The Numbers Behind the Risks of China’s Overseas Development Lending

LONDON – From a predominantly recipient country to one of the world’s largest foreign aid donors, China has built a complex web of relationships with its development partners around the world.

But, according to the analysis of one of the most comprehensive studies of Chinese development assistance to date, not all partners appear to be treated equally.

AidData, a research lab at the College of William & Mary in the United States, tracked more than 4,000 files of official Beijing funding projects between 2000 and 2014.

Nikkei Asian Review assessed the interest rates attached to aid programs received by different countries based on AidData figures, and compared them with numerical credit risk scores compiled by data analysis company Trading Economics.

The figures for the Americas were correlated to a standard loan model of higher rates for higher risk loans. Those for Africa and Asia, however, did not show the expected pattern.

The results suggest that factors other than creditworthiness may have played a role when Beijing made investment decisions between 2000 and 2014.

Weighted interest rates were estimated taking into account the loan amounts. The rates were then plotted against the risk assessments for a sample of 46 countries. Trading Economics default risk scores range from 0, Probably Default, to 100, or No Risk.

Bradley C. Parks, chief researcher for the project and executive director of AidData, suggested a potential explanation for the imbalance.

Beijing provides public funding for highly concessional development projects that meet the Organization for Economic Co-operation and Development criteria for official development assistance, which includes grants and soft loans with a large grant element.

It also provides funding through what the OECD calls “other official flows”. These are official transactions that do not meet the organization’s ODA criteria, and are either primarily for commercial purposes or for development, but for which the grant element is less than 25%.

ODA usually comes with lower interest rates, which means that a country receiving more ODA than the OFA tends to have a lower borrowing rate.

Kenya, for example, had a risk score of 20, well below the sample average of 37. But only three out of 26 projects qualified as OFA. This had the effect of lowering the weighted average borrowing rate to 2.38%.

According to Parks, China’s decisions on ODA subsidies appear to be largely guided by two principles.

On the one hand, the poorest and most populous countries tend to receive a higher amount of Chinese ODA. On the other hand, foreign policy considerations have a significant bearing on where money is loaned. A country that recognized Taiwan diplomatically would automatically be excluded from consideration, for example.

Parks and his colleagues recently published a study analyzing the electoral behavior of beneficiary countries at the United Nations General Assembly.

The results indicate that countries that align their votes with China often receive ODA.

“The Chinese OFA is more trade-oriented and as such tends to go to more creditworthy countries, while also going to China’s trading partners and countries rich in natural resources,” he said.

The risks involved are contrasted when one considers Beijing’s recent investment strategy.

Findings released by the Washington-based think tank, the Center of Global Development, suggest that of the 68 countries hosting projects related to China’s Belt and Road Initiative, 23 are currently at risk of debt distress. eight planned projects significantly increasing the risk.

Even when it comes to commercial-oriented OFA, Parks said, there are a number of instances where nonconcessional or low concessional loans have been made to countries with questionable ability to repay them.

“Venezuela may be the canary of the coal mine,” he said.

As one of the 10 richest countries in the world in iron, natural gas and oil, the country received very few classified ODA loans from China between 2000 and 2014. Beijing has, however, provided significant amounts of ODA. ‘OOF.

“China has loaned billions of dollars to the Venezuelan authorities, where it now seems very unlikely that they will repay these loans given the country’s precarious economic situation.”

In cases like Lebanon, commercial interest may become more difficult to disentangle from official aid. The country is a neighbor of war-torn Syria and has received interest-free ODA loans.

It also sits at the crossroads of Africa, Asia and Europe, in a place of enormous strategic importance, especially with regard to the Belt and Road and, according to Financial Times reports, China is considering opportunities of a more commercial nature. The country is seeking funding for many projects, including a $ 58 billion project to expand and deepen the port of Tripoli.

Datawatch is a new series produced jointly by Nikkei Asian Review and FT Confidential Research.


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