Share and Follow
On “Intelligence Matters” this week, host Michael Morell speaks with Brad Parks, executive director of research lab AidData at the College of William and Mary. The two discuss China’s spending on foreign development, which outpaces all other countries, and how the U.S. can catch up. Parks details how China is using foreign aid to gain influence abroad and create a market for its industries.
HIGHLIGHTS:
- China spending on overseas projects: “In a typical year, Beijing is spending about $85 billion on various overseas projects. That means they’re outspending Washington on a more than 2 to 1 basis. They’re outspending Brussels on a more than 4 to 1 basis, and they’re outspending London on a more than 8 to 1 basis. So in the U.S., typically we’ll spend about $37 billion a year on overseas projects, and China spends about $85 billion each year on overseas projects.”
- Beijing aid and influence: “When they are providing aid, their main audience is- they’re looking to cater to the interests of politicians. Chinese aid projects really focus on things like supporting the construction of presidential palaces and parliamentary complexes and museums and theaters, even statues or convention centers, sort of amenities in major urban centers for governing elites. They will even use their Chinese aid program to provide personal vehicles and security details to senior politicians in the host countries. Whereas U.S. foreign assistance and European foreign assistance is very much oriented towards ordinary citizens living in these countries. Chinese aid really focuses narrowly on decision makers, and that’s because they are trying to purchase foreign policy concessions through their aid program.”
- China’s goals and development finance: “This program is meant to address long term structural economic weaknesses in China. They live in fear of laying off tens of thousands of steelworkers and cement workers because they know that that would be a threat to regime stability. So rather than reforming inefficient state-owned enterprises or privatizing them, they’re basically subsidizing them by just creating a larger customer base overseas. A lot of customers that are contractually obligated to buy their oversupplied stuff.”
Download, rate and subscribe here: iTunes, Spotify and Stitcher.
TRANSCRIPT: BRAD PARKS, “INTELLIGENCE MATTERS”
PRODUCER: PAULINA SMOLINSKI
MICHAEL MORELL: Brad, welcome to Intelligence Matters. It’s great to have you with us.
BRAD PARKS: It’s a pleasure to be on. Thank you, Michael.
MICHAEL MORELL: Brad, you have a new book published earlier this year called Banking on Beijing: The Aims and Impacts of China’s Overseas Development Program. Congratulations on the book. I want to start, Brad, by noting that you’re not the only author, and I wanted to give you a chance to say a few words about your colleagues, who you’re representing here today as well as yourself.
BRAD PARKS: This book is the fruit of a ten year project with a group of economists and political scientists in Germany and in Hong Kong and here in the U.S. and that’s Axel Dreher and Andreas Fuchs in Germany, Austin Strange in Hong Kong, and then Mike Tierney and myself. We’re both from William and Mary.
MICHAEL MORELL:That’s great. Brad, what is aid data and what is its link to the book?
BRAD PARKS: Aid data is a research lab at William and Mary that collects very detailed information and comprehensive information about China’s overseas grant giving and lending activities. And we make all these data publicly available for use by policymakers and journalists and researchers. And so those data that the research lab generates and publishes is the primary data source that’s used for the analysis in the book.
MICHAEL MORELL: Just so we’re all on the same sheet of music here and our listeners understand what we’re talking about. Can you define development finance? What is it composed of?
BRAD PARKS: Development finance really has two components. There’s a foreign aid component and then there is a foreign lending component. So I’ll just use the shorthand terms aid and debt. So the lion’s share of China’s overseas development finance is provided in the form of credit or debt, not in the form of aid.
MICHAEL MORELL: I think one of the things that struck me right off the bat was that rapid transformation really in only a generation from China being a net recipient of development finance to being a dominant provider of it. Can you talk about that a bit?
