Wed | September 27, 2023

Hong Kong  —  The inauguration of two new electricity-generating units in Zimbabwe’s Hwange power station last month was not an unfamiliar scene when it comes to major infrastructure projects in Africa.

There, in a remote region of the country of southern Africa, authorities and the Chinese ambassador came to cut the ribbon on the expansion of the coal-fired plant intended to lessen the country’s power outages and to celebrate Beijing’s part in financing it.

One of the many expensive projects on the continent financed by Chinese lenders as part of president Xi Jinping’s signature Belt and Road Initiative is the project, which was funded by around $1 billion in Chinese financing years before Beijing ceased subsidizing new coal-powered projects abroad.

In Africa, residents of large cities like Lagos, Nairobi, and Addis Abeba now commute everyday via railways, motorways, and airports constructed in recent years with Chinese financing and frequently by Chinese construction companies.

There are now concerns about how Beijing will choose to lead the project as it approaches its second decade, as well as whether it will reduce funding in light of further difficulties and indications of a reassessment.

The Covid-19 outbreak, the war in Ukraine, Beijing’s own burgeoning financial problems, and the need to adequately handle environmental issues are just a few of the new pressures on China’s lending and borrowing practices.

Data from the Boston University Global Development Policy Center in the US monitor what they claim is a gradual fall in new loan pledges from Chinese corporations to African government borrowers that intensified in the previous two years, suggesting a transition is already under place.

This was the second year in a row that lending fell below $2 billion, and the researchers say in a new report that the decline may not only be explained by the pandemic but also by a broader shift toward lending that could see fewer large-scale loans. Those new loans fell from a peak of $28.5 billion in 2016 down to just under $1 billion last year.

According to report author Oyintarelado Moses to CNN, “The Belt and Road Initiative does appear to be in recalibration mode.”

Furthermore, it’s possible that this tendency extends beyond China’s support of Africa.

“Looking at decreasing loan averages globally, it is likely that this new phase (of Belt and Road lending) will be characterized by less financing overall,” said Moses, a statistics analyst with the center’s Global China Initiative.

However, figuring out how much money is leaving China and going toward global development is notoriously difficult because Beijing withholds this information and a variety of financial institutions are involved.

For instance, the data from the Global Development Policy Center excludes some Chinese credit that might be going to private borrowers for projects on the continent and concentrates on African government borrowers or loans with a sovereign guarantee.

Some experts argue that Beijing’s primary drivers for becoming the largest bilateral lender in the world are still in place, implying that it will continue to fund both large- and small-scale projects in the years to come, but it is uncertain at what magnitude.

The outcome of everything could have a big impact on how easy it is for poor nations to get money for their desperately needed infrastructure.

Next month’s important international conference in Beijing will be watched closely by policymakers for clues as to what comes next.

Economic headwinds

During a 2013 visit to Kazakhstan, Xi unveiled the plan that would later serve as the foundation of his foreign policy.

The Chinese leader there urged the revival of the historic Silk Road to “broaden the space for development” and to strengthen economic links between nations.

Since then, billions of dollars in loans have poured into railroads, power plants, motorways, ports, and telecoms throughout the developing world, not only from development finance organizations but also from China’s commercial banks.

This enables China to increase its worldwide influence and soft power by finding a use for its spare industrial capacity and financial resources and by strengthening ties with the initiative’s signatories, who according to Beijing number more than 150 nations.

The new infrastructure has benefited several of its partners.

However, projects covered by the Belt and Road initiative have drawn criticism for allegedly having insufficient environmental and labor regulations as well as dangerous lending. Detractors claim that China has burdened low- and middle-income countries with excessive levels of debt in relation to their GDPs.

Beijing has refuted these claims and praised the effort instead, saying that it will allow people all over the world “to make the ‘cake’ bigger and share it more equally” and “foster new engines for economic development.”

New economic realities are now in play, as pandemic-affected nations are impacted by rising interest rates and rising commodity prices brought on by the conflict in Ukraine.

