China cut its overseas development finance further in 2020 and 2021, signalling the end of a boom in the supply of Chinese money to low- and middle-income countries driven by its Belt and Road Initiative (BRI), a new report has found.

The China Development Bank (CDB) and the Export-Import Bank of China (Chexim), the nation’s main development finance institutions, committed a combined US$10.5bn across both years, compared to US$15.1bn and US$22.1bn in 2019 and 2018 respectively, according to Boston University’s Global Development Policy (GDP) Center.

Since 2018, both Chexim and CDB have shifted their strategy towards making smaller and more targeted loans, in contrast to the general purpose lending favoured during the initial phases of the BRI.

As China has scaled back its lending, the US has ramped up its international development finance, committing over US$7.4bn in 2022 as the two global powers continue their rivalry.

The GDP Center’s report shows a continuing downward trend in Chinese lending after financing peaked in 2016, with an average commitment of US$378mn per project between 2018 and 2021 versus US$534mn between 2013 and 2017. Projects also tended to be smaller in geographical footprint.

“When the lending was at its peak, China was sitting on a tremendous amount of US Treasury bonds in its international reserves, which were earning historically low interest rates. It made business sense to leverage that supply of dollars outward,” says Rebecca Ray, author of the report and senior academic researcher at the GDP Center.

Dollars became scarcer during the trade dispute between then-US President Donald Trump and Chinese leader Xi Jinping. “From 2015 to 2018, China’s current account surplus plummeted by 90%,” Ray says.

Although the country’s current account surplus has since recovered, its lending has so far not returned to previous patterns. Instead, Xi has pledged to concentrate on so-called ‘small and beautiful’ projects.

“With this more limited scope, we see that China is focusing more on its core competency of projects it knows it can do well and quickly, that it knows it can get completed with borrowers who have a history of working with China and are at least working to pay them back, such as the construction of public transit in Egypt, for example, highways in Bangladesh, power plants in Pakistan, Uzbekistan, Russia,” Ray says.

As the prospect of sovereign debt crises looms, China is being strategic in terms of which countries it is continuing to work with, Ray suggests. While Venezuela is not receiving new financing, and Cuba is accepting grants instead, China continues to negotiate new deals with Pakistan, for example, given its importance for trade.

Though not included in the report’s dataset, a deal to upgrade the Main Line 1 railway connecting Karachi and Peshawar in Pakistan has revealed a change in the way China interacts with the nation, Ray says.

“China and Pakistan have been going back and forth on the final details of this project for a long time. The last six months in particular have been a frenzy of final negotiations: on the money, on the oversight, on the logistics, everything,” she says. “That kind of hesitancy is not something that we necessarily saw in the early years of the BRI.”


The importance of transport and trade

Chinese development finance in 2021 was restricted to transport – an expressway in Bangladesh – and trade finance and general budgetary support for Angola, Pakistan, Sri Lanka, Trinidad and Tobago and Turkey.

Trade finance commitments made in 2021 included Chexim’s loan of US$397mn to Turkey’s Ziraat Bank, while the government of Trinidad and Tobago borrowed US$204mn from CDB.

Trade finance initially intended for specific purchases is also being repurposed, Ray says. For instance, the loan to Trinidad and Tobago was originally aimed at importing vaccines, but as the global shortage of shots eased, the financing was reprogrammed partway through its tenor to be used as general purpose trade finance.

Transport has been the main target of China’s development finance for the last five years, totalling 33% of all committed funding since 2018. Extraction and pipelines, along with power, make up another 33%, with the three sectors combined accounting for US$331bn.

The findings add to previous reports that China is shifting focus from infrastructure to trade. Ray also notes that Chinese firms are continuing to favour foreign direct investment after gaining experience bidding on overseas infrastructure contracts, which had always been a goal of the BRI.

As an example of this trend, Ray cites the China National Offshore Oil Corporation’s (CNOOC) stake as a minority joint venture partner in the East African Crude Oil Pipeline (EACOP), which is set to link Uganda’s oil fields to Tanzania.

“CNOOC has been in Africa for so long, it can join these projects as a joint venture member without needing sovereign finance to connect it to the projects. CNOOC has enough experience now to do this as an investor,” Ray says.

Geographically, China’s overseas development finance remains concentrated in Southeast Asia, Africa and South America, with Russia, Angola, Pakistan and Iran among its top 10 borrowers, the report shows.

The report also found evidence that China had made progress on improving its management of environmental risks. Between 2018 and 2021, 66% of finance for specific projects with geographic footprints had no overlaps with critical habitats, Indigenous peoples’ lands or national protected areas.

Lending to oil firms also declined, the report notes, with CDB and Chexim making no new general purpose commitments since 2017 after injecting US$60bn into this sector between 2009 and 2017.

The GDP Center’s China’s Overseas Development Finance database is a global, geolocated record for the period 2008-2021, covering loans from Chexim and CDB to governments, inter-governmental bodies, majority state-owned entities and minority state-owned entities with sovereign guarantees.