Catching the Dragon

Responding to China’s Trillion Dollar Charm Offensive in Developing Countries

staci warden is executive director of the Global Market Development practice at the Milken Institute. She is also the chair of the Rwandan Capital Markets Authority, which regulates that country’s financial markets.

Published July 29, 2019


After World War II, the United States pledged over $13 billion ($143 billion in 2018 dollars) in foreign assistance under the Marshall Plan to help rebuild the war-ravaged economies of Europe. This marked the first time that financial aid and technical assistance abroad were deliberately incorporated into U.S. foreign policy. The whole effort was born of a humanitarian impulse, but it was fueled by commercial opportunity, and its strategic North Star was the containment of the newly discovered menace, the Soviet Union.

Today, as even the most casual reader of presidential tweets can attest, China has replaced Russia as the superpower rival to the United States and, as in the Cold War, foreign assistance is playing a front-and-center role in the drama. This time, though, China has taken a lesson from U.S. history and is forging its own kind of Marshall Plan by building rail and maritime links across some 65 countries in Eurasia, Oceana, Africa and Europe. Known as the Belt and Road Initiative (BRI) and part of its overall Going Out policy, the idea is to build a new Silk Road of transportation and supporting infrastructure to stimulate commerce and reduce its cost across these continents — with China, many would argue, at the center. The BRI was enshrined in the Chinese Constitution in 2017.

Maxim Pavlov/Alamy

The United States has repeatedly raised the alarm about China’s Going Out policy in general and the BRI in particular. Reasons range from strategic fears about Chinese ownership of key geographic assets (exhibit A being China’s newly acquired right to manage the port at Djibouti, where the United States has its only military base in Africa) to concerns about the BRI’s impact on the sovereignty of developing countries, to the undermining of globally agreed norms and practices for development engagement. At the heart of all of these concerns is the large amount of debt that countries are taking on from China as part of the BRI and related programs.

Enter China, Stage East

As with all things Chinese, the numbers here are humongous. Most estimates place Chinese spending on BRI initiatives at more than $1 trillion, and to date China reports signing contracts valued at over $500 billion across 171 intergovernmental cooperative agreements with over 150 countries and international organizations. In Africa, China has financed over 3,000 infrastructure projects and, from 2000 to 2015, extended roughly $6 billion a year to African governments and state-owned enterprises. It stepped up its engagement considerably in 2015, pledging $60 billion in aid and loans to the continent, and President Xi Jinping just matched that $60 billion commitment last September at the seventh Forum on China-Africa Cooperation in Beijing.

Like the Marshall Plan, most of this money consists of loans and other credit facilities such as export credit guarantees, infrastructure finance (often at below-market terms and with significant grace periods) or credit lines for Chinese investors and exporters. But unlike the Marshall Plan, there is very little in the way of outright grants.

Whereas 80 percent of U.S. development assistance is now broadly humanitarian and developmental, taking the form of grants and materiel for the most part, only about 21 percent of Chinese assistance meets the OECD’s definition of overseas development assistance.

The hardline version of the narrative on Chinese international engagement runs that China is practicing a form of “debt diplomacy,” wherein it foists massive sovereign indebtedness on countries in a Trojan Horse maneuver, enabling it to later seize important raw materials (e.g., iron, cobalt, oil, gas, and so on in Africa) or other strategic assets (e.g., ports in Sri Lanka and Djibouti) in the form of collateral for non-payment. But even discounting the idea that China is some kind of hyper-rational long-term actor bent on global domination, the United States fears that the BRI and related activities will create (or recreate) unsustainable debt dynamics that could potentially lead to a vicious circle of state fragility and economic and political dependence on China.

Moreover, as a practical matter, Western donors in general, and the Trump administration in particular, are not terribly keen to provide financing to developing countries — after having granted them massive debt relief at the turn of the century as part of a global effort in which China did not participate — so that those countries can then turn around and use that money to pay off their newly acquired Chinese creditors. Secretary of State Mike Pompeo, for example, made (but then backed off) threats to veto IMF assistance to Pakistan, given its indebtedness to China.

In addition to Pakistan (which owes China a whopping $68 billion in infrastructure debt), one of the more well-known examples of oppressive indebtedness is Venezuela, a country geographically close to the United States (and one that can now barely feed itself), which has racked up debts to China totaling $65 billion. Then there’s Laos, where the $7 billion cost of the China-Laos railway equalled more than half the country’s GDP (yes, GDP) in 2015, and Sri Lanka, where in 2017 the newly elected government had to turn over its main (globally strategically located) port to China because debt service on the $13 billion it owed was approximately 95 percent of total government revenue. All told, the Center for Global Development has identified eight countries that have debt-sustainability problems, with China as the dominant creditor, from the BRI alone.