BRAD PARKS: Yeah, sure. It was really in the late 1990s, right around the turn of the century that China began to turn outward and think about scaling up its overseas grant giving and lending activities. And that strategy called the going out strategy was really born from a challenge that they faced, which was recurring trade surpluses had led to a kind of stockpiling of U.S. dollars. And so that really gave them an incentive. They for a long time were parking those surplus U.S. dollars in U.S. treasuries. And then when the U.S. Treasuries started to deliver a less favorable rate of return than they were hoping for, then they started to pull those dollars out, give them to their banks and ask their banks to denominate their loans in U.S. dollars to get them a more favorable rate of return. That’s really one of the key drivers that led to the rapid expansion of this overseas lending and grant giving program.
MICHAEL MORELL: Let’s actually size this. How much does China spend on overseas development finance today and how does that compare to the United States? And when you break down aid and debt, what does that look like both in China and the United States? Put that into context for us.
BRAD PARKS: The overall scale of the program is just under a trillion dollars, $843 billion by last count. That money is spread across 165 countries and across 13,400 projects. In a typical year, Beijing is spending about $85 billion on various overseas projects. That means they’re outspending Washington on a more than 2 to 1 basis. They’re outspending Brussels on a more than 4 to 1 basis, and they’re outspending London on a more than 8 to 1 basis. So in the U.S., typically we’ll spend about $37 billion a year on overseas projects, and China spends about $85 billion each year on overseas projects.
MICHAEL MORELL: And then that breakdown, for Beijing on aid to debt. And compare that with the U.S.
BRAD PARKS: The vast majority of China’s overseas spending is financed via debt, more than 90%. And so the scale of its foreign aid program is quite modest. It spends roughly about $5 billion a year on aid projects, which kind of puts it on par with a northern European donor like Sweden. But when it comes to lending, China is now the world’s largest official lender, larger than the World Bank, the IMF and all Western creditors combined.
MICHAEL MORELL: Wow.
BRAD PARKS: Now, the interesting thing is, if you kind of drill down on U.S. spending, you know, we kind of do the exact opposite. So we’ve ratcheted down our overseas lending levels to exceptionally low levels and replaced that with grants so nearly 100%, more than 95% of our spending is now provided via grants to the developing world.
MICHAEL MORELL: When we think about when we think about China’s objectives in providing development finance. What are those? And are there any differences between their objectives in providing those loans and providing aid?
BRAD PARKS: Yeah, there sure are. So when they are providing aid, their main audience is- they’re looking to cater to the interests of politicians. Chinese aid projects really focus on things like supporting the construction of presidential palaces and parliamentary complexes and museums and theaters, even statues or convention centers, sort of amenities in major urban centers for governing elites. They will even use their Chinese aid program to provide personal vehicles and security details to senior politicians in the host countries. Whereas U.S. foreign assistance and European foreign assistance is very much oriented towards ordinary citizens living in these countries. Chinese aid really focuses narrowly on decision makers, and that’s because they are trying to purchase foreign policy concessions through their aid program. China’s aid program has a very strong foreign policy orientation. So they use aid to implement the one China policy. If you diplomatically recognize Taiwan, you are automatically rendered ineligible for PRC aid. So Beijing also uses aid to buy votes in the U.N. General Assembly and in other international organizations. We’ve modeled this statistically. And what we’ve found is that if you just look at one region of the world, Africa, the average African country, if it was to increase the alignment of its voting with China in the U.N. General Assembly by just 10%, what we find is that that country could reasonably expect to increase the amount of Chinese aid that it receives by 86%.
Chinese aid is really used as a reward for foreign policy allegiance, aligning your foreign policy preferences with those of China. Those foreign policy considerations, what we find is they don’t really matter very much when the PRC is lending, when they’re financing projects with debt they’re really looking to make money. So I like to talk about Chinese state owned lenders as yield maximizing surrogates of the government. Meaning the government has sort of deputized their state owned banks and they’ve said, go scour the globe for profitable projects. We’ve got all these surplus dollars, go get us an attractive rate of return. The reference rate is what they would otherwise get if they parked their dollars in U.S. treasuries.
