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Responding to Belt & Road and Beyond:

What Washington is Getting Right and Wrong about Chinese Development Finance

Scott Mor­ris

Senior Fel­low, Cen­ter for Glob­al Devel­op­ment


Let me start by read­ing a quote to you from a senior USAID offi­cial:

We are going to absolute­ly call this stuff out and to be more clear about the choice that our part­ner coun­tries have, and be clear that if you decide to work with Chi­na, it is bad.”

If you decide to work with Chi­na, it is bad. This state­ment per­fect­ly cap­tures where US pol­i­cy stands today when it comes to Chi­nese devel­op­ment finance. And while I do want to focus on the Trump admin­is­tra­tion, which is set­ting the tone and the pol­i­cy, it is also impor­tant to note that the wider Wash­ing­ton pol­i­cy com­mu­ni­ty, cer­tain­ly Con­gress but also the think tank com­mu­ni­ty, is not so dis­tant from this sim­plis­tic stance. For the think tanks, I attribute this to the out­sized voice of the nation­al secu­ri­ty expert com­mu­ni­ty, and the fact that they have only recent­ly wok­en up to the fact of Chi­nese finance, giv­en promi­nence under the Belt & Road ini­tia­tive.  The dom­i­nant ana­lyt­i­cal frame­work in Wash­ing­ton for assess­ing BRI is a secu­ri­ty one, and the dom­i­nant view in Wash­ing­ton right now is that Chi­nese finance glob­al­ly rep­re­sents a nation­al secu­ri­ty threat here it home. As a result, we have moved seem­ing­ly overnight from the lan­guage of devel­op­ment coop­er­a­tion to com­pe­ti­tion and con­flict, in which an emerg­ing and poten­tial­ly lead­ing objec­tive of US for­eign assis­tance is to counter Chi­na.

As a frame­work for engag­ing with oth­er coun­tries, “Chi­nese mon­ey bad, US mon­ey good” has some prob­lems. It is coun­ter­pro­duc­tive and miss­es the mark when it comes to ground­ed and need­ed crit­i­cism of Chi­nese behav­ior. So, let me spend a few min­utes on what I think cur­rent US pol­i­cy is get­ting wrong and then focus on what actu­al­ly is wrong with Chi­nese financ­ing, with some thoughts about get­ting to a more pro­duc­tive US pol­i­cy stance.

First, let’s con­sid­er the lan­guage of admin­is­tra­tion offi­cials more gen­er­al­ly, which often por­trays the fun­da­men­tal weak­ness of a “state-dri­ven” devel­op­ment mod­el, the need for “mar­ket-dri­ven” solu­tions, and more gen­er­al­ly has sought to con­vince devel­op­ing coun­try offi­cials that Chi­nese finance every­where and always leads to bad out­comes. Locked in a Cold War men­tal­i­ty, the admin­is­tra­tion seems to be obsessed with the idea that Chi­na is spread­ing Karl Marx around the world one loan at a time. The prob­lem here is that they are fix­at­ed on the wrong Marx. It was Chico Marx in the movie Duck Soup, who famous­ly asked, “who are you going to believe, me or your own eyes?” And so you can pic­ture Sec­re­tary Pom­peo in meet­ing after meet­ing with devel­op­ing coun­try offi­cials preach­ing the sins of Chi­nese finance when these offi­cials only need to look out their win­dows and see the roads, bridges, pow­er plants and ports brought to them by Chi­na.

An extreme ver­sion of the administration’s approach, appar­ent­ly being giv­en seri­ous con­sid­er­a­tion, would force coun­tries to choose between US assis­tance and Chi­nese finance. They are call­ing this the “Clear Choice” pol­i­cy. If they pur­sue this all or noth­ing approach, the admin­is­tra­tion may be sur­prised at just how clear the choice will be for most devel­op­ing coun­tries. Yes, these coun­tries undoubt­ed­ly val­ue the sup­port from PEPFAR and US human­i­tar­i­an assis­tance in times of nat­ur­al dis­as­ters or pan­demics, but when it comes to their day-to-day devel­op­ment pri­or­i­ties, infra­struc­ture is typ­i­cal­ly first, sec­ond, and third on the list.