Adding to U.S. concerns, the whole Chinese checkbook-diplomacy enterprise is just a bit murky for Western tastes. First, Chinese lending almost always requires sovereign guarantees or collateral claims that are not always well documented, so that what might at first look like private-sector borrowing turns out to affect sovereign indebtedness in ways that are often not properly understood or accounted for at the macro level. This sort of thing also gives particular agita to institutions like the IMF, which cares deeply about such matters.

In addition, loan terms and procurement guidelines are opaque in most cases. This makes it difficult for U.S. and other non-Chinese companies to compete for lucrative construction and other deals. And, where there is an absence of sunshine, as the saying goes, there is opportunity for corruption — especially given that in many of the countries associated with the BRI corruption is already endemic. Of course, large infrastructure projects lend themselves particularly well to bribery. Inflate your costs, over-invoice for supplies, and then pocket the difference. The bigger the real cost of the project, the easier it is. The fear, from a geopolitical viewpoint, is that these payments could be deployed to garner the support of local elites for China’s strategic objectives.

The U.S. Response

The Trump administration tends to characterize all of this in apocalyptic terms. For example, in a speech outlining the administration’s new Africa strategy last December, National Security Advisor John Bolton claimed that the BRI had “the ultimate goal of advancing Chinese global dominance,” and Jim Richardson, coordinator of USAID’s Transformation Task Team, warned that “to roll back transparency and to leverage unsustainable debt onto our partners, that’s not success, and for us to sit back … rather than speak out in truth; that’s something that we can’t do anymore.”

What we can do is not always clear from administration rhetoric. But one thing that it manifestly does not have in mind is an increase in overall development assistance. Richardson may want to speak out in truth, but this administration isn’t exactly putting its money where its mouth is. In three budget submissions, three years in a row, the White House has proposed dramatic reductions in support for development assistance across the board. Instead, the administration is jawboning what it calls a “clear choice” for developing countries to pick a U.S. development model over a Chinese model and, by Cold War-like extension, a U.S. alliance over a Chinese alliance and sphere of influence.

For its part, the White House appears to advocate the “stick” formulation of this policy. In 2018, for example, in a speech before the UN General Assembly, President Trump said, “Moving forward, we are only going to give foreign aid to those who respect us and, frankly, are our friends.”

The “carrot” approach is being promoted primarily from USAID and the newly created International Development Finance Corporation. And here there are two important ideas: the first, as announced by USAID Administrator Mark Green, is “to realign [USAID] policies, strategies, programs and investments to support our partner countries on their ‘Journey to Self-Reliance.’” The second is to do more across all agencies to engage and leverage the private sector as an important vehicle for, and beneficiary of, development assistance.

Surely an important component of self-reliance is that you can accept assistance — and, moreover, forge trade and diplomatic relationships — with whomever you want. So a skeptic might be forgiven for asking whether the two policies of promoting both a) self-reliance and b) a “clear choice” might conflict. But, if the administration dials back the bluster and instead doubles down on its agenda for private-sector-led growth and self-reliance, it may find that it can, indeed, continue to support inclinations on the part of developing countries in the U.S.’s favor, at least at the margin. To do so, it will need to think hard about the Chinese value proposition for developing countries, learn from and engage with it—and then lead from the U.S.’s numerous competitive advantages with respect to it.

Get in the (great) game

There is an estimated $1 trillion dollar annual need for spending on infrastructure globally, and a significant portion of that need comes from Asia and Africa. Somebody must finance it, and Western bilateral and multilateral assistance is not doing the job.

From the perspective of developing countries, of course, the Chinese numbers are compelling. China’s overseas infrastructure spending dwarfs other bilateral and multilateral infrastructure spending in most every country in which it operates. In Africa, for example, China promised to spend $60 billion last year, whereas the combined State Department/USAID budget for the entire continent was just under $9 billion. In 2017, in fact, the United States spent just roughly $1 billion (from both aid and capital markets) on infrastructure across all developing countries. As one institutional investor and former U.S. Treasury Department official bluntly explained to me, there is indeed a “clear choice” for developing countries between working with the Chinese and working with the United States, and it’s called: “Airport, or no airport.”

Chinese-built Maputo Bridge, Mozambique
Xinhua Xinhua/Eyevine/Redux
From the perspective of developing countries, the Chinese numbers are compelling. China’s overseas infrastructure spending dwarfs other bilateral and multilateral infrastructure spending in most every country in which it operates.