That’s why the single biggest year on year increase in Chinese lending was between 2008 and 2009. Because what happened? The global financial crisis hit. And when that happened, the Fed here in the U.S. did quantitative easing. And when they did quantitative easing, the rate of return that China started getting on all of its dollars in U.S. treasuries dropped to about 1 to 2%. So a lot of people sort of look at Chinese overseas loans and they scratch their head and say, well, why are these loans so expensive? The average interest rate is north of 4%. The reason it’s north of 4% is because these banks have been asked to go find profitable projects that will deliver a better rate of return than what they would otherwise get in the U.S. Treasuries.
MICHAEL MORELL: And on the debt side, what kind of projects are we talking about? What’s typical?
BRAD PARKS: What’s typical is that they’re going to finance projects that generate a revenue stream. So these are going to be oil refineries and steel mills and toll roads that the lenders expect will turn a profit and thus allow the borrower to repay its debts.
MICHAEL MORELL: What’s the impact on the recipients of both aid and data? What’s the impact on the recipients and why so much controversy about this? I know that’s a big question.
Read Related Also: 6 injured in “targeted shooting” outside Pittsburgh church during funeral
BRAD PARKS: It’s an important one because the conventional wisdom is that China bankrolls white elephants, these projects that are kind of politically expedient but economically inefficient. And the conventional wisdom, what we found, it’s not entirely right and it’s not entirely wrong. The average Chinese development project actually has a huge impact on economic growth in the short run. A typical Chinese development project will usually cost about $120- $150 million. Let’s say you’re a country that before you ever accept one of those projects, you have a baseline economic growth rate of 2%. What we find is that you can reasonably expect to increase your growth rate by about a full percentage point. So like from 2% to 3% by just accepting one additional Chinese development project. If you think about what we would do in the U.S. to boost our economic growth rate, 1% rate, we would give our right arm to be able to do that. So this is a very attractive proposition for a lot of countries around the world.
MICHAEL MORELL: But boosting it for how long?
BRAD PARKS: This is the key thing. We find that the effects are short lived. They really start to materialize within about two years of the project being approved. But then by year five, they vanish. And so we don’t know definitively why they vanish. But I think it’s fair to say that any time you do a mega infrastructure project, you start hiring lots of people and bring in construction workers to a site, that is going to kind of give the economy a bit of a sugar high. And the question of whether those economic gains are durable and produce long lived economic development, that’s still kind of an open question. We really don’t know. And then the other challenge with these projects is that they can have a lot of negative spillovers, unintended effects on the environment, on governance, corruption, on debt sustainability, a whole range of other outcomes.
MICHAEL MORELL: Could you explain those downsides? Why do they emerge? What’s the source?
BRAD PARKS:I think that the fundamental problem is that there is rot in the system that the PRC has created to fast track the approval and the implementation of these projects. Whereas the U.S. or the World Bank, when they ask for a project proposal or a loan application, they would go to a technocrat and they would ask them to put together the proposal. Beijing doesn’t do that. They ask for proposals and loan applications from politicians, and those politicians are usually located in the office of the president or the prime minister. And Beijing, they have really no compunction about greenlighting projects that disproportionately benefit the core political supporters of the president or the prime minister.
That’s why in the run up to elections, we find that jurisdictions that are really important for the president or the prime minister in the country that they’re lending to see really sharp increases in Chinese funding. The other source of rot in the system is that no bid contracts are being issued to Chinese state owned enterprises that already have a presence on the ground. And so they have the ability to quickly mobilize as soon as that loan application is approved. Chinese state owned enterprises and then these politicians in the president’s office or the prime minister’s office who are actually responsible for submitting the loan applications, what they have done is they’ve institutionalized a very simple but effective deception. And here’s how it works.