The anti-Chi­na rhetoric has found par­tic­u­lar force in the charge of “debt trap diplo­ma­cy,” the notion that Chi­nese lend­ing is delib­er­ate­ly seek­ing to dri­ve debt dis­tress in devel­op­ing coun­tries in order to extract things from these gov­ern­ments when they can­not repay the loans—those things being mil­i­tary or strate­gic con­ces­sions, diplo­mat­ic stances, or com­mer­cial inter­ests.  Now, I have to con­fess that this term debt trap diplo­ma­cy doesn’t sit well with me because, more often than not, when it is invoked, it is linked to research that I did with co-authors at CGD ear­li­er this year. You will not find the phrase in our study. Where we sought to iden­ti­fy and con­tex­tu­al­ize debt vul­ner­a­bil­i­ties aris­ing from Chi­nese lend­ing and to focus on the spe­cif­ic pol­i­cy short­com­ings unique to Chi­nese lend­ing, the debt trap diplo­macists only seem to want to lev­el the term as a sweep­ing indict­ment. But ulti­mate­ly the charge doesn’t stick because it uses the facts of a few extreme cas­es to gen­er­al­ize about all Chi­nese lend­ing. If every coun­try looked like Djibouti—which has effec­tive­ly become a client state with unsus­tain­able lev­els of exter­nal debt, near­ly all of it owed to China—if this were the norm, then the pic­ture would be very bad indeed. But the broad­er pro­gram of Chi­nese lend­ing is more com­plex than that.

And this is what’s par­tic­u­lar­ly frus­trat­ing about the US stance – it miss­es the oppor­tu­ni­ty to focus in a con­crete way on what is wrong with Chi­nese finance and what can be done about it at the pol­i­cy lev­el. So what are the spe­cif­ic charges we could lev­el against Chi­nese lend­ing?

  1. It is not trans­par­ent, with far too lit­tle infor­ma­tion about vol­umes and terms report­ed by the Chi­nese gov­ern­ment. It’s remark­able and absurd that for the largest sin­gle source of devel­op­ment finance in the world, a cot­tage research indus­try has sprung up sim­ply attempt­ing to report in a piece­meal fash­ion what every oth­er major offi­cial cred­i­tor reports for itself. So, instead of China’s Finance Min­istry being the defin­i­tive source on Chi­nese finance, we have William & Mary Col­lege. Of course, there are two par­ties to every loan, and this is as much a prob­lem with bor­row­ing gov­ern­ment trans­paren­cy and a lack of account­abil­i­ty to their own cit­i­zens.
  2. It is by design a good deal for Chi­nese lenders and goods/service providers, but may or may not be a good deal for the bor­row­ing coun­try. Mean­ing: lend­ing terms favor com­mer­cial rates over con­ces­sion­al­i­ty; debt may be col­lat­er­al­ized in ways that oth­er major offi­cial cred­i­tors have foresworn as bad prac­tice for devel­op­ment; pro­cure­ment out­comes con­sis­tent­ly favor Chi­nese firms; and there are no dis­cern­able mea­sures of devel­op­ment “impact” asso­ci­at­ed with the selec­tion of these projects.
  3. How­ev­er lim­it­ed, the Djibouti’s are real, and in some cas­es the Chi­nese do appear to exploit some financ­ing rela­tion­ships to obtain oth­er things. On this list of coun­tries we might put Sri Lan­ka, Tajik­istan, or Venezuela. Each rep­re­sents a case where debt dis­tress leads to con­ces­sions on the part of the bor­row­er – either because the debt was col­lat­er­al­ized with things like extrac­tive rev­enue streams or because Chi­nese nego­tia­tors have sought things in exchange for debt resched­ul­ings or for­give­ness. To be clear, I don’t believe these case rep­re­sent the norm, and it’s worth not­ing that Chi­na has pro­vid­ed near­ly 100 debt resched­ul­ings over the past 15 years with most seem­ing­ly designed to ensure repay­ment in the face of a poten­tial default and noth­ing more.
  4. Final­ly, I believe China’s approach to finance is rever­ber­at­ing through the sys­tem of offi­cial devel­op­ment finance (by which I mean oth­er bilat­er­al actors, includ­ing the Unit­ed States, as well as mul­ti­lat­er­al insti­tu­tions like the World Bank and Asian Devel­op­ment Bank) in a way that has dimin­ished the already lim­it­ed propen­si­ty of some of these actors to address abus­es and bad behav­ior in var­i­ous forms. Let me give you one exam­ple. The UN has impli­cat­ed the Myan­mar gov­ern­ment in the Rohingya geno­cide. The World Bank and ADB are pro­vid­ing this gov­ern­ment with about $5 bil­lion in sub­si­dized loans. There is some lim­it­ed prece­dent in the mul­ti­lat­er­al devel­op­ment banks for with­hold­ing sup­port in the face of atroc­i­ties, but it’s not hap­pen­ing in this case. When it has hap­pened, it is typ­i­cal­ly dri­ven by the G7 mem­bers of these banks and just as typ­i­cal­ly encoun­ters resis­tance from Chi­na in par­tic­u­lar. In the case of Myan­mar, Chi­na is all the more rel­e­vant because of the scale of its financ­ing in the coun­try. And this I believe, explains the silence of the G7 when it comes to cut­ting off MDB assistance—they do not want to cede their influ­ence in a “bat­tle­ground” coun­try.

