China has nothing to do with its money but lend it

A report released this week offers new details on Chinese lending around the world. This totals some $2.2 trillion in loans and development grants, researchers at the AidData center at the College of William and Mary found. That figure is larger than some prior estimates, although not implausibly so. Data collected by the Bank for International Settlements demonstrate a dramatic increase in China’s foreign claims over the past decade, to $2.9 trillion from $1.5 trillion in 2015.

The AidData report offers a wealth of granular information about who in China is doing all this lending and where it’s all going. A common perception remains that Beijing mostly concentrates its lending in developing countries via the Belt and Road Initiative, funding public works. AidData finds increasing Chinese lending to wealthier countries—to the tune of $202 billion of lending in the U.S. between 2000 and 2023, $60 billion in the U.K. and $161 billion in the European Union. Such lending adds up to more than three-quarters of Chinese lending during that period.

Beijing used to route much of its foreign lending through its official development bank or the State Administration for Foreign Exchange, which manages foreign-exchange reserve funds. But credit now more often is extended via state-owned commercial banks or even regular state-owned companies. One result, which presumably isn’t an accident, is that it has become much harder to track Chinese lending.

The purpose of lending has changed, too. Beijing is less likely to extend credit for development projects and more likely to offer loans that support mergers and acquisitions. A Chinese state-owned bank might provide debt financing for the acquisition of an American or European firm by a Chinese state-owned company.

What does it all mean? These figures should be mostly unsurprising to anyone who has noticed that China runs chronic and large trade surpluses. As a matter of arithmetic, a trade surplus (outflow of spare goods) must be offset by an outflow of spare cash.

The classical framing is that such an economy exports the capital foreigners will use to buy its exported goods. Belt and Road was intended to finance the purchase of Chinese raw materials and machinery (and often labor) to build roads and bridges. But inevitably a lot of China’s exported capital will end up in the developed countries that purchase the bulk of its exported goods.

It’s also helpful to distinguish between debt and equity when digesting numbers such as AidData’s that are objectively large. There is a growing recognition in Western countries that Chinese ownership of Western assets presents dangers, among them that Beijing will pilfer Western technology or manufacture strategic vulnerabilities such as implanting exploitable faults into utility grids. Those are serious concerns, but aren’t necessarily relevant when Beijing flexes its financial muscle via credit rather than equity investments. Creditors enjoy less (or no) management control over their debtors.

Given the higher risks of Chinese equity over debt, there’s an increasing hostility in the West to Chinese direct investments that give China an ownership stake of anything. The AidData report notes that some early attempts to use credit to finance direct investments or acquisitions have hit regulatory walls, auguring further embarrassment and perhaps losses for China as this trend accelerates. Beijing is becoming a large lender because it must: Becoming an owner is drifting out of reach politically.

The tendency among observers is to view control over so much capital as a boon, an impression Communist Party officials seem keen to encourage. Yet in examining what at first look like gestures of Chinese geoeconomic supremacy, one detects pangs of worry.

Beijing’s refusal to participate in established debt-relief programs in developing countries appears to arise from anxiety about forcing fragile state-owned banks to recognize potentially large losses. Its attempts to funnel capital into foreign direct investment or mergers and acquisitions are exposing Beijing to growing political controversy. The AidData report suggests Beijing increasingly prefers the relative economic safety and political cover of syndicated lending in order to generate returns with less risk or controversy.

China’s export-led economic model depends on recycling its export earnings overseas. Yet shifting Western attitudes toward China are such that Beijing may find it harder in the future to own anything in return for that capital. Instead it lends, lends, lends—to economies already so heavily indebted that they lurch from one fiscal and financial crisis to the next.

It’s a reminder that what often looks like dominance in the global economy may instead be symptomatic of a pathological codependence. Just ask the bank in that old joke.