China slashes overseas loans amid geopolitical backlash

China has significantly slashed the foreign lending program of its two largest political banks, after nearly a decade of ambitious growth that at its peak rivaled that of the World Bank, new research shows.

Loans from the China Development Bank and the Export-Import Bank of China fell from a peak of $ 75 billion in 2016 to just $ 4 billion last year, according to data compiled by researchers at Boston University and consulted by the Financial Times.

The sharp downsizing comes as Beijing rethinks its Belt and Road Initiative, the signing program of Chinese leader Xi Jinping, which finances and builds roads, railways, ports and other infrastructure in most developing countries.

The BRI attracted growing criticism around the world for weaknesses, including loans to low-income countries with fragile finances and a lack of transparency or social and environmental impact studies on funded projects.

Kevin Gallagher, director of the Global Development Policy Center at Boston University, which compiled the data, said Beijing’s trade war with the United States was also a factor in this drastic change.

“In 2018 and [20]19 There was so much uncertainty due to the trade war with the United States, maybe they wanted to keep the dollar assets at home, ”he said.

According to a recent report by the Overseas Development Institute, a think tank, Beijing now realizes that its approach to lending is unsustainable.

“The old one..” Says the ODI report.

China has three policy banks that boost infrastructure investment at home and abroad: the two banks covered by the Boston University survey and the Agricultural Development Bank. They can lend abroad on favorable terms, but most often at similar commercial interest rates.

CBD and EIB loans totaled $ 462 billion between 2008 and 2019 according to the data, which will be released on Tuesday – just below the $ 467 billion loaned by the World Bank to low- and middle-income countries during the period.

But the poor governance standards often associated with Chinese loans to BIS projects have contributed to a series of scandals and complaints from debtor countries.

In a recent example, Pakistan – one of the largest recipients of BIS loans – alleged that Chinese companies have inflated the costs of power projects by billions of dollars; he seeks to renegotiate the repayment terms. Islamabad accused Chinese and local power companies of “embezzlement” and of exaggerating costs. Several large-scale projects in Malaysia have also become mired in controversy.

Yu Jie, a senior researcher on China at Chatham House, the UK think tank, said state-owned companies and state-owned banks shift their resources to domestic projects rather than overseas. Beijing’s economic policies have shifted in recent years from a focus on export-led growth to domestic investment and consumption.

“There will be much stricter criteria on the commercial viability of projects,” Ms. Yu said. “In the past, it was more about using financial resources to expand China’s political influence. It will now be more about trade gains. “

She added that China was facing “a huge situation. . . Reputation Damage “of the BIS:” Its expansive nature has alarmed the rest of the world and the government has been unable to come up with a transparent plan and explain its debt diplomacy. “

Public opinion in China is also a headwind for overseas lending, she said, as policymakers and the public realized that China needed to invest more in its health services, which had been tested by the coronavirus pandemic.

China’s loans have been concentrated in a relatively small number of countries, with 10 recipients accounting for 60% of the total, according to research from Boston University. Loans to Venezuela, the main recipient, accounted for more than 12.5%, followed by Pakistan, Russia and Angola.

The projects financed were mainly in transport and other infrastructure, mining and oil extraction, including pipelines, as well as power generation and transmission.

Of 858 loans identified by the Boston researchers, 124 were for projects in nationally protected areas, 261 were in critical habitats, and 133 were on native land.

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