The Chinese state owned enterprise and then the interlocutor in the president’s office or the prime minister’s office, they agree to inflate the cost of the underlying commercial contract that the loans are going to finance. So imagine you’re going to build a road. And if that road was subjected to competitive bidding, it would cost $100 million. Well, they’re not going to price it at $100 million. They’re going to price it at $120 million. And then they’re going to develop a side agreement to split the extra profit. Quote unquote, extra profit from that contract. So those are illicit proceeds. And usually there’s a cut that goes to someone in the president or the prime minister’s office. And then the other portion of the illicit proceeds goes back to the Chinese company almost as like a super profit or a rent.
That’s why in a place like Sri Lanka, you see an unusual number of overpriced infrastructure projects that are all located in the president’s home district. I think this highlights one of the most important vulnerabilities in the system that they’ve put in place to really rapidly implement these big ticket infrastructure projects. Everything is sort of hunky dory unless or until these illicit financial relationships are exposed. When they are exposed and that’s happening all around the globe now by journalists and civil society and parliamentarians, what happens is these projects that kind of start off as reputational assets very quickly transform into reputational liabilities.
Case in point is Sri Lanka, where public antipathy towards China increased very sharply when evidence emerged that the president himself was receiving illicit payments from a Chinese state owned enterprise and taxpayers were on the hook to repay loans for, frankly, outrageously overpriced projects in his home districts. We’re talking about- there’s one project in particular, a road in Hambantota district that sort of infamously cost $40 million per kilometer to build. It was on a unit cost basis the most expensive road ever constructed in the country. That ended up setting in motion this domino effect, this chain of unintended consequences. So President Rajapaksa, back in 2015, was narrowly defeated by a political outsider. And that political outsider, his campaign manifesto called out the ruling party for exploiting these Chinese development projects for private gain and for political gain. That helps shed some light on why you see this short term economic boost through these projects. Because any time you do a big ticket infrastructure project, it’s almost by definition going to lead to more economic activity in and around the project site. But in terms of how those gains are distributed within the economy and within society, that’s a very different question. And in terms of the long run political consequences, what we’re beginning to learn is that there’s this kind of hangover effect from many of these projects that can really lead to electoral changes in the electoral landscape and governance impacts.
MICHAEL MORELL: How does the environmental impact play out?
BRAD PARKS: It’s another great question. As a kind of companion study to the book, we just finished an evaluation of 30 Chinese loan financed highway construction and, and rehabilitation projects in just one country, in Cambodia. And what we what we did was we tried to look at, well, where where do these highways go? And then how does forest cover change alongside the road corridors? And we can use satellite data to track changes in forest cover. And what we found was that these 30 Chinese financed highway construction projects triggered sharp increases in deforestation along side the the road corridors. There’s a 25 to 50% increase in forest loss. And that was not happening just anywhere. It was happening in these kind of pristine rainforest areas that other road financiers had deliberately avoided. So many of these roads were actually leading directly to land concessions that have been granted to Chinese investors to extract timber. Some of these loan finance projects are an example of the Chinese state almost serving as a handmaiden to its companies. Where the roads are facilitating the extraction and the export of a primary commodity and thus facilitating trade and commerce. The other players on the ground in that particular country, they wouldn’t dare go and build a road in the middle of a protected area, in a national park. But China sort of has demonstrated through its actions that it’s not deterred by a national park. So that that is certainly a very real danger associated with these projects.
MICHAEL MORELL: On the macroeconomic impact, if we could jump back to that for a second. Is debt financing by the U.S. government, is the macroeconomic impact similar to China’s or is it different?
BRAD PARKS: U.S. lending has dropped to exceptionally low levels. And part of this is because in the late 1990’s and early 2000’s, there were a whole host of countries that got in over their heads in debt. The U.S. worked with a coalition of like minded countries and multilateral institutions to write down those debts and restore fiscal discipline and give these countries healthy balance sheets. Once they had healthy balance sheets, the U.S. pivoted towards grants in many of its allies, pivoted towards grants so that they wouldn’t repeat the same problem that had built up as a result of an excessive sovereign debt accumulation. So the irony is, of course, that when the U.S. and its partners wrote off all these debts, that became an incentive or it cleared the pathway for a lot of these countries to go on a Chinese borrowing spree because when they were carrying lots of debt on their books, they just couldn’t couldn’t absorb much new lending. And so the U.S. and and the World Bank and others were reluctant to engage in fresh lending. And that was coming right at the same time that China had all these surplus dollars and they were ready to lend. That really led to a rapid build up in debt around the developing world.
