Opinion

As a leader in development finance, China can help create a green, inclusive recovery

Name: Kenya opens massive US$1.5 billion railway project funded and built by China
Uploaded: 2020-12-11T00:45:14.000Z
Duration: 2 min 9 s
Description: Kenya opens massive US$1.5 billion railway project funded and built by China

China’s leading role creates a great opportunity for the world economy, but there are also risks of debt distress and environmental damage

China, its debtors and the international community need to maximise the benefits and minimise the risks of Beijing’s much-needed global development finance

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A bridge crane is installed at the US$1.4 billion coal-fired Hwange Thermal Power Station in Zimbabwe. Although Chinese development lending has helped increase global energy capacity, 64 per cent of the plants it has financed are in the carbon-intensive coal sector. Photo: Handout

Kevin P. GallagherandRebecca Ray

Published: 8:45am, 11 Dec 2020Updated: 8:51am, 11 Dec 2020

According to new estimates, China now finances overseas development at nearly the same level as the World Bank. With countries currently struggling to combat Covid-19, protect the vulnerable and mount a green and inclusive recovery, this significant increase in global development funding could potentially bring major benefits to the world economy.

Like any huge influx of capital into the developing world, though, China’s financial assistance also poses large risks – especially regarding debt distress, biodiversity loss and climate change.

A new interactive data set from Boston University’s Global Development Policy Centre tracks the overseas sovereign loan commitments of China’s two global policy banks – China Development Bank and the Export-Import Bank of China. Between 2008 and 2019, China’s global development finance totalled US$462 billion, just US$5 billion short of the World Bank’s sovereign commitments in the same period.

China’s development finance is highly concentrated in infrastructure – a sector with strong potential for spurring economic growth – as well as extractive sectors. The World Bank estimates that China’s overseas investments could lead to an increase in global real income of up to 2.9 per cent by 2030, with recipient economies experiencing real income gains of up to 3.4 per cent.

In contrast, researchers using similar modelling techniques estimated in 2016 that the Trans-Pacific Partnership trade pact would boost growth in its member countries by just 1.1 per cent by 2030 and globally by 0.4 per cent.

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Kenya opens massive US$1.5 billion railway project funded and built by China

Moreover, forthcoming research in the American Economic Journal shows that each Chinese-financed project has yielded a 0.41 to 1.49 percentage-point increase in economic growth. The same study found no robust evidence that World Bank projects promoted growth.