The United States cannot win a great game that it is not playing. It is falling behind China, and indeed behind several other countries, in trade, foreign investment, development assistance, security cooperation, military spending, high-level summits, diplomatic partnerships, multilateral cooperative agreements and cultural outreach to any number of these countries. The United States can’t blame countries for choosing China when China is the only choice on offer.

Given the global infrastructure need, China’s first-mover initiative and U.S. miserliness in this area, a good start to a more strategic engagement on the issue would be to do more to welcome, publicly applaud and participate in sensible, demand-driven Chinese global infrastructure projects, where they exist, rather than sit on the sidelines complaining about them.

A more active engagement on the part of the United States makes sense for several reasons. The first is the plain fact that infrastructure is a public good, even if it is “made in China.” Shipping goods across Eurasia by land, while more expensive than by sea, takes one-third of the time. And once BRI infrastructure is built, it can be used to advantage by commercial entities from all countries, including the United States. Second, the BRI can be an enormously profitable opportunity for U.S. firms, particularly at a time when U.S. domestic infrastructure investment is at an all-time low.

The administration’s new focus on private-sector engagement is welcome in this regard. In particular, the administration’s recent reforms to the former Overseas Private Investment Corporation are an important step in the right direction. OPIC has been transformed into the Development Finance Corporation, or DFC, which will have a lending envelope of $60 billion (double that of OPIC) and the ability to make equity investments, as well as to make grants and loans in local currency. OPIC was not able to do any of these, and they are more in line with the range of financing options that China has on offer.

These are important, and somewhat surprising, steps toward a more flexible and comprehensive commercial engagement. But the administration needs to pay attention to budgetary and other details to ensure that the DFC can live up to its promise.

A reason that Chinese money is compelling for developing countries is that it largely comes with no political, governance or environmental strings attached. For the West, this represents a kind of “rogue aid.”

Second, if the United States wants to influence Chinese policy with respect to its overall Going Out engagement, arguably the best place (and perhaps only place) to do so is from inside the tent. While U.S. membership in the BRI is unlikely, the United States should seriously consider becoming a formal member of the Chinese-created-and-led Asian Infrastructure Investment Bank. In its formation, the AIIB became a major diplomatic embarrassment to the Obama administration, as the United States objected to its establishment and refused to participate. It then had to watch as 57 other countries, led by the United Kingdom, signed up as member shareholders. The AIIB now has 80 members, and it is time for the United States to think seriously about joining them.

As some proof of the power of Western influence and engagement, the Western ideas around development assistance have to a certain extent permeated the new institution. For example, the AIIB has begun to put in place some of the same principles around environmental protection that the core multilateral development banks espouse. In addition to benefiting U.S. companies, membership in the AIIB would lend a positive voice to those efforts. And it could encourage better standards around conditionality as well as, perhaps, overall indebtedness.

Improve the Western Development Assistance Offering

An important reason that Chinese money is compelling for developing countries is that it largely comes with no political, governance or environmental strings attached. (Don’t anyone go off recognizing Taiwan, though.) For the West, this represents a kind of “rogue aid” that allows developing country governments to ignore the environmental, social and governance conditionality imposed by Western lenders, enabling them to play China off against the West in an alleged race to the bottom of corruption and environmental degradation.

China, though, characterizes its approach as enlightened aid policy. In announcing Chinese investment last year at the Forum on China-Africa Cooperation, President Xi proudly reminded African nations again that “China’s investment in Africa does not come with any political conditions attached and will neither interfere in internal politics nor make demands that people feel are difficult to fulfill.”

The truth is likely somewhere in the middle. But the West can certainly learn from China’s overall approach to treating developing countries as “win-win partners” rather than subservient aid recipients. Here, the United States and other Western donors will need to continue to work to put developing countries squarely in the driver’s seat in regard to what kind of aid is prioritized and in what form that aid is delivered. China prides itself on a “demand-driven” aid policy, and the United States should lead Western efforts to do more to adopt this approach.

Second, and relatedly, Western bilateral, and especially multilateral, donors are rightly criticized for projects that impose excessive conditionality, take years of work to get off the ground, and have onerous reporting requirements. Western institutions should take a hard look at the conditionality they impose and ask where it could be usefully right-sized.

In this regard, Chinese lending is already having an impact on the overall aid ecosystem. University of Heidelberg economist Diego Hernandez found that the World Bank attaches fewer conditions to its loans for African countries also receiving Chinese development assistance. Specifically, he found that for every 1 percent increase in Chinese aid, the World Bank lessened its conditionality in core areas such as market liberalization and economic transparency by 15 percent. This might not be a race to the top, exactly. But assuming that the World Bank does not compromise its core values on environmental, social and governance issues, it may have great-power competition to thank for making it a more agile and impactful development partner.

