[Part 1] Questions & answers on China as a major creditor power by Éric Toussaint

14 February by Eric Toussaint


Source : Global Monitor, China’s Overseas Investment in the Belt and Road Era, Hongkong, 2021, https://www.globemonitor.org/content/chinas-overseas-investment-belt-and-road-era , page 22

China has been demonized by several commentators: it is said to be the main creditor of many countries of the South and to get the most of them through ruthless exploitation whereas the World Bank, the IMF, the Paris Club, that bring together traditional creditor powers, are supposed to do their best to help those countries burdened by too much debt.

China also uses propaganda. It parades as an ally of countries of the South, regularly announces debt cancellation and debt relief, and claims that it does not enforce neoliberal conditionalities as do the IMF and the World Bank. It also stresses its efficiency.



 What are the scope and amount of loans granted by China?

China is the main public creditor for countries of the Global South

In a report published in November 2023 the research laboratory AidData listed 20,985 projects in 165 countries that had benefited from loans or grants by China. The total amount of credit was $1,340 billion over 22 years [1]. This turns China into the main public creditor for countries of the Global South. The volume of China’s loans is higher than the combined loans granted by the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

 [2]. China overtook other public creditors in 2015 [3].

But we have to be aware that private creditors, not China, are the main creditors of public and private debt in both so-called developed countries and developing countries.

It is thus wrong to claim that China is the main creditor whether globally or for countries of the South. Private lenders (notably investment funds Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
such as BlackRock or Pimco, pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
, private banks or vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
) are actually the main creditors.
What is true is that China is the main public creditor and consequently the largest official debt collector in countries of the South.

 Does China lend more than the US?

China overtook the US as creditor in the early 2000s

Yes indeed. The volume of credits granted by China from 2020 onward amounts to about $80 billion a year [4] while the US, though they try to catch with China, grant credits for an average of $60 billion a year. China overtook the US as creditor in the early 2000s.

As shown in Figure 1, in 2016, the annual volume of credits granted by China peaked at $140 billion, three times more than those granted by the US. In 2017 and 2018, it amounted to $120 billion, 100 billion in 2019, 80 billion in 2020. We can also notice that official credits granted by the US were less than $40 billion from 2016 to 2020 and increased afterwards to reach $60 billion in 2021. Official financial flows from G7 countries (including the US) were less than those of China in 2016, then China fell behind. From 2020 onward G7 official flows increased steeply to compete with China’s influence.

Figure 1: Official financial flows from China, the US and G7 countries to developing countries during the Belt and Road Initiative era of , 2014-2021, in constant 2021 USD billions [5].

Source : AIDDATA, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 12, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 2: Official financial flows from China and G7 countries to developing countries during the Belt and Road Initiative era, 2014-2021, in constant 2021 USD billions [6]

Source : AIDDATA, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 11, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 2 shows that China’s official credits in 2014-2021 amount to twice those of the US. We can also notice that the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of Official Development Aid (ODA ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
) is much lower in Chinese credits than in credits granted by the US, Canada, Germany, Japan, the United Kingdom and France.

 When did China become a major official creditor? What part does the Chinese project known as the Belt and Road Initiative (BRI) play?

From 2013/2014, China launched a major programme of investments and credits on a global level, which it called the Belt and Road Initiative. One of the aims was to create vast economic corridors enabling it to export and import as cheaply, safely and quickly as possible

After the victory of the Chinese Revolution in 1949 China provided loans and grants to Third World countries as they were called at the time. The money went to countries that China tried to bring closer to its area of influence and very much belonged to solidarity cooperation. Beijing’s objectives at the time included neither financial return nor access to raw material. From the 1980s, under Deng Xiaoping, so-called ‘market’ reforms were applied at an accelerated pace, leading to the creation of a major capitalist sector in China, even though the State retained control of the main economic instruments.

In the 1990s, China has gradually become the world’s largest workshop. It has welcomed a huge amount of investment from American, European, Japanese and Taiwanese transnationals, all of which re-export their products to the world market. In this context, China has accumulated huge trade surpluses compared with the United States and the European economic powers. These surpluses, mainly in the form of foreign exchange reserves in dollars, have accumulated, and China has begun to lend these dollar surpluses on an increasingly massive scale to countries in the Global South and, more marginally, to some countries in the North. China has also used a significant part of its reserves to buy companies in both the North and South of the planet. Boosted as it was by a growth rate close to or above 10% a year over more than 20 years (from 1990 to 2013, China’s annual growth rate varied between 7.66% and 14.23%), it has become the second industrial power in the world, and could soon overtake the US.

