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Xi Jinping’s Next Overseas Lending Revolution

Hachicks have As long as I’ve been lending abroad, I’ve stuck a slogan on the loan. The “going out” strategy of 1999 was replaced in 2011 by a “community with a common destiny,” but was quickly overshadowed two years later by Xi Jinping’s “One Belt, One Road” vision. Throughout this period, one type of project dominated, even as slogans changed. A Saudi bank finances everything from the Mecca Metro, Saudi Arabia’s railway being built at a cost of $16.5 billion by the same construction company that once laid the tracks for Mao Zedong. Newly developed in the Malaysian state of Johor, shiny Bandar is an attempt to compete with Singapore.

By the time the covid-19 pandemic hit and lending dried up, China’s approach was starting to look inadequate.Our estimates put the world at least $1.8 trillion in debt to China’s eight state-owned banks. , which is more than 2% of the World Bank. gdpCritics have accused China of luring poor countries into debt traps to further its geopolitical ends. Technocrats were concerned about how China would fit into the structures the rich world uses to alleviate the debt of poor countries. There was growing concern that it would not be possible to obtain China is changing course as lending rises again. The emerging system is leaner and more sophisticated, but determined to reshape the world in Beijing’s favor.

It is not the institution that has changed. Poor countries borrow from the West through multilateral organizations, aid agencies, banks and bond markets. China’s overseas lenders, including his two largest banks, the Exim Bank and the China Development Bank, are state-owned, blurring the lines between profit-making lending and aid. While Western lenders outsource loans to borrowers and charities in the countries they lend to, almost all loan financing infrastructures built by Chinese state-owned enterprises ensure that funds never leave the country. means.

In the early days, the system seemed to benefit everyone. In China, weak construction demand has put the industry’s state-owned giants on edge. State-owned banks were hit by a dollar overflow from rapid exports. Both bosses not only earned valuable business by looking abroad, but also earned points from officials. In return, these officials diplomatically pulled borrowers. Loans especially flowed to Africa, home to receptive governments and abundant untapped resources. But eight large state-owned banks were lending everywhere. The global loan balance owed to China increased from $390 billion at the end of 2010 to $1.5 trillion in 2017.

However, cracks began to form towards the end of this period. Xi Jinping’s mandate was to focus on the world’s shipping lane ‘roads’ and the land ‘belts’ that connect distant China to the farthest reaches of Africa and Europe, but financing cannot be changed. was. Belt and road loans continued to flow to hostile or distant countries to no avail. Poor countries struggled to pay back, and more projects were abandoned. State-owned construction companies, the borrower-heavy part of the lending system, had little involvement in the game. If the loan deteriorated, the bank lost money and the officials were embarrassed, but the builders could still make a profit. According to the American Enterprise Institute (Aei), a think tank that monitors Chinese lending, said new construction projects were starting to dry up even before the pandemic, suggesting authorities are finally holding back lenders.

Western observers expected the brakes applied at the start of the pandemic to last until China dealt with the restructuring left behind by its previous debauchery. Instead, policymakers are now directing lenders to head abroad again, with senior diplomats facilitating the process with them. , which could only be confirmed in the host country figures. However, these numbers are now on the rise.Meanwhile, data from fdConsultancy firm i Markets has shown an announcement of a new project showing financing expected in the second half of 2022.

The features of this new age are beginning to emerge. In 2020, officials told construction companies that future Belt and Road projects should resemble “meticulous blueprints.” In his 2021 speech, Mr. Xi reminded them that “small is beautiful.” His Sinosure, a state-owned insurance company, is now refusing to lend to a country that already owes China heavily. Construction companies also have to make small investments in the projects they are working on.according to AeiThe average construction project value fell from $459 million in 2018 to $407 million in 2022. Another database maintained by Boston University researchers shows that the footprint is also shrinking from an average of 90 km.2 16km from 2013-172 2018-2021.

Chinese policymakers are also controlling spending more tightly. Before the pandemic, equity funds owned by ministries, policy banks, and other public institutions were the fastest-growing source of foreign funding, according to Boston University data. These will help the government direct government money where it is needed without going through state-owned construction companies. Some funds are partnerships with China and the Gulf countries. Others act in a manner similar to private equity outfits. Fund managers make big decisions. So far, they have opted to invest in fintech and greentech. In time, China will even be able to use these channels to invest in rich countries that have little desire for debt.

Many of the new generation projects are in hotspots of commodities that are critical to the transition to the environment. China’s manufacturing industry once needed oil and iron ore. Today, we manufacture more electric vehicles than anywhere else in the world, demanding vast quantities of cobalt, copper and lithium. From 2018 to 2021, state-owned banks stopped lending to other countries, but transferred billions of dollars to partnerships between state-owned enterprises in China and local metal mining operations in Latin America. This has led to a surge in buying by state-owned enterprises and equity funds, three of which are specifically dedicated to the region.

Lend money and lose a friend

In this leaner, more centralized system, money is passed to two types of borrowers: borrowers who are more likely to repay (because the project is more likely to be profitable or the government is wealthy enough). ) and the borrower for which the lost money represents a worthy price. Pay for diplomatic or military gain. Lending to friendly countries with limited geopolitical uses, such as Angola and Venezuela, has dried up. But the China-Pakistan Economic Corridor, labeling his $60 billion worth of megaprojects in a country that already owes more than 30% of its foreign debt to China, appears to be an exception to Sinosure’s new lending rules. . The Center for Research on Energy and Clean Air, a think-tank, believes Pakistan has at least four power plants that would have been abandoned if authorities had stuck to recently adopted climate policies.

In this way, China’s external financial map is being rewritten. Banks are reducing lending to Africa. Instead, they are heading to closer countries, sources of fresh commodities, and places where Chinese companies can fend off Western trade tariffs. Malaysia and Indonesia benefit from their proximity. Latin America is rich in minerals. A small but growing number of state-owned manufacturers are using loans from state-owned banks to enter into deals with local governments and companies. One such arrangement is the Kuantan Industrial Park in Malaysia. The infrastructure cost at least $3.5 billion and was funded by joint ventures between the state and state-owned enterprises. The Middle East, where Oman and Saudi Arabia host Chinese manufacturing clusters, offers similar access to Europe.

The new age presents the unknown. One is the scale of investment. Money from equity funds transits places like Hong Kong and the British Virgin Islands, making it difficult to track. Lending from state-owned banks is shrinking, but lending is accelerating. Another unknown is regarding decoupling. In its early days, China’s overwhelming ambition was to tie itself into the global economy. Now, he also wants to protect himself from America’s economic war. If relations continue to sour, China may step up efforts to dodge tariffs, lock in allies and secure global supply chains. The final unknown is whether such efforts will be hampered by national desires for a more sustainable approach to debt. Some question whether China’s behavior has really changed. Will it eventually return to building and funding megaprojects, along with various new activities?

In the past, Chinese banks would lend to poor countries for large and wasteful projects. But the same bank also financed large and useful projects such as dams and roads in countries where they could not borrow from anyone else because they could not really repay anyone. Consultancy Oxford Economics estimates that there will be a $15 trillion global “infrastructure investment gap” between now and 2040 between the construction money that economies need and the money that is actually available. . The change in approach makes China less likely to intervene, and other countries less enthusiastic. China’s new era of lending will be more focused and better for its own finances. Nevertheless, some countries, especially in Africa, will miss the old ways.

https://www.economist.com/finance-and-economics/2023/02/22/xi-jinpings-next-overseas-lending-revolution Xi Jinping’s Next Overseas Lending Revolution

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