10 Years and $330B Later, What Has China's Belt and Road Achieved?

[By David Uren]

China’s Belt and Road Initiative, which is celebrating its 10th anniversary this week, has now advanced more than US$330 billion, which is about 80% of the lending of the World Bank over that period.

The BRI mainly lends to infrastructure projects, while the World Bank increasingly focuses on ‘capacity-building’ projects, such as education and agriculture reform, but both are operating in the same field of development lending.

It is less widely appreciated that China is also competing with the International Monetary Fund, in providing liquidity or ‘lender of last resort’ finance, principally through its central bank, the People’s Bank of China.

A World Bank working paper published earlier this year estimated that US$170 billion had been used to provide liquidity support across 128 rescue lending operations to 13 countries, using currency ‘swap’ arrangements set up since 2009.

In addition to the swap financing, the World Bank study establishes that China’s state-owned banks have provided a further US$70 billion in balance-of-payments support to troubled BRI borrowers. This lending and the swap arrangements amount to about 20% of IMF liquidity support over the past decade.

With both the BRI and the liquidity backstop operations of the PBOC, China is turning its chronic and massive balance-of-payments surpluses to its geopolitical advantage.

Unusually among developing nations, China has built up huge foreign exchange reserves, thanks to its model of export-led growth, so it has money to lend. It also has expertise and spare capacity in building infrastructure.

China has attracted representatives of 130 nations to its BRI forum being held in Beijing this week, after the IMF and World Bank meetings held in Marrakech last week.

Currency swap arrangements among central banks were pioneered by the US Federal Reserve at the peak of the 2008–09 global financial crisis, when global liquidity in US dollars almost disappeared. They were designed to ensure that US currency was available for international transactions.

The PBOC followed suit and now has a total of US$570 billion in bilateral swap arrangements (including one with the Reserve Bank of Australia for A$40 billion). While these were initially seen as a means of facilitating trade in renminbi, they are increasingly being used to assist BRI borrowers facing financial difficulty.

The biggest users of the country’s liquidity supports have been Argentina, Mongolia, Pakistan and Suriname. Egypt, Nigeria and Russia have also tapped these facilities multiple times.

Argentina, which established a US$19 billion swap with the PBOC in 2009, tapped it in both July and August this year for a total of US$3 billion to meet a scheduled repayment on a 2018 IMF loan.

Argentina was in desperate straits. It had negotiated a new US$44 billion loan from the IMF and was due for a US$7.5 billion disbursement, but it had exhausted its foreign exchange reserves, had no funds to meet the repayment on the earlier loan and had no access to private banks.

The IMF will not lend anything to a country that falls into arrears and nor will the World Bank. By using the swap agreement with China to meet a repayment on the old IMF loan, Argentina was able to keep the new IMF loan alive and, when the US$7.5 billion disbursement was finally made, the first use of the funds was to repay the PBOC.

Argentina was in a position to use the swap agreement because its finance minister, Sergio Massa, had travelled to China in May and negotiated to double the portion of the swap line over which Argentina had complete discretion to US$10 billion.

Reuters quoted the former head of the IMF’s western hemisphere department, Alejandro Werner, saying the deal demonstrated how ‘much more agile Chinese external financial diplomacy can be, and it’s an additional virtue that countries see in maintaining a constructive relationship with China’. It’s unthinkable that the US Federal Reserve would countenance its swap arrangements being used in this way.

The geopolitical advantage that China gains from this transaction may prove ephemeral. The frontrunner in next week’s Argentine elections, the conservative populist Javier Milei, has said that if he wins he will freeze relations with the Chinese government, which he described as an ‘assassin’, and adopt the US dollar as the country’s currency.

China has often been accused of recalcitrance in negotiating the restructure of debts of troubled borrowers. The central issue has been that China won’t accept writing down the value of debts when the IMF and the World Bank also refuse to do so.

China sees the IMF and the World Bank as essentially Western institutions and as its peers in supporting poorer nations. Although China is a member of both funds, their governance is dominated by the Western nations. The managing director position of the IMF is reserved for a European, while the World Bank president is always an American.

China’s voting share in the IMF is less than Japan’s and a third of that of the United States. The US voting share gives it sole veto rights over major IMF decisions. Last week’s IMF and World Bank meetings agreed to an increase in contributions, but the US rejected any increase in China’s share.

The IMF and the World Bank, as a matter of principal, won’t accept any losses on their loans, although they insist that commercial lenders and other national development banks should do so. China has demanded equal treatment with the IMF and the World Bank.

A prolonged impasse on this point over Zambia’s debts was resolved last year with an agreement on an interest-rate grace period and extended repayment terms, rather than writing down the value of the debt.

China last week surprised Sri Lanka’s Western creditors and the IMF by being the first to strike a deal over the rescheduling of debt. The agreement is expected to defer payments on US$4.2 billion of debt to China. Other creditors must also agree to debt restructuring before the IMF will release funds from a US$2.9 billion facility.

The World Bank notes that Chinese loans differ from IMF loans by being opaque, carrying relatively high interest rates, and being offered exclusively to BRI borrowers.

‘China has developed a system of “Bailouts on the Belt and Road” that helps recipient countries to avoid default, and continue servicing their BRI debts, at least in the short run,’ the paper says.

The paper says China’s role as an international crisis manager is similar to that of the US Treasury during previous Latin American debt crises and the European Union’s stability mechanism that was deployed during the Greek debt crisis in 2010. It helps to avert or resolve defaults by highly indebted borrowers. Its financing is more like ‘bridging finance’, than the extended support provided by the IMF.

The geopolitical advantage gained by China from its international lending is hard to assess. A study by a US-based research institute, Aiddata, examined more than 13,000 BRI projects and found that 35% had implementation problems, such as corruption, labour conflicts, environmental problems or public protest.

However, the same study notes that China is an active financier of infrastructure in low-income countries that struggle to obtain funding from anyone else.

David Uren is a senior fellow at ASPI. 

This article appears courtesy of ASPI's The Strategist and may be found in its original form here.