So I want to pause here to empha­size the point I made ear­li­er: even with all of these iden­ti­fied short­com­ings, Chi­nese devel­op­ment finance does not every­where and always lead to bad out­comes. I would argue, based on avail­able evi­dence, that devel­op­ment out­comes in many cas­es are quite good, in all cas­es they are not as good as they could be, and in some cas­es they are clear­ly bad. I can’t assign weights to these cat­e­gories, but I do think our under­stand­ing of the pol­i­cy short­com­ings is strong enough to inform an approach to reform with­out arriv­ing at a sum­ma­ry judge­ment pro or con.

So if the Unit­ed States were inter­est­ed in a more nuanced approach to address­ing the prob­lems with Chi­nese finance, what would that look like?

First, I’m cau­tious­ly in favor of the Unit­ed States itself doing more in the way of devel­op­ment finance. US and Chi­nese offi­cial assis­tance actu­al­ly rival each oth­er in scale, but are rad­i­cal­ly dif­fer­ent in com­po­si­tion. Where Chi­na is most­ly a lender (includ­ing sub­si­dized or “con­ces­sion­al” lend­ing), the Unit­ed States has not empha­sized lend­ing for devel­op­ment, instead pro­vid­ing grants par­tic­u­lar­ly for health and human­i­tar­i­an pur­pos­es. I believe a lot of this work is high­ly effec­tive and high­ly val­ued by devel­op­ing coun­try part­ners and it should be sus­tained.

But the US approach to assis­tance may be chang­ing, per­haps rad­i­cal­ly so. Just a few weeks ago, the US Con­gress, with the sup­port of the admin­is­tra­tion, passed leg­is­la­tion to change the assis­tance port­fo­lio, putting more empha­sis on devel­op­ment finance, ie, lend­ing. The exist­ing Over­seas Pri­vate Invest­ment Cor­po­ra­tion, with an expo­sure lim­it of $29 bil­lion, will become the US Inter­na­tion­al Devel­op­ment Finance Cor­po­ra­tion, with a lim­it of $60 bil­lion. (Big­ger port­fo­lio, big­ger name appar­ent­ly). I’m all for more devel­op­ment finance to sup­port good infra­struc­ture with good stan­dards attached to it, and the leg­is­la­tion lays key mark­ers that seek to ensure max­i­mum devel­op­ment impact.

But this big push on lend­ing for devel­op­ment is hap­pen­ing even as the tra­di­tion­al aid bud­get is under attack by the admin­is­tra­tion. Each bud­get put for­ward by this White House has sought to gut tra­di­tion­al aid and to real­lo­cate mon­ey away from clear­ly-defined pro­grams like PEPFAR in favor of essen­tial­ly slush funds.

