AidData found that in 2021, China’s aid and credit commitments to low- and middle-income countries were around US$80 billion, while Washington’s development finance stood at about US$60 billion. Two years before, that gap was over US$60 billion.

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China’s Belt and Road, 10 years on

China’s Belt and Road, 10 years on

The researchers also found in 2021, the G7 outspent China by US $84 billion in development financing, but notes that the G7 has a history of “over-promising and under-delivering”.

“The G7, the EU and their allies have announced a variety of new initiatives, such as the Partnership for Global Infrastructure and Investment [and others], with much fanfare,” said Bradley Parks, executive director of AidData.

“However, to date, very few large-scale infrastructure projects have been approved for financing or implemented through these initiatives.”

Meanwhile, the authors point to Beijing’s huge foreign exchange reserves – about US$3 trillion in official reserve holdings – as a source of financial strength that they argue allows it to avoid making promises it cannot keep. Citing economist Brad Setser of the Council on Foreign Relations, the authors argue that China also has “hidden reserves” – foreign currency that the central bank has moved to state-owned funds and policy and commercial banks – that add another US$3 trillion.

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China’s exposure profile as a lender is changing, the report found, as the belt and road is now at its 2.0 stage, distinct from the period of “easy money” from 2014-2017 when loans were issued with lengthy grace periods.

Fifty-five per cent of Beijing’s loans have entered their principal repayment periods, and this figure will increase to 75 per cent by 2030. AidData also estimates that 80 per cent of China’s overseas lending portfolio in the developing world is currently supporting countries in financial distress.

The lab found that the cumulative percentage of China’s infrastructure project portfolio with significant environmental, social or governance (ESG) risk exposure increased from 12 to 53 per cent over the 22-year period tracked. ESG risk is determined by whether a project is located in sensitive areas like terrestrial and marine protected zones, indigenous lands or districts vulnerable to political capture.

To decrease its repayment risk exposure, Beijing has turned focus from dollar-denominated infrastructure lending to Chinese yuan-denominated “emergency rescue” lending to financially distressed borrowers. This would ensure borrowers have enough cash on hand to service their outstanding infrastructure project debts.

Another strategic shift for Beijing has been reducing its use of policy banks – to only 21 per cent by 2021 – while increasing its reliance on commercial banks. China’s policy banks – namely China Development Bank and the Export-Import Bank of China – have particularly high levels of exposure to non-performing loans in developing countries.

Beijing is also outsourcing its risk: while scaling down its use of bilateral lending instruments, it’s dialling up the provision of credit through collaborative lending arrangements with multilateral institutions and Western commercial banks.

AidData also found that by 2021, 57 per cent of China’s infrastructure financing portfolio in developing countries had strong ESG safeguards in place – a statistic they note is a major departure from two decades ago.

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These safeguards have not led to substantially longer implementation delays, which the authors argue may undermine G7 efforts to outcompete Beijing on “quality” or “safety” grounds.

Beijing has unwound relationships with countries that have high levels of ESG risk, and redirected infrastructural lending to countries with lower risk levels.

In terms of managing its reputational risk exposure, the researchers found that Beijing generally did not engage in countries where another sovereign lender has a clear lead in momentum; only 16 per cent of its portfolio is dedicated to those countries.

AidData also found that Beijing tended to disengage rather than double down in countries where there are strong indications of backlash against the Belt and Road Initiative.

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But if a new leader comes to power and takes a less adversarial posture toward China, Beijing typically responds quickly and starts helping incumbents take credit for high-profile infrastructure projects.

Overall, though, AidData found that Beijing was losing the battle for hearts and minds to the West. Since 2014, it experienced more losses than gains compared with Washington on three measures of soft power: public opinion, media sentiment and elite support.

But those who vote with China were found to be richly rewarded. On average, if a foreign government increases the alignment of its UN General Assembly voting with China by 10 per cent, it can expect to see a 276 per cent increase in loans and grants from Beijing.

“Beijing is not going to stand by and watch its flagship global infrastructure initiative crash and burn,” Parks said.

“It is focused on giving leaders in the developing world exactly what they want: rapid delivery of large-scale infrastructure projects without unreasonably high levels of ESG risk. If Washington and its allies cannot compete on this basis, they will face a crisis of relevance.”