Episode Notes:

The Chinese government has reportedly spent $240 billion bailing out countries that have received loans, as part of the Belt and Road initiative. To discuss the Belt and Road policy, and the impact of the bailouts, David Sacks, a research fellow at the Council on Foreign Relations joined the WarCast.

[:18] What is the Belt and Road Initiative

[2:04] The bail outs

[5:58] The impact on Chinese banks 

[8:28] Competition with the United States

Episode Transcript

Aaron Stein: My name is Aaron Stein, and I am the chief content officer at War on the Rocks. You are listening to the WarCast, the members-only podcast for what you need to know — now. Hello and welcome. Today, I'm talking to David Sacks, who is a research fellow at the Council on Foreign Relations, and also a co-author of the Council on Foreign Relations’ Independent Task Force Report, China's Belt and Road: Implications for the United States. The co-chairs for that were Jacob J. Lew and Gary Roughead. And David and his co co-author, Jennifer Hillman, were the authors. For listeners who haven't been following China all that closely, can you do a two-minute primer on what exactly Belt and Road is? 

David Sacks: Xi Jinping announced the Belt and Road Initiative in a speech in the fall of 2013 in Kazakhstan, shortly after coming to power. What Belt and Road aimed to do was leverage Chinese financing and Chinese building and infrastructure expertise to construct everything from power plants, railways, roads, ports, and telecommunications infrastructure in the developing world. Initially, the focus was really on Central Asia and South Asia, with Pakistan being the most ambitious Belt and Road recipient or partner. But this has since become a globe-spanning initiative with now around 140 countries signing up to the Beon Road Initiative in some form. So this is really no longer geographically bound to South and Central Asia or Southeast Asia, but again, spans the world. Now, China doesn't publish a master list of BRI projects. It doesn't publicize how much money it has lent, but some estimates assert that China has funded around $1 trillion in infrastructure since BRI was introduced in 2013. Because of that, China's now the world's largest official creditor, and Chinese lending on infrastructure in the developing world now exceeds all multilateral development banks combined. 

Aaron Stein: That is a natural segue to the report that came out of Reuters. But they're summarizing a broader report by researchers from the World Bank, the Harvard Kennedy School, AidData, and the Kiel Institute for World Economy. And what they have found is that China spent $240 billion, as I said, bailing out 22 developing countries between 2008 and 2021, with the amount soaring in recent years as these recipients of Chinese aid or, partners or states, I guess we view as partners, are having trouble paying back the loan. So what do you make of all that? 

David Sacks: Yeah, I mean, I think that the more striking figure is that since 2019 alone, China has spent around $100 billion of that $240 [billion] bailing out these countries. And so a lot of this I think is tied to the COVID-19 pandemic. BRI lending was really, really high in the years leading up to the COVID-19 pandemic. A lot of that was fueled by pretty rosy economic projections in BRI countries. But then, of course, they all had to face significant headwinds, difficulty bringing in workers and materials to construct these projects, economic growth going down, the U.S. dollar appreciating in value, and global interest rates going up. And all of that really prompted countries to number one, pause or shelve a lot of projects, but also put them in a lot of debt distress, trying to figure out how to repay these loans that they had taken out. So, BRI hit those headwinds in COVID. And then there were also problems that I would argue were more self-inflicted and inherent flaws in the way BRI was constructed. One of the reasons why a lot of countries signed up to BRI was that there were fairly low transaction costs. If you wanted something built, China was willing to build it. In many cases it didn't require feasibility, studies, and things of that nature. And so a lot of these projects, even in the best of circumstances, were not going to allow countries to repay those loans. So add onto that this huge global economic shock of COVID-19, and, and that's how we got where we are today. The issue here that I think the report highlights, and it's worth us highlighting, is that the flaw here is not so much what China's doing. The U.S. Treasury has given similar bailouts in Latin America, for instance, in the past, but it's the way that China's going about what it's doing, which is that this is incredibly opaque. As the authors of this report noted, most of this activity had occurred without anybody noticing. So it took academics bringing this out into the open for people to really understand what was going on. And this complicates the ability for the IMF and countries to conduct macroeconomic oversight to figure out what a country's true debt sustainability is. And China's just not sharing the data, sharing the terms of these bailouts, with countries and with the World Bank and IMF. I would also say that, as these bailouts all show, China likes to work bilaterally one-on-one with these countries, it doesn't coordinate with the Paris Club, which is an informal grouping of your traditional lenders or with the IMF or World Bank. And that makes it more difficult to really resolve these problems because China's not coming to the table with the United States, Japan, the Europeans, and others, and saying, “Okay, here's our situation. Here's your situation. How can we move forward?” China's really trying to address all of this behind closed doors between itself and the recipient. 