MICHAEL MORELL: I thought one of the most important contributions of the book is debunking some popular myths. And perhaps we can start with what you guys call the hero or the villain myth. Talk about that.
BRAD PARKS: I think the conventional wisdom about China is that it’s a rogue donor, that it’s propping up corrupt regimes. And it is making it more difficult for the U.S. to advance its interests. What we find is that actually there’s great similarities in the way that China and the U.S. allocates aid. So both countries favor poor recipients. If you were a country in need, you have a higher level of need. Both the U.S. and China are more likely to give you aid. And when it comes to using aid for foreign policy purposes, Washington and Beijing appear to be following the same playbook. I mentioned earlier that countries are richly rewarded when they align their votes with China in the U.N. General Assembly. The same thing is true of U.S. aid. We richly reward countries for voting with us in the General Assembly, in the Security Council and elsewhere. In that respect, the book does kind of debunk the idea that China is unique and sort of upending the existing set of practices that govern the provision of aid.
MICHAEL MORELL: Here’s my favorite. It’s the grand strategy myth. Can you talk about that?
BRAD PARKS: The wrap on the Belt and Road Initiative is that it is this grand strategy to create a Sino-centric world order to win influence and build alliances. What we found was that in fact, the single the indicators that best predict the overall scale of China’s overseas development finance program, as well as where the money goes it is, there’s basically three main drivers of this program, and they’re all about domestic economic challenges that China has been facing for nearly two decades. We already touched on one of them, which is the dollar surplus. If they keep all those dollars on shore, it creates macroeconomic chaos. So they need to offshore those dollars. And that’s why these loans are not denominated for the most part in R&B or some other currency. They’re denominated in dollars. They’re solving that problem with this foreign lending program. Number two is that they have for the better part of two decades, had a major domestic industrial overcapacity problem. They produced too much steel and cement and glass and aluminum. And the problem is they’ve got these bloated, inefficient, Chinese state owned enterprises that employ tens of thousands of people, and they don’t have enough domestic customers to buy all of this, these oversupplied industrial inputs. They’ve come up with a clever strategy, which is they contractually obligate their borrowers to buy all of those domestically oversupplied inputs. So if you’re going to build a thousand kilometer railway in Kenya, you’re going to borrow from us in dollars, but you’re also going to be obligated to buy all the steel for that railway from these companies in China that don’t have enough customers.
MICHAEL MORELL: Domestic jobs program.
That’s right. And then finally, they have a long term need for natural resources that they lack in sufficient quantities at home to continue to fuel domestic economic growth. And so they’ve come up with this really clever way of allowing their borrowers to repay their loans and collateralize their loans with natural resource revenues from natural resource exports. So you sell us oil, and then we’re going to take the proceeds from the sale of oil, and we’re going to deposit those funds into two accounts: one account to service the debt, and then another account that basically the money just sits in escrow as our source of collateral. It’s a liquid source of collateral that we can seize in a moment’s notice.
This is another area where the book really busts a long standing myth, and that is the myth of debt trap diplomacy. Around Washington, it is now received wisdom that Chinese state owned lenders, they ask their borrowers for physical assets as sources of collateral, like seaports and airports and electricity grids. We have access to some of the unredacted loan contracts between Chinese state owned lenders and their overseas borrowers. And what we find is that the Chinese are way savvier than that. They don’t collateralize on physical illiquid assets. They collateralize on cash. They have their borrowers maintain a minimum cash balance in an offshore bank account that they the lender control. And with a keystroke on their computer, they can debit that account. They could seize those liquid assets without ever going before a judge. To try to liquidate an asset or recover an overdue debt. So they’ve expunged uncertainty from the system. They’re trying to de-risk this lending system that they’ve created by asking for a source of easy to access collateral that other lenders have traditionally not asked for.
