China’s Belt and Road Initiative and Implications for GVCs August 2018 David Dollar, Senior Fellow John L. Thornton China Center, Brookings

In 2013 Xi Jinping proposed the Belt and Road Initiative

China’s Belt and Road Initiative China has become a major funder of infrastructure through CDB/EXIM/AIIB China’s initiative is global and demand-driven – BRI countries get a minority of the funding While infrastructure financing is welcome, the initiative raises issues: Risk and debt sustainability Weak link with GVCs Environmental and social safeguards AIIB is a promising innovation and points the way towards reform

Belt and Road countries take a small share of CDB/EXIM outstanding loans, end-2016

China’s development finance: Data issues and options CDB/EXIM do not report detailed data on countries and terms Updated AidData through 2014 based on media reports and follow-up covers 131 countries SAIS China-Africa Research Initiative covers lending to African countries through 2015

Half of China’s $40 billion annual lending has gone to BRI countries

McKinsey 2017 study of infrastructure gaps Infrastructure will be a crucial input into sustaining growth and poverty reduction Infrastructure financing needs for the developing world (excluding China) are on the order of $1 trillion per year until 2035 60% of that is needed in developing Asia Power and roads together account for more than half the need

Where infrastructure finance is needed per McKinsey

Where China lends, 2012-2014

China’s finance, 2012-2014, by sector

China’s development finance 2012-14: Regression analysis Only population is significant No favoring of landlocked Asia or Maritime Asia Uncorrelated with indices of political stability and rule of law

Partial scatter of CDF and rule of law

GVC participation is highly correlated with rule of law

Rising external debt raises sustainability issues

Environmental safeguards in two Cameroon hydro projects Project Memve’ele Lom Pangar Financier China EXIM World Bank Loan terms Euribor+3.1% 0.5%, 40 years, 15 years, 5 grace 10 grace Contractor Sinohydro China Int’l Water-Electric Preparation 4 years 7 years Env oversight Gov Cameroon Independent panel

Asian Infrastructure Investment Bank Charter similar to World Bank and MDBs Acted on Zedillo report recommendations for MDB reform 87 member countries $4.4 billion in lending in first two years, three-quarters co-financed with MDBs India is the largest borrower

Improving China’s development finance China’s financing is too scattershot to have much effect on GVCs Good infrastructure feeds into trade costs and can help developing countries join GVCs However, countries with very poor governance are bad candidates for investment Countries with macro instability (debt unsustainability) and poor rule of law have no involvement in GVCs

Improving China’s development finance To attract better countries, China’s development finance needs to be More transparent More competitive (open procurement) Higher standard (environmental and social standards)

China’s development finance and evolution of GVCs China has become a major funder of infrastructure through CDB/EXIM/AIIB China’s initiative is global and demand-driven – BRI countries get a minority of the funding While infrastructure financing is welcome, the initiative raises issues: Risk and debt sustainability Weak link with GVCs Environmental and social safeguards AIIB is a promising innovation and points the way towards reform

Thank You!