Keep Calm and Believe in Market Discipline

To the extent it’s true that state-backed Chinese lenders are willing to lose billions of dollars purely to achieve foreign policy objectives, U.S. firms will find it extremely difficult to compete with China on commercial terms. However, this administration should probably take a deep breath and believe its own rhetoric about the inherent superiority of a market-based approach. The U.S. government gives aid — and U.S. public and private actors extend credit — primarily to countries with good governance, and on a transparent basis, because it believes that these conditions help ensure that the money is spent wisely on behalf of investors and will more likely achieve its global welfare goals. Throwing money at white elephants is throwing money away, and it is not sustainable even for the biggest balance sheets.

Inaugurating a rail line in Lahore, Pakistan, part of the China-Pakistan Economic Corridor.
Sajjad Xinhua/Eyevine/Redux
Among BRI participating countries, 27 have a credit rating of junk and 14 are not rated at all. Chinese lenders can expect the same result from lending large amounts of money to junk-rated borrowers with very little conditionality that has plagued most every lender throughout history.

Among BRI participating countries, 27 have a credit rating of junk and 14 are not rated at all. This time is not different, either: Chinese lenders can expect the same result from lending large amounts of money to junk-rated borrowers with very little conditionality that has plagued most every lender throughout history.

Indeed, the infrastructure chickens are already beginning to roost. A report by the Rhodium consultancy, for example, estimates that about $50 billion in BRI loans have been restructured through deferments or write-offs in recent years. And so for every national security expert worried about what the BRI means for Chinese dominance across Eurasia and Africa, there is an institutional investor worried about the extent to which BRI lending will have substantial negative ripple effects back to the Chinese banking sector, adding to the country’s already terrifying levels of indebtedness. (Which is now $34 trillion. Seriously.)

The United States shouldn’t be at all happy about the implications of $50 billion worth of non-performing loans for China, but it’s not clear that it should fear them from a geopolitical/security perspective, either. As a former special assistant to the president at the National Security Council explained to me: “There is a real possibility that it all ends in tears for China with lots of money wasted, little goodwill earned and painful debt negotiations that drag on for years. It’s not clear at all to me that China really wants to ‘own’ the Sri Lankan port.”

Arguably, the United States can expect that over time markets will discipline the worst Chinese impulses, leading to better (and thus more curtailed) Going Out engagement. China is already demonstrating increasing understanding of the downside of its headlong rush into large-scale foreign lending. And as they have been exposed to ever more non-performing loans globally, Chinese banks seem to have become more prudent in their credit allocation. China’s four biggest lenders have made no loans to date this year, for example, and their investment in commercial real estate abroad has plummeted from $23 billion in 2016 to less than $1 billion in the first quarter of 2019.

Zambian stadium financed and builby a Chinese company.
Thomas Lekfeldt/Moment/Agenc/Redux

In addition, the Chinese government is now talking more about sovereign limits per country and concentration limits for banks, and it is beginning to acknowledge publicly that global best practices might actually be best. For example, at a Belt and Road Forum hosted by Beijing in April of this year, President Xi pledged to reformulate the BRI with greater emphasis on international cooperation, market principles and sustainability. “Everything should be done in a transparent way, and we should have a zero tolerance for corruption,” he added. Welcome words from the U.S. standpoint, for sure.

From a strategic perspective, the whole matter of unsustainable indebtedness suggests at least two practical areas for deeper U.S. development assistance. First, the United States can offer technical assistance to countries in their negotiations with the Chinese. In Myanmar, for example, the United States recently staffed the government with financial and legal experts to help it restructure its loans to China and then renegotiate them. The restructuring markedly curtailed the scope of the Chinese project and improved its terms for Myanmar. The United States might help ameliorate sovereign debt issues on a larger scale by more systematically calling out bad lending practices, helping bring their details to light, and even participating in negotiations to avoid or restructure them.

Second, the United States could devote considerably more technical assistance to helping developing countries build domestic capital markets.

There are surprisingly large pools of domestic capital available even in poor countries, and particularly in resource-rich ones. These funds could be deployed to finance domestic infrastructure and private-sector led growth more generally, if only the proper legal, regulatory and human capacity components were in place. The United States has the most efficient capital markets in the world, and is also the richest large country in the world.

Developing countries understand that connection and are almost universally keen to build their own domestic markets along the U.S. model. Here, the United States can lead through technical assistance as well as through partnerships among institutional investors and market participants of various kinds.