The period of low interest rates and cheap money flowing from China into these countries is finished, and that is the largest change that we must realize. Ammar A. Malik, a senior research scientist at the AidData research lab at William & Mary’s Global Research Institute in the US, which also analyzes Chinese overseas development money, claimed that China has already overtaken all other countries as the largest debt collector.

Accordingly, the problem for China is to basically ensure that these nations have enough liquid assets and that the projects are adequately operational so that China could collect the repayments with interest and on schedule.

Several recipient countries have recently approached creditors, including China, for debt postponement or relief treatment. Beijing has responded by extending bailout loans and joining other lenders in cooperative negotiations on debt relief for struggling borrowers like Zambia and Ghana.

According to Malik, debt distress difficulties may mean that a lot of low- and middle-income nations are not currently able to take on extra debt.

There are a number of factors that “incentivize both China and recipient countries to continue working together,” he said, so there may not be a slowdown in financing in the near future. However, many developing economies are likely “still very interested in receiving funds for large infrastructure projects that are so critical to grow their economies.”

Along with facing severe domestic economic difficulties, China is navigating the second decade of the Belt and Road.

Local governments are battling growing debt tied to a real estate problem as the anticipated post-Covid economic recovery has not materialized.

Long-term repercussions of Beijing’s domestic economic problems on its foreign financing are still uncertain, but Moses of the Global Development Policy Center says there are already indications of effects.

Beijing’s choices over how to use its foreign exchange reserves and its requests for more liquidity to deal with domestic problems “show a current shift to lenders having a higher focus on domestic financing needs,” she said.

Austin Strange, an assistant professor at the University of Hong Kong, claims that while China’s economic problems may make financiers more cautious, some of the economic priorities that initially drove China’s global infrastructure spree—such as an interest in creating new investment opportunities in a slowing economy—remain.

“This basic intuition is arguably still valid as the slowdown continues, particularly as geopolitical tensions are making it more difficult for Chinese firms in certain sectors to increase their investments in advanced economies,” he said.

A Beijing gathering

Policymakers from all over the world will be keeping a close eye out for signs of how the Belt and Road program will develop as delegates from more than 100 nations are anticipated to congregate in Beijing for a forum next month.

China may aim to place more focus on environmental issues, better social rights, and due diligence – especially as Beijing and its banks learn lessons from the project’s first decade, analysts say. A drop in the size of loans is not the only area being studied, they add.

According to a 2021 AidData analysis, from 2013 to 2017, 35% of Belt and Road projects that were solely run by Chinese corporations experienced “implementation challenges,” like as environmental problems, corruption scandals, and labor laws that were broken.

China published guidelines in 2017 to promote a “green” Belt and Road, which emphasized environmental conservation and sustainable growth. Recently, authorities have started advocating for “small and beautiful” initiatives, claiming that these will appeal to the local populace.

China promised not to develop any new coal-fired power projects abroad in 2021, according to Xi.

According to AidData’s Malik, China has historically allowed the recipient country to determine the nature of the project, in contrast to Western lenders who look to apply their environmental and other standards onto projects they fund. This could limit how much Beijing can achieve its green objectives.

Future financing to the continent of Africa, according to academics at the Global Development Policy Center, might mean less loans with huge values over $500 million, more loans with smaller values under $50 million, and loans with more positive social and environmental benefits.

However, it is probable that China will keep allocating funds in accordance with its geopolitical objectives, particularly in regions where it is battling for influence against the United States, which just unveiled its own efforts to compete with Chinese support for foreign development.

There are also “likely still considerable pockets of (Belt and Road Initiative) enthusiasm on the part of China and counterpart governments, for instance, in China’s regional neighborhood,” despite the fact that China’s investment of massive infrastructure projects may have reached its worldwide peak,” said HKU’s Strange.

New projects “should in theory benefit from past lessons learned,” he said, if Chinese authorities and project executives have made significant efforts to improve on how they manage these projects over the past ten years. “In hindsight, this could be advantageous.”

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