The talk­ing points for the new devel­op­ment finance ini­tia­tive are telling: it’s all about com­pet­ing with Chi­na. Again, the “state-dri­ven” ver­sus “mar­ket-dri­ven” argu­ment.

The prob­lem here is that the more the Unit­ed States sets a goal of com­pet­ing with Chi­na, the more prone our gov­ern­ment will be to either miss­ing the mark in terms of meet­ing devel­op­ment needs, or worse, to mim­ic­k­ing some of the very prob­lems asso­ci­at­ed with Chi­nese financ­ing.

Much of the pub­lic infra­struc­ture agen­da is, well, pub­lic and is best financed by gov­ern­ments. Chi­na does a lot of lend­ing to gov­ern­ments. The new US IDFC will have the abil­i­ty to lend to gov­ern­ments, even though that seem­ing­ly would be at odds with the administration’s “mar­ket-dri­ven” rhetoric.  It’s worth not­ing that the Unit­ed States once did a lot of lend­ing to devel­op­ment coun­try gov­ern­ments but moved away from this prac­tice fol­low­ing mul­ti­ple rounds of debt for­give­ness ini­tia­tives, which con­vinced US pol­i­cy­mak­ers that lend­ing to sov­er­eign gov­ern­ments cre­at­ed a lot of headaches for them and for all par­ties. Now that the new IDFC has the abil­i­ty to go down this road, it remains to be seen if it will have retained the lessons from the past.

More gen­er­al­ly, by going big with a devel­op­ment finance insti­tu­tion, the Unit­ed States will be more vul­ner­a­ble to a set of pres­sures fac­ing all bilat­er­al Devel­op­ment Finance Insti­tu­tions, includ­ing Chi­na: choos­ing and struc­tur­ing deals in ways that clear­ly ben­e­fit a domes­tic firm or inter­est but less clear­ly deliv­er devel­op­ment impact in the devel­op­ing coun­try. This prac­tice is essen­tial­ly tied aid but with­out the aid com­po­nent. To be fair, the leg­is­la­tion actu­al­ly eas­es up on any hard require­ment that the IDFC work with US firms, but it is stat­ed as a pref­er­ence and I expect the polit­i­cal pres­sure to demon­strate sup­port for US firms will be very hard to resist in prac­tice.

And as pres­sure mounts to com­pete with Chi­na, there will also be pres­sure to weak­en the very stan­dards that are meant to dis­tin­guish US finance from Chi­nese finance: things like hold­ing poten­tial projects to a high thresh­old for devel­op­ment impact; and employ­ing cost­ly and time con­sum­ing envi­ron­men­tal and social impact mea­sures.

If the IDFC and the rest of US assis­tance becomes cap­tured by a “Clear Choice” frame­work that seeks to divide up the world in the fash­ion of the Cold War era, then we will undoubt­ed­ly see a real dete­ri­o­ra­tion in the qual­i­ty of US assis­tance. Devel­op­ment objec­tives will increas­ing­ly take a back seat to polit­i­cal con­sid­er­a­tions, which seek to size up devel­op­ing coun­try gov­ern­ments in terms of whether they’re with us or against us and is ready to deploy cash to our friends in ways that have lit­tle to do with devel­op­ment.

Rather than com­pet­ing head to head with Chi­na, the bet­ter objec­tive for US pol­i­cy would be to change Chi­nese lend­ing behav­ior through direct engage­ment and by work­ing with allies. This is not as naive as it might sound.

For exam­ple, there were strong indi­ca­tions that Chi­na would join the Paris Club of cred­i­tors at the end of Oba­ma admin­is­tra­tion, now less cer­tain as the bilat­er­al US-Chi­na dia­logue has been all but dis­man­tled. Mem­ber­ship in this club brings with it sig­nif­i­cant oblig­a­tions when it comes to lend­ing trans­paren­cy and adher­ence to appro­pri­ate lend­ing prac­tices on the part of gov­ern­ments. Good com­ments from Chi­nese offi­cials, includ­ing in Bali last week, con­tin­ue to sug­gest that they are at least sound­ing respon­sive to this agen­da.

