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Construction teams work on the Nairobi-Mombasa railway line. Kenya is one of the countries to have benefited from China's development loan strategy.   © Reuters

The numbers behind China's overseas development loan risks

Figures show Belt and Road strategy favors countries with low credit ratings

BEN HEUBL, Data Journalist | China

LONDON -- Having gone from being mainly a recipient country to one of the world's largest donors of foreign aid, China has built up a complex network of relationships with its development partners around the world.

But, according to analysis of one of the most comprehensive studies on Chinese development aid to date, not all partners appear to receive equal treatment.

AidData, a research lab at College of William & Mary in the U.S., tracked over 4,000 records of Beijing's official finance projects between 2000 and 2014.

Nikkei Asian Review evaluated interest rates attached to the aid packages different countries received based on AidData's figures, and contrasted them with numerical credit risk scores compiled by data analytics company Trading Economics.

The figures for the Americas correlated according to a standard lending pattern of higher rates for higher risk loans. Those for Africa and Asia, however, did not display the expected pattern.

The findings suggest that factors other than creditworthiness may have at play when Beijing made investment decisions between 2000 and 2014.

Weighted interest rates were estimated by accounting for loan amounts. The rates were then plotted against risk evaluations for a sample of 46 countries. Trading Economics' default-risk figures scores range from 0, likely to default, to 100, or riskless.

Bradley C. Parks, the project's chief researcher and executive director of AidData, suggested one potential explanation for the imbalance.

Beijing provides government financing for highly concessional development projects that meet the Organization for Economic Cooperation and Developement's criteria for official development assistance, which includes grants and soft loans with a large grant element.

It also provides funding through what the OECD terms "other official flows." These are official transactions that do not meet the body's ODA criteria, and are either for essentially commercial purposes or intended for development but have a grant element of less than 25%.

ODA typically comes with lower interest rates, meaning a country receiving more ODA than OOF tends to have a lower borrowing rate.

Kenya, for example, had a risk score of 20, well below the sample average of 37. But only three out of 26 projects qualified as OOF. This had the effect of dragging down the average weighted borrowing rate to 2.38%.

According to Parks, China's decisions on ODA grants appear to be largely guided two principles.

On the one hand, poorer, more populous countries tend to receive a higher amount of Chinese ODA. On the other, foreign policy considerations have a significant bearing on where money is lent. A country that recognizes Taiwan diplomatically would automatically be excluded from consideration, for example.

Parks and his colleagues recently published a study analyzing the voting behavior of recipient countries in the U.N. General Assembly.  

The findings indicate that countries that align their votes with China often receive ODA.

"Chinese OOF is more commercially oriented and as such it tends to go to more creditworthy countries, while it also tends to go to China's trading partners and countries that are rich in natural resources," he says.

The risks involved are brought into contrast when considering Beijing's recent investment strategy.

Findings published by Washington-based think tank the Center of Global Development suggest that, of the 68 countries hosting projects linked to China's Belt and Road Initiative, 23 are currently at risk of debt distress, with eight planned projects adding considerably to the risk.

Even when it comes to commercially oriented OOF, said Parks, there are a number of cases in which non-concessional or weakly concessional loans have been issued to countries with a questionable ability to repay them. 

"Venezuela may be the canary in the coal mine," he said.

As one of the world's 10 richest countries in terms of iron, natural gas and oil, the country received very little in the way of ODA classified loans from China between 2000 and 2014. Beijing did, however, provide significant amounts of OOF.

"China lent billions of dollars to the Venezuelan authorities, where it now seems very unlikely that they will repay those loans given the country's precarious economic circumstances."

In cases like Lebanon, commercial interest may become harder to disentangle from official aid. The country neighbors war-torn Syria and has received interest-free ODA loans.

It also lies at the crossroads of Africa, Asia and Europe, in a location of huge strategic importance, particularly with reference to Belt and Road and, according to reports in the Financial Times, China is eyeing opportunities of a more commercial nature. The country is in search of funding for numerous projects, not least a $58bn project to widen and deepen the port at Tripoli. 

Datawatch is a new series jointly produced by the Nikkei Asian Review and FT Confidential Research.

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