Aaron Stein: So let me ask you to turn inside to China itself, which is looking at the health of their own economy, particularly as they have to bail out countries that they have lent to themselves. They faced similar challenges during the COVID-19 pandemic as many other countries, perhaps even more, because some of their certain policies. So is there a spillover effect to the Chinese domestic economy here, stemming from their foreign policy in the Belt and Road Initiative? 

David Sacks: Yeah, I mean, that's a really good question, but these Chinese state-owned banks and its policy banks, like the China Development Bank or the Export Import Bank of China, they have massive balance sheets. So when you compare BRI loans compared to what Chinese banks are lending domestically and around the world every year, it's a small fraction. So for instance, Chinese banks lend around $2.6 trillion annually, but BRI at its peak was around $120 billion per year. An average year for BRI, it was around $85 billion. China Development Bank and the Export Import Bank of China, their assets devoted to BRI are perhaps around 3 percent of their balance sheets. So I think that China can sustain this lending if it wants to. I also think that there continues to be political will behind BRI. As I noted at the outset, BRI is really one of Xi Jinping's premier foreign policy objectives. And the way the Chinese system is constructed, let's just put it this way, you're not gonna say that this was a failure and that Xi Jinping's brilliant idea was a dud. So I think that China's still going to pursue BRI. We still see mentions of BRI popping up in authoritative high-level Chinese policy documents. But the question is how it moves forward. And I think that China and these banks are going to try to pursue a slimmed-down BRI with less expensive projects, with less risk attached to them. I mean, while the bank's balance sheets are huge, no bank wants to lose money. And I think a lot of these banks went into BRI assuming that there was an implicit sovereign backing or sovereign guarantee here, given that this was Xi Jinping's endeavor. But now they don't want to lose their shirts. They don't want to lose money. So I think that going forward, these banks will pursue some projects, but those that have a high likelihood of succeeding. 

Aaron Stein: So I guess the final question here is, it's hard, particularly in the U.S. national security framework or establishment, to not view BRI as a broader Chinese attempt to gain influence around the world. Right? Is this a zero-sum competition with the United States or perhaps the West who would also, or at least tries, to seek out economic cooperation with other countries? You talked about how you think this will still be a priority for the Chinese government moving forward, but it is a good priority, or are there broader lessons here for the U.S. foreign policy establishment, who may be coming to this and seeing these numbers and not quite being able to put them into context? 

David Sacks: I think that the U.S. foreign policy establishment has begun to learn lessons from this. The principal lesson, I think, is that you can't beat something with nothing. So for the first years after BRI really came out into the open, the U.S. response was, “Well, countries shouldn't do this because it's risky. It opens you up to China having more economic and political leverage,” and that potentially the BRI projects were corrupt or the quality wasn't great. But the reality is that there is an $18 trillion global infrastructure gap. And if the United States and its allies and partners are not willing to help developing countries fund this, China is going to step into that void. And I think that's the lesson of BRI. So we have seen, for instance, Japan announce its own kind of response to BRI. The Biden administration has. So has the E.U. Congress also passed legislation that gave the U.S. Export-Import Bank more authorities and more funding to counter BRI. So I think that we're slowly waking up to the challenge, but the answer isn't to try to match China dollar-for-dollar around the world. China has certain comparative advantages vis-a-vis the United States. And so really what the U.S. should focus on is those technologies that, I think, pose a threat. So for instance, 5G, as well as those areas where it has a comparative advantage over China and seek to leverage that around the world. So I think that that is where the United States and its allies and partners are moving. But it has been a very, very slow journey. It's taken us almost a decade to get here. And in that decade, China has spent nearly a trillion dollars around the world. But when you go talk to leaders and representatives from developing countries, where they're experiencing things like power outages or a lack of potable water, lack of transportation infrastructure, they're gonna take the Chinese loan if there's no alternative, and they know that it comes with certain risks, they know that it might not be the best deal, but unless you're willing to put something else on the table, in many instances, they believe like they don't have an alternative. And I think that that's the lesson for us. But to get back to your initial question, I mean, there's no doubt that this is not an altruistic endeavor from China. It is seeking to increase its influence and its leverage around the world. In some cases, it has succeeded. In some cases, there's been backlash against Chinese BRI practices, its tendency to import the labor and not use local talent, the terms of the loans that are onerous with high interest rates, the corruption of some BRI projects. So it hasn't been a resounding success for the Chinese, but nor do I think it's been an unmitigated disaster for them. 

Aaron Stein: David, I have a lot more questions, but we're going to have to leave it there. Thanks for joining the WarCast.