, including energy cooperation in Africa and the BRI.
Meanwhile, Beijing realizes that the World Bank will remain US-led, and that Japan and the US will continue to jointly lead the ADB. Therefore, in order to have a dominant voice in multilateral governance, China needed to establish a new MDFI outside the Bretton Woods system. The AIIB was accordingly founded in 2015. Although the US and Japan did not join the bank, Beijing did receive endorsement and support from several of its geopolitical competitors and systemic rivals, including India, Australia and EU countries, which made the bank more global. Although the AIIB’s general governance framework and project practices are in line with the World Bank and the ADB, several of its institutional features particularly reflect Chinese interests and objectives. Under China’s leadership, the architects of the AIIB sought to address Beijing’s dissatisfaction with traditional MDFIs. They also had more specific aims: to mobilize resources for infrastructure projects; to focus on the economic performance of projects rather than the social impact; to adopt the latest methods of development finance; to be more efficient in both project operation and institutional set-up than traditional multilateral development banks (MDBs); to respond better to the needs of regional members, developing countries and borrowers; and to make the governance procedures and project operation more flexible, and strategic and institutional adjustments easier, than in traditional MDFIs.
Some of these objectives were achieved. For instance, the AIIB offers more decision-making powers to regional members and the bank’s policies and strategies take into account Asian countries’ specific needs and development trajectories. Moreover, the AIIB has adopted the latest implementation methods, made project operations more flexible and simplified the process of making strategic and institutional adjustments. Nevertheless, it has attracted some controversy. For example, the AIIB’s focus on economic performance rather than social implications of projects could be understood as a ‘non-intervention’ approach, which makes it popular among some borrowers. The bank has also been criticized for lacking social accountability and precluding opportunities of collaborating with other MDFIs on social issues. Moreover, critics disapprove of the bank’s investments in fossil fuel-based energy. Finally, the AIIB also streamlined its project operation and institutional set-ups, although doing so has cast doubt over the effectiveness of the bank’s safeguarding mechanisms.
The innovations in the AIIB alongside China’s strong bilateral actions have had a wider impact on MDFIs. For example, having claimed to shift away from infrastructure projects towards social policy and governance reform programmes in the past 10 years, the World Bank and the ADB have recently made efforts to increase infrastructure funding – this could easily be read as a response to China’s strong advocacy of infrastructure financing. Moreover, the World Bank’s new regulatory framework offers large borrowers (including China) more freedom to use their respective country systems, as an alternative to its Environmental and Social Standards, for monitoring and controlling the environmental and social impacts of World Bank-funded projects. In addition, the ADB has reduced its project approval cycle from three years to 18 months as a response to the AIIB’s leaner institutional set-up and faster project procedures.
In summary, China adopts both bilateral and multilateral approaches to increase the chances of achieving its domestic objectives and to push forward reforms in the global governance of development finance. China’s use of outside options as an alternative to the traditional MDFIs – such as lending bilaterally and establishing the AIIB – has been largely successful without the support of major economic powers like the US and Japan, though endorsement from India and European states contributed to the success of the AIIB. Furthermore, these powerful outside options have successfully prompted changes inside the World Bank and the ADB. Beijing’s multifaceted approach is underpinned by the country’s abundant financial resources, rich experience in infrastructure development, rising strategic role in the international economy, and its pragmatic attitude to global governance.