And I don’t think we should under­es­ti­mate the degree to which Chi­nese offi­cials are attempt­ing to take on and respond to the back­lash of crit­i­cism around their lend­ing prac­tices. Not just with blan­ket denials that there are prob­lems, but by start­ing the dif­fi­cult process of using pol­i­cy to dis­ci­pline the var­i­ous and com­pet­ing domes­tic inter­ests impli­cat­ed in Chi­nese finance.

For the Unit­ed States and its allies, it is an impor­tant moment to encour­age greater Chi­nese reliance on mul­ti­lat­er­al mech­a­nisms and those with­in Chi­na who are cham­pi­oning these mech­a­nisms. It’s worth not­ing that some of the ratio­nale with­in the US Trea­sury for the Bret­ton Woods insti­tu­tions in 1944 was to bind the Unit­ed States itself to the agen­da it was cham­pi­oning, rec­og­niz­ing the fact that there were com­pet­ing views with­in the gov­ern­ment about the direc­tion of US pol­i­cy.

What’s the evi­dence that mul­ti­lat­er­al­iz­ing Chi­nese finance could have a good effect? Look at Asian Infra­struc­ture Invest­ment Bank, which is mul­ti­lat­er­al in char­ac­ter, even with a dom­i­nant Chi­nese posi­tion. Its rules align very well with those of oth­er mul­ti­lat­er­al devel­op­ment banks, and where it has depart­ed from the norms, it has often been to intro­duce bet­ter prac­tice rather than to bol­ster Chi­nese pow­er.

But for US pol­i­cy, the focus ought to be on the World Bank in par­tic­u­lar. Chi­na prizes its rela­tion­ship with the Bank. It is always remark­able to hear just how much Chi­nese offi­cials attribute China’s eco­nom­ic suc­cess­es to the country’s part­ner­ship with the Bank dur­ing the open­ing up peri­od. Whether it’s about Chi­nese vot­ing pow­er in the insti­tu­tion or China’s abil­i­ty to keep bor­row­ing from the bank, there’s no ques­tion that Chi­na cares about the World Bank.

But as this rela­tion­ship enters a new phase, with the bank advis­ing, part­ner­ing, or per­haps mere­ly along for the ride when it comes to China’s activ­i­ties in oth­er coun­tries, there’s a key role for the Unit­ed States as the World Bank’s largest share­hold­er. As much as I think mul­ti­lat­er­al­iz­ing BRI through part­ner­ship with the Bank can be a good thing, I’m also dis­ap­point­ed by the institution’s uncrit­i­cal eye on the Belt & Road ini­tia­tive to date. As a pri­or­i­ty for World Bank pres­i­dent Jim Kim, the bank has com­mit­ted con­sid­er­able resources to a mul­ti-year tech­ni­cal engage­ment around the BRI at the behest of the Chi­nese. A pre­view of that project in Bali last week revealed detailed mod­el­ing of the initiative’s ben­e­fits (siz­able accord­ing to ear­ly esti­mates!) and vague com­ments about poten­tial risks. Worse, these risks were char­ac­ter­ized by a senior bank offi­cial as gen­er­al risks asso­ci­at­ed with infra­struc­ture projects and not any­thing to do with the short­com­ings of China’s approach to financ­ing.

So yes, the World Bank should be a key part­ner in BRI. But mul­ti­lat­er­al­ism is a two-way street, and the bank in par­tic­u­lar sim­ply hasn’t been ask­ing enough of the Chi­nese. For the bank to devote the resources and pro­file to its BRI part­ner­ship that was on dis­play in Bali and in every oth­er annu­al meet­ing since BRI was launched, only to spend much of that effort on con­struct­ing a piece­meal data­base of BRI because the Chi­nese them­selves won’t report their data…Well, it sug­gests far more def­er­ence than lead­er­ship com­ing from the World Bank.

