By Oyintarelado Moses
Debates about the drivers and impacts of Chinese overseas lending and development finance (OLDF) have accompanied the rise of China as the world’s largest official bilateral lender.
Amidst stalled debt negotiations under the G20 Common Framework, geopolitical tensions between the United States and China and “debt trap diplomacy” allegations surrounding China’s Belt and Road Initiative (BRI), it can be difficult to determine the true drivers and impacts of Chinese OLDF.
In a new policy brief published by the Boston University Global Development Policy Center, we provide evidence-based research to explain why China lends and objectively provide insight on how China became a creditor on the world stage.
Three main points are key to understanding the drivers and impacts of Chinese OLDF:
1. Push “supply” factors and pull “demand” factors drive Chinese OLDF.
Several key push factors have driven Chinese OLDF, including China’s current account surplus, overcapacity in key infrastructure sectors in China, the need to secure imports and government policies and mechanisms specifically encouraging outward finance.
The pull factors representing recipient country demand include the need to fill finance gaps, address core infrastructure needs and a preference for Chinese finance. Ultimately, the demand for external finance is based on recipient countries’ policy goals and priorities.
2. Chinese “debt trap diplomacy” is not a driver of Chinese OLDF and there is no empirical evidence of this phenomenon.
Based on our analysis of eight examples of supposed “debt trap diplomacy” cases, we found no empirical evidence that China lends with the end goal of seizing a strategic public asset or gaining strategic leverage in the event of non-repayment.
3. Chinese OLDF has both benefits and risks to recipient countries.
Empirical evidence shows that China’s OLDF is associated with short-term economic growth that benefits recipient countries by helping them overcome infrastructure bottlenecks and giving countries more choices for liquidity.
Chinese finance can also pose social, environmental and debt sustainability risks to recipient countries. As such, China should promote low-carbon, resilient and socially inclusive growth abroad, as well as participate in debt relief and emergency financing efforts.
Goal 17 of the UN 2030 Sustainable Development Goals (SDGs) encourages the globe to revitalize global partnerships for sustainable development. But politically charged narratives exacerbate tensions between the US and China over development finance at a time when global coordination is of the utmost urgency. Rather, the narrative surrounding China’s OLDF should center on addressing pressing infrastructure and climate financing gaps in emerging markets and developing economies and setting a stronger foundation for achieving the SDGs.
Oyintarelado Moses is the Data Analyst and Database Manager for the Global China Initiative at the Boston University Global Development Policy Center. Follow her on Twitter: @TarelaMoses.