China’s policy lending in Eurasian Belt and Road economies is facing a raft of debt relief requests and a slowdown in bilateral government-to-government loans. However data analytics that focus solely on policy bank lending through bilateral agreements miss the wider geoeconomic picture. China’s policy banking environment in Central Asia is shifting, but the loan books of the future will be more heavily weighted to Chinese enterprises operating in host economies and host economy state-owned enterprises (SOEs).
The financial model underpinning Belt and Road investment is a combination of public finance vehicles, all essentially drawing on China’s sovereign wealth currency reserves. The most common pattern is “three banks, one insurer” comprising the joint operations of the Export-Import Bank of China, China Development Bank, Industrial & Commercial Bank of China, and Sinosure. Other commercial banks are also incentivized to participate in the Belt and Road public finance model with access to China’s foreign currency reserves and with overseas operational risks underwritten by Sinosure.
The Financial Times among other outlets this week reported a sharp drop-off in China policy bank lending to Belt and Road economies based on a Boston University Global Development Policy Center dataset on China’s Overseas Development Finance. However, there are serious flaws in using this particular dataset as an exhaustive list of China’s policy lending in the various Belt and Road regions.
The Boston University interactive based on the dataset took a geospatial approach in examining China’s overseas development financing, focusing on biodiversity and indigenous lands. Loans not attached to a specific project with a geographic location were omitted from the original public data. This means ignoring multimillion dollar loans issued for non-greenfield investments, such as China’s 2010 $10 billion loan to the Kazakhstan sovereign wealth fund, Samruk-Kazyna, and a similar but smaller “no strings attached” loan to the National Bank of Uzbekistan.
Kazakhstan is a good example of why relying on this dataset as an exhaustive list of China policy loan books is fallible. The Boston University interactive lists only seven projects in Kazakhstan from 2008 to 2019, totaling $5.7 billion [Editor’s note: This count has been updated after Boston University released updated figures]. But the list of joint projects under the latest China-Kazakhstan bilateral agreement alone is 56 projects, totaling $24.52 billion. Regionally, the Boston University dataset estimates China’s total lending to Central Asia at $19.3 billion for 2008-2019; however this figure is at least $41 billion, according to the author’s unpublished database. This means a huge amount of projects are unaccounted for.
Disaggregated data on specific China policy bank investments in Kazakhstan are also available. China Development Bank’s Kazakhstan loan book goes beyond the bilateral agreement and in 2018 totaled $28 billion across 32 projects. Examples of China policy bank loans in Kazakhstan omitted from the Boston University database include a $500 million loan to Kazakh Development Bank to modernize the Shymkent refinery. Export-Import Bank of China has loaned $808 million to the Kazakh National Highway company for two highways, and another $300 million to Kazakh Finance Ministry for border modernization. These are all examples of policy bank loans with geospatial footprints.
More importantly, some media analyses based only on the Boston University dataset, which only covers sovereign loans by policy banks, fail to examine how Chinese policy and commercial banks are behaving operationally in their foreign lending activities. China Development Bank, Bank of China, ICBC, and CITIC have all opened branches or subsidiaries in Kazakhstan, issuing a variety of loans to Kazakh businesses outside of the government-to-government loan scheme. These China bank operations are directly tied to China’s domestic banking superstructure and thus operate in an ambiguous space between state and market.
For debtor economies, the types of projects that Central Asian states can choose from for China policy bank investment are also directly tied to China’s domestic economy. Projects must serve China’s geoeconomic purposes. This means most projects are in low-end industrial and agro-industrial sectors, or infrastructure construction or maintenance. This has the potential to create genuine opportunities for positive economic cooperation. However, it also means that many policy bank debtor economy projects serve Chinese interests more than they do debtor economy interests. Development of a Kazakhstan oilseed processing plant may serve a Chinese geoeconomic interest to diversify supply away from Pacific Ocean economies, but the financial risk of the project’s feasibility falls entirely upon the debtor.
Nevertheless, Central Asian economies such as Kyrgyzstan are still requesting more policy bank investment, even while struggling to maintain existing obligations. For debtor countries, Chinese capital investment is still the only viable short-cut to modernization. For China, the political risk of investing in Kyrgyzstan’s semi-industrial economic structure is serious. The recent political reset in Bishkek grew out of a disappointing election in which the status quo came out on top despite extensive public dissatisfaction. The Matraimov scandal, and its linkages to the Belt and Road system, cannot be ignored either. Former deputy customs head Raimbek Matraimov captured the customs system, enriching his entourage by skimming the cream from external trade. There are thus serious political and financial risks to China’s policy lending in the region that go beyond the single dimensionality of the debt-trap diplomacy analysis.
For a geoeconomic project with serious financial and political risk, China has little competency in investing in external economies. China’s public finance architecture does not have a functioning country risk model with which to gauge the operations of policy bank lending. This leaves the entire public finance structure, in both domestic and foreign operations, essentially flying blind on sovereign risk. With the sizable financial and political risk underpinning China policy bank investments in Belt and Road economies still being largely guesswork, this leaves the policy banks open to the possibilities of huge default losses.
As well as the Chinese public finance system’s exposure to sovereign risk, all China policy bank loans in Belt and Road economies directly expose debtor economies to China’s domestic financial systemic risk. This means that a debt-deflation scenario in China would impact all overseas assets, projects, and liabilities. The risk of a debt deflation scenario in China is now high. This means that any policy bank loan in any country on the Belt and Road is tied directly to China’s local government bond market and its institutional peculiarities. The risks then for the policy bank loans are equally exposed to debtor non-payment as they are to policy bank insolvency.
In practical geoeconomic development terms, China’s Belt and Road policy in Eurasia is failing. But the policy banking system is already in an advanced state of deployment. While China’s policy bank model and the Belt and Road project have taken a geoeconomic hit through poor lending practices, backlash against increased China influence in Eurasia, and the effects of the pandemic, lending will continue. However it is more important to understand the changing dynamics and shifting motivations of China’s policy lending, particularly in Central Asia.
China is now shifting policy bank lending down the public finance hierarchy to more intra-country loans and more loans to SOEs. China’s policy bank lending in Central Asia, Eurasia, and Middle East economies have been policy-driven to directly target China firms operating in Belt and Road host economies that help to develop China’s offshore production system. According to the author’s unpublished database, 23 out of 44 Central Asian loan deals with public agreement terms require the participation of Chinese firms.
Analyses of Belt and Road public finance tend to measure only bilateral deals that develop new infrastructure. However China’s wider underlying banking system in Belt and Road economies is fundamentally policy-driven, centrally coordinated, and targeted toward developing China’s offshore production system. This is still very much policy lending, not commercial lending. As the first phase of Belt and Road completes and even retracts, expect stronger lending in the pseudo-commercial and SOE space as Belt and Road policy banking becomes more distributed to match the economic activities of China enterprises in the region.
This piece has been updated to clarify the arguments made. An earlier version of this piece listed a $1.5 billion loan to Kazakhmys and a $278 million loan for the construction of the Moynak hydropower station as omitted from the dataset; both loans fell outside the dataset’s scope. The Diplomat regrets the error.