Double Down on the Core U.S. Value Proposition

Democratically elected governments participating in the BRI, as it turns out, appear to be less likely than other participants to tolerate massive indebtedness to China. Recently, a number of countries have done a more sophisticated job of assessing their debt vulnerabilities and, as a result, have increasingly pushed back on Chinese offerings. Malaysia, Myanmar and Nepal are all recent examples of countries that have turned down Chinese debt or even cancelled projects for fear of over-indebtedness or Chinese “neo-colonialism.” Malaysia, for example, suspended and/or cancelled large parts of the Malaysia Rail Link and two pipeline projects, with a planned price tag in the neighborhood of $22 billion, out of fears of ballooning Malaysian indebtedness, Chinese influence and possible bribery associated with the 1MDB scandal.

Much of this pushback has come on the back of democratically driven regime change, and in fact, excessive indebtedness to China helped drive incumbent governments out of power in Malaysia, Sri Lanka, the Maldives and Brazil, all of whose winning parties ran in part on anti-Chinese platforms. Civil unrest against China has flared up with increasing frequency in places like Zambia (which is facing $10 billion in loan restructuring), Kenya and Ethiopia (over cost overruns and lack of job creation), and even in Pakistan, despite (or because of) massive Chinese lending to the China-Pakistan Economic Corridor. The Financial Times reports that there are even signs of online protests (quickly taken down) in China pushing back on the large sums of BRI spending abroad, given development needs at home.

Good governance and strong civil institutions of the kind that the United States continues to champion are doing much to fortify countries against Chinese excesses.

These examples show that the strongest bulwark against crony capitalism and profligate spending may come from civil society in the countries themselves, and that strong civil institutions may be the most important defense against clientelism from China or anywhere else. U.S. programs to strengthen governance and civil society, then, are not being undone by China’s aggressive outward expansion, as Jim Richardson fears. Rather, good governance and strong civil institutions of the kind that the United States continues to champion are doing much to fortify countries against Chinese excesses.

If the Chinese reputation is for rapid growth through state-led industrialization, the reputation of the United States is for democratic institutions of government, a strong civil society, and free, open and transparent markets. Not only are these central U.S. ideals, they are central to the United States’ own growth story. The United States can lead in these areas by continuing to foster democracy and promote good governance in the countries with which it engages.


While there is surely a great power rivalry at play at some level for China, the Chinese development agenda also comes from its own deep experience as a recipient of tough conditionality-based aid from the West as well as from the lessons it has learned from its own growth story. From its own experience, the fundamental takeaway is surely that economic development comes first, and that political and social niceties can come later (or not). And it is no surprise that this is the basis on which China seeks to engage with other developing countries.

This is not how the West views the proper sequencing of reform along the road to economic prosperity. But it is worth remembering that George Marshall himself agreed with the Chinese framing. Marshall argued that liberal democratic institutions are made possible by economic progress, but they are not preconditions for it. As he put it, the purpose of economic assistance “should be the revival of a working economy in the world, so as to permit the emergence of political and social conditions in which free institutions can exist.” And it’s not surprising (or condemnable) that developing countries will look wherever they can to make this journey easier.

A BRI project: the Lotus Tower in Colombo, Sri Lanka, the highest TV tower in South Asia.

Of course, the single most effective way to promote economic growth and self-reliance in developing countries — and to strengthen their ties with the United States — is through the liberal doling out of U.S. visas and access to U.S. markets. Liberal trade and immigration policies give developing countries both the training and income that come from short and long stints in the United States, as well as the markets at scale with which to develop domestic industry. But, dear reader, the year is 2019, and this is an article in a journal of economic policy, not a fairy tale.

Even within these guardrails, though, this administration will find that more active commercial engagement, enlightened technical assistance and committed ongoing support for democratic and market institutions can help formulate a compelling alternative to the Chinese world view. As David Bohigian, acting head of the new DFC articulates it, the U.S. offering — sovereignty, environmental protection, jobs for domestic workers, transparency and infrastructure that is built to last — isn’t all that bad of a choice when you get right down to it.

USAID Administrator Green stated in his announcement of the “Journey to Self-Reliance” approach that “the ultimate goal of development assistance must be to work toward the day when it is no longer necessary,” and that “we should measure our work by how far every one of our investments moves us closer to that day.” The truth is that, to the extent that the United States does help countries achieve this goal, it will also enable them to make the best decisions regarding both the Chinese and U.S. offerings. As such, it could genuinely both help developing countries on their self-sovereign journey to prosperity and, at the same time, do much to advance America’s interests. In this way, the United States could potentially help make the whole world great again — as it were.

main topic: Region: China