Here is where tougher rhetoric and engage­ment from the US could have a good effect. By affirm­ing a legit­i­mate role for the mul­ti­lat­er­al insti­tu­tions, US offi­cials, work­ing with allies in Europe, Japan, and Inda, could then delin­eate the terms of mul­ti­lat­er­al engage­ment.

What would those terms look like? By lend­ing their name and offices to BRI, the lead­ing mul­ti­lat­er­als (WB, IMF, ADB, EBRD) should strike a frame­work agree­ment that binds the lead­ing Chi­nese financiers (CDB, Chi­na Exim, Silk Road Fund):

  • join the Paris Club, or adop­tion of club prin­ci­ples in some oth­er fash­ion;
  • oper­a­tional­iz­ing G20 Sus­tain­able Financ­ing Prin­ci­ples;
  • com­mit to match financ­ing terms to coun­try cir­cum­stances, with high­er over­all lev­els of con­ces­sion­al­i­ty;
  • com­mit to oth­er uses of grant and TA sup­port that help to lev­el the play­ing field in the lender-bor­row­er rela­tion­ship, mak­ing use of mul­ti­lat­er­al ini­tia­tives like the Legal Sup­port Facil­i­ty, the IMF-WB Debt Man­age­ment Facil­i­ty, and UNCTAD’s Debt Man­age­ment and Finan­cial Analy­sis Sys­tem;
  • adopt open pro­cure­ment rules when local pro­cure­ment rules are weak;
  • and adopt oth­er safe­guard arrange­ments when local rules are inad­e­quate.

This stuff isn’t wide­ly unre­al­is­tic. Chi­na has already report­ed­ly made a sig­nif­i­cant grant con­tri­bu­tion to the IMF’s tech­ni­cal assis­tance work on pub­lic finan­cial man­age­ment in the con­text of BRI.

And let’s under­stand China’s moti­va­tions here. To some degree, they are strug­gling to respond to a polit­i­cal back­lash in their bor­row­ing coun­tries and with­in the G7/G20. But they are also real­iz­ing the lim­i­ta­tions of going it alone when the going gets tough. After all, the Paris Club is not a debt for­give­ness mech­a­nism. It is a mech­a­nism for offi­cial cred­i­tors to band togeth­er in order to get repaid. Increas­ing­ly, I think Chi­nese offi­cials view mul­ti­lat­er­al­ism as a means to pro­tect­ing their rep­u­ta­tion and their financ­ing.

So I am guard­ed­ly opti­mist about progress in a num­ber of these areas.

I am less opti­mistic about a behav­ior change from Chi­na on human rights and polit­i­cal issues, which is why I think the US does need to take a tougher stand when these issues inter­sect with devel­op­ment finance. Unfor­tu­nate­ly, the con­cern about com­pet­ing with Chi­na that is dri­ving Trump admin­is­tra­tion pol­i­cy seems less anchored in a firm com­mit­ment to human rights and lib­er­al val­ues than it is in win­ning the favor of coun­tries one deal at a time.

If we are tru­ly going to offer the devel­op­ing world a “clear choice”, then we need clar­i­ty on what makes US pol­i­cy and mon­ey dif­fer­ent from China’s, even as Chi­na takes steps to improve some of its prac­tices. How much clear­er the choice would be if, in the face of geno­cide, the Unit­ed States went to the rest of the G7 and struck an agree­ment to vote down any new World Bank or ADB project for the Myan­mar gov­ern­ment as lever­age to extract a change in behav­ior. This approach would be square­ly at odds with Chi­na, and crit­i­cal­ly, it just might, along­side oth­er sanc­tions, have some pos­i­tive effect. Yes, it risks fur­ther ced­ing influ­ence in Myan­mar to the Chi­nese. But if we can’t even muster a puni­tive response to this scale of atroc­i­ty, then the clear choice we are offer­ing gets defined sole­ly by things like the inter­est rate on our loans. And that seems like a pret­ty hol­low devel­op­ment agen­da to me.

Thank you.

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