MICHAEL MORELL: It sounds like to me, correct me if I’m wrong, but it sounds like to me, you hear China political experts say that the fundamental goal of the government is the maintenance of the Communist Party, which in their mind requires continued economic growth to ensure social stability and political stability. And so everything at the end of the day is about making sure the domestic economy continues to grow. And it really sounds to me like what you’re describing here in terms of China’s development finance is all part of that focus. Is that fair?
BRAD PARKS: Yeah, that’s fair. In some respects, the mere fact that this program exists is a sign of weakness rather than strength. This program is meant to address long term structural economic weaknesses in China. They live in fear of laying off tens of thousands of steelworkers and cement workers because they know that that would be a threat to regime stability. So rather than reforming inefficient state owned enterprises or privatizing them, they’re basically subsidizing them by just creating a larger customer base overseas. A lot of customers that are contractually obligated to buy their oversupplied stuff.
MICHAEL MORELL: I want to take you for the last two questions here a little bit out of your comfort zone. Given what China is doing here, what’s the proper policy response from Washington? How do you think about that?
BRAD PARKS: I think we’re at a really important inflection point because for the first five or six years of this Belt and Road initiative, China was on the front foot. They were playing offense. Everybody wanted to jump on the Belt and Road bandwagon and be part of this program that Beijing was bankrolling. And now what we’re starting to see is a dynamic that I refer to as Belt and Road buyer’s remorse, where you have dozens of countries that have overcommitted themselves from a debt management standpoint. They’ve got too much Chinese debt on their books. And we’re also seeing that some of these very large infrastructure projects are encountering major implementation problems. We find that 35% of the infrastructure, the Belt and Road Infrastructure Project portfolio, is now plagued by a major implementation problem, like a corruption scandal or an environmental disaster or a labor protest.
What I think that means for the U.S. and for its allies is that there’s an opportunity here to really force the Chinese to be more transparent about what they’re doing and be on the side of the partner countries who are trying to get out of this mess. Whereas the U.S. government might be inclined to just use this as an opportunity to bash China. There are many countries around the world right now where this is their hour of need. They need someone to step in and help them get out of the mess that they’ve found themselves in. The US government and its allies will either be there and be willing to step into the breach or not. And I think what we’ve detected over the last 18 to 24 months is that windows of opportunity are opening. You see this in electoral cycles where politicians are coming to power on platforms where they are identifying all the problems with these Chinese debt financed infrastructure projects. They are identifying the problems and using that to come to power. And once they come to power, they still have to show their citizens that they can deliver.
At that point, once they come to power, then they’re casting about for new suitors, other people that can come and help them. I think that means that the U.S. government needs to have a rapid response capability to really keep its ear to the ground and address the unmet needs of these countries and that their leaders. I think there’s a lot of bureaucratic inertia that is built into the U.S. aid system. I think it’s high time that that system be reformed to be more demand responsive. To address these very real needs of our overseas partners so that they don’t end up right back in Beijing’s orbit. There’s no lack of opportunity for the U.S. to compete, but we have to compete on the merits, right? We have to have a compelling value proposition so that- it can’t just be rhetorical. We can’t just be beating up China rhetorically. We have to have a compelling offer that perhaps will be based more on having infrastructure projects with stronger social and governance and environmental safeguards, with more transparency around the contractual terms that really provides a viable alternative.
MICHAEL MORELL:That’s a great policy recommendation. Brad. The book is Banking on Beijing: The Aims and Impacts of China’s Overseas Development Program. The author is Brad Parks. Brad, thank you so much for joining us. This was a very insightful discussion.
BRAD PARKS: Thank you. It was my pleasure.