From 2013/2014, Chine launched a major programme of investments and credits on a global level, which it called the Belt and Road Initiative. One of the aims was to create vast economic corridors enabling it to export and import as cheaply, safely and quickly as possible. It would import the material needed by its industry to manufacture technological products and export them to the world market along those same corridors.

Figure 3 and the map show that over 140 countries have signed agreements with China in the BRI context, among which an overwhelming majority of countries in Afrique, the Middle East and Asia.

Graph 3 & map: Countries of the Belt and Road Initiative

Source : Green Finance and Development Center, FISF Fudan University, extrait de Christoph Nedopil Wang, “Ten years of China’s belt and Road Initiative (BRI) : Evolution and the road ahead”, FISF, Griffith University, page 7.
Subsaharan Africa 44 countries
Europe and central Asia 35 countries
East Asia and Pacific 25 countries
Latin America and the Caribbean 21 countries
Middle East and North Africa 18 countries
South Asia 6 countries
Income groups
High income countries34
Upper intermediate income countries 43
Lower intermediate income countries 41
Low income countries 31
Source : Green Finance and Development Center, FISF Fudan University, extrait de Christoph Nedopil Wang, “Ten years of China’s belt and Road Initiative (BRI) : Evolution and the road ahead”, FISF, Griffith University, page 7.

Figure 4: Official financial flows from China to the developing world, 2000-2021, in constant 2021 USD billions

Source : AidData, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 8, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 5: Cumulative financial flows from China to the developing world, 2000-2021, in constant 2021 USD billions

Source : Source : AidData, “Belt and Road Reboot, Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, Novembre 2023, page 10, https://docs.aiddata.org/reports/belt-and-road-reboot/Belt_and_Road_Reboot_Full_Report.pdf

Figure 5 shows that credits as official development aid (ODA) that are granted at concessional rates, i.e. lower than market rates, amount only to about 10% of the Chinese credits. The cumulated total of China’s official external lending amounts to $1,300 billion.

Figure 6: Growth in Chinese external lending in USD trillions (thousands of billions)

In the figure below, published by the Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank : http://www.federalreserve.gov/
Bank of New York, we can see clearly a four-fold increase in Chinese external lending from 2012 to 2022, from just under $500 billion in 2012 to close to $2,000 milliards in June 2022.

The part in blue refers to credits that companies owned by China abroad grant to each other. Orange refers to trade credit and grey to other credit, the part that most increases. The volumes presented in this graph do not coincide entirely with those provided by AidData, but they show the same trend and include trade credit and loans between companies owned abroad by China.

Source : State Administration of Foreign Exchange and Bank for International Settlements, both via CEIC (in https://libertystreeteconomics.newyorkfed.org/2022/11/a-closer-look-at-chinese-overseas-lending/ )
Note: Les données vont jusque juin 2022.

 Have Chinese credits strongly decreased as is claimed by the World Bank in its December 2022 and December 2023 reports?

According to AidData, it would be wrong to claim that Chinese lending have decreased sharply since 2021. AidData considers that Chinese loans reached $75 billion in 2021 while the World Bank claims that on the same year loans amounted to $ 7.1 billion. The huge difference, AidData explains, can be accounted for by the fact that China used other channels for lending (see AidData November 2023, chapter 2, pp. 47-54).

The author would like to thank Gilbert Achcar, Maxime Perriot and Claude Quémar for document research and proofreading.
Translated by Christine Pagnoulle


Footnotes

[1AidData, “Belt and Road Reboot : Beijing’s Bid to De-Risk Its Global Infrastructure Initiative”, November 2023, https://www.aiddata.org/publications/belt-and-road-reboot

[2AidData, ibid. chapter 2, page 58.

[3Sebastian Horn, Carmen M. Reinhart and Christoph Trebesch, “China’s Overseas Lending” NBER Working Paper No. 26050, July 2019, Revised May 2020.

[4This amount includes Official Development Aid and Other Official Flows, i. e. loans officially granted though not as aid. The ODA consists mainly of subsidies and concessional loans (at a lower rate than those of the market) intended for development projects and activities financed by public institutions. The OOF consist mainly of non-concessional loans from public institutions. Over the past years, over 90% of China’s annual commitments in the financing of international development consist of OOF.

[5This figure measures official financial flows (ODA and OOF) of China, the US and G7 countries top low and middle income countries from 2014 to 2021. AidData relies on OECD-DAC measurement criteria to make ODA and OOF determinations. The U.S. and G7 ODA and OOF data represent gross disbursements from the OECD-DAC.

[6AidData relies on OECD-DAC measurement criteria to make ODA and OOF determinations. The Vague (Official Finance) is a residual category for official financial commitments from China that could not be reliably categorized as ODA or OOF because of insufficiently detailed information. G7 ODA and OOF data represent gross disbursements from the OECD-DAC.

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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