A couple of decades ago, the largest bilateral lenders in the world were the United States, Japan, and Germany. These three economic powerhouses played a crucial role in financing infrastructure, food supplies, and general development in low and middle-income countries. Data from 1970 to 2000 consistently showed the United States as the leading bilateral lender, with Japan eventually surpassing it. Germany, too, was a major player in global lending. However, if we extend this data to recent years, one country has rapidly overtaken all these major economies in bilateral lending: China.
China’s Rise as a Global Lender
Despite having a lower economic output per capita than the United States, Japan, and Germany, China has quietly emerged as the world’s largest bilateral lender. As of 2019, China had provided over $154 billion in debt to low and middle-income economies—a staggering figure that highlights its growing influence in global finance.
A major driver of this shift is China’s Belt and Road Initiative (BRI), launched in 2013 by President Xi Jinping. This ambitious project aims to enhance global trade by financing infrastructure projects across Asia, Africa, and Europe. China provides funding for roads, railways, ports, power plants, and telecommunications projects in partner countries. The initiative serves dual purposes: boosting economic development in recipient countries while expanding China’s global influence by creating new markets for its goods and services.
The Financial Engine Behind China’s Lending
One of the key questions is how China manages to finance such massive lending, given its per capita income is lower than many developed economies. The answer lies in two main factors: China’s vast foreign exchange reserves and its policy banks.
Foreign Exchange Reserves
China is the world’s largest holder of foreign exchange reserves. Over the past two decades, its reserves have skyrocketed due to consistent trade surpluses, primarily from exports to the United States and other global markets. These reserves provide China with a vast pool of funds that it can deploy in its overseas lending activities. The rise in China’s foreign reserves has directly paralleled its expansion as the world’s leading bilateral lender.
Policy Banks
Unlike traditional commercial banks, China’s policy banks—the Export-Import Bank of China, the China Development Bank, and sovereign funds like the Silk Road Fund—do not operate purely for profit. Instead, they serve China’s strategic economic and geopolitical interests. Unlike the International Monetary Fund (IMF) or the World Bank, which impose strict conditions on borrowers, China’s policy banks offer loans with fewer restrictions, often tied to infrastructure projects that benefit both China and the recipient country.
For example, the China Development Bank plays a crucial role in financing large-scale infrastructure projects at concessional interest rates, sometimes as low as 1.6%. While some Chinese loans are offered at higher rates, typically ranging from 2% to 3%, they remain attractive compared to market-based commercial lending.
The Controversy Surrounding China’s Lending
Although China’s lending has facilitated significant infrastructure development worldwide, it has also sparked controversy. Critics argue that China’s loans can be financially burdensome, especially when compared to Japanese loans, which sometimes offer interest rates as low as 0.1%. This discrepancy has led to concerns about debt sustainability for recipient nations, particularly those struggling with financial instability.
Furthermore, China’s role as the global “lender of last resort” has raised additional concerns. A study by AidData, the World Bank, Harvard Kennedy School, and the Kiel Institute for the World Economy found that between 2008 and 2021, China provided over 128 rescue loans across 22 countries. These emergency loans were often issued to countries struggling to repay their previous debts to China, creating a cycle of dependency rather than resolving the underlying financial problems.
China’s Shift to Bailout Lending
Initially, from 2000 to 2013, most Chinese loans were issued by state-owned policy banks and enterprises to finance infrastructure projects. However, recent data shows that since 2021, a significant portion of lending has shifted to bailout loans, dominated by the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE). These institutions are responsible for managing China’s foreign reserves and have increasingly stepped in to provide financial assistance to struggling economies.
Why Countries Turn to China for Loans
Despite the controversies, many low and middle-income economies continue to seek Chinese loans for several reasons:
- Rapid Infrastructure Development: Countries such as Bangladesh and Pakistan have borrowed extensively from China to accelerate their economic growth and build critical infrastructure.
- Faster Loan Processing: Compared to Western financial institutions, China offers quicker access to funds, making it a more attractive option for cash-strapped nations.
- Fewer Political Conditions: Traditional lenders like the IMF and the World Bank often impose policy reforms or austerity measures as conditions for their loans. Many emerging economies prefer China’s less restrictive approach, even if the financial terms are slightly higher.
Conclusion
China’s transformation into the world’s largest bilateral lender and banker is a testament to its strategic use of financial diplomacy. By leveraging its vast foreign exchange reserves and policy banks, it has not only expanded its economic influence but also positioned itself as a key player in global finance. However, as China continues to issue loans and bailouts, questions remain about the long-term sustainability of its lending practices and the risks they pose to recipient nations. Whether this trend will continue or face challenges remains to be seen, but for now, China’s role as the world’s banker is undeniable.