Is China’s Development Finance a Challenge to the International Order?

• Author: David Dollar
• DOI: http://doi.org/10.1111/aepr.12229
• Published date: 01 July 2018
• Date: 01 July 2018

Is China’s Development Finance a Challenge

to the International Order?

David DOLLAR†

Brookings Institution

China is a major funder of developing country infrastructure, lending $40 billion annually

through policy banks. Lending does not favor the belt and road above other regions. China’s

lending is indifferent to risk, that is, it is uncorrelated with indices of political stability and rule

of law. Some major borrowers with poor governance are beginning to have debt sustainability

problems, while other borrowers are in good fiscal shape. Chinese banks have been reluctant to

follow global environmental norms but seem to be evolving in that direction. Chinese actions

seem more a revision of the global system than a challenge to it.

Key words: Asian Infrastructure Investment Bank, belt and road initiative, Chinese economy,

debt sustainability, foreign aid

JEL codes: E22, E61, F35

Accepted: 29 December 2017

1. Introduction

China in recent years has become a major funder of infrastructure in the developing

world. The big Chinese financing push started shortly after the global financial crisis

(GFC). Starting in 2013 China “branded”the program under the rubric of the Belt and

Road Initiative (BRI). In speeches in Kazakhstan and Indonesia, President Xi Jinping

proposed the Silk Road Economic Belt and the 21st Century Maritime Silk Road. The

BRI involves issues such as policy coordination and harmonization of standards, but at

its heart is infrastructure financing.

In his opening remarks at the Belt and Road Forum in Beijing in May 2017 Presi-

dent Xi noted that:

“Infrastructure connectivity is the foundation of development through cooperation. We

should promote land, maritime, air and cyberspace connectivity, concentrate our efforts

on key passageways, cities and projects and connect networks of highways, railways and

sea ports…. We should improve trans-regional logistics network and promote connectiv-

ity of policies, rules and standards so as to provide institutional safeguards for enhancing

connectivity.”(Xi, 2017)

†Correspondence: David Dollar, John L. Thornton China Center, Brookings Institution, 1775

Massachusetts Ave NW, Washington DC 20036, USA. Email: ddollar@brookings.edu

© 2018 Japan Center for Economic Research 283

doi: 10.1111/aepr.12229 Asian Economic Policy Review (2018) 13, 283–298

The initiative has been met with enthusiasm by many developing countries, who

see new opportunities for financing needed infrastructure. Some nearby countries such

as India, on the other hand, have reacted with caution as they question China’s strate-

gic motivations. Developed countries of the West have also been reticent to endorse

the program until they learn more about the details. A concern of Western countries is

that China’s efforts will undermine global norms, especially in the areas of debt sus-

tainability and environmental and social safeguards.

This paper examines China’s role in development finance and in particular

addresses the issue of whether China is challenging global norms. China’s effort is

recent and data problems are legion. Most of the lending is coming from two big state-

owned policy banks, China Development Bank and China EXIM Bank. It would be

straight-forward for them to publish up-to-date data on lending to different countries,

including the terms. In the absence of that kind of transparency, researchers have to

make heroic efforts to compile their best estimates. The next section of the paper looks

at the available estimates and paints a picture of the scale of Chinese financing and

where it goes in terms of countries and sectors.

The third section of the paper takes up the issue of debt sustainability. The coun-

tries receiving significant finance from China vary significantly in the quality of eco-

nomic governance. Some have very good governance, and some, quite poor. Not

surprisingly, some of the countries with poor governance are beginning to have prob-

lems servicing their external debts. This raises some important questions of global gov-

ernance: will the troubled countries go to the International Monetary Fund (IMF), as

has been the practice in the past? Will China change its behavior as recipient country

debt reaches unsustainable levels?

The fourth section of the paper examines another important global issue, environ-

mental and social safeguards in infrastructure projects. Most large projects have

environmental risks and involve resettlement of communities. The multilateral devel-

opment banks (MDBs) have developed through experience a set of rules and proce-

dures for assessing and mitigating risks. Many client countries, however, find these

procedures cumbersome. China’s approach is to follow the laws and regulations of the

country in which it is operating, which is a reasonable position. However, in some

countries with poor governance regulations are mostly honored in the breech. How is

the Chinese approach playing out on the ground? And is there evidence of any shift in

the Chinese approach?

An interesting recent development covered in Section 5 is the establishment of the

Asian Infrastructure Investment Bank (AIIB), a Chinese-led MDB that has quickly

attracted 56 member countries. In 2 years of operation the AIIB has lent about $3 bil-

lion, a very small share of China’s development finance; and three-quarters of the pro-

jects have been co-financed with the other MDBs. AIIB’s lending will grow over time,

however, and has the potential to directly and indirectly address some of the concerns

about Chinese practices.

Section 6 concludes. It is too early to make a definitive judgment on whether

China’sfinance is a challenge to the global economic order. There are certainly things

China’s Development Finance David Dollar

284 © 2018 Japan Center for Economic Research