China’s overseas spending has, in recent years, refocused away from Western economies towards the low- and middle-income countries of the Global South. This has, from the China side, been largely driven by the Belt and Road Initiative (BRI) over the last decade, but there are also some clear correlations between the political structures of many of the recipient countries which make them fertile ground for Chinese lending.

In this interview, Richard Carney, author of China’s Chance to Lead: Acquiring Global Influence via Infrastructure Development and Digitalization, discusses the political conditions in many countries that facilitate greater Chinese overseas lending, the generally positive impact of Chinese infrastructure projects for recipient countries and the growing importance of digital exports.

Q. Where has Chinese overseas spending been targeted in recent years and what are the trends in terms of investment channels?

A. Prior to COVID, spending on infrastructure projects specifically focused a lot on low- and middle-income countries, such as those in Southeast Asia, the Middle East, Africa and Central Asia, with some important exceptions in higher income countries.

COVID, of course, had a big impact on those projects and what resulted was a shift in emphasis towards digital exports, partly by way of the BRI, and global health concerns, which created a very good justification for introducing Chinese digital products, both physical infrastructure and services, to help with the tracing of COVID in recipient countries.

After COVID, there has been a reorientation away from the very large construction projects towards “small yet beautiful” and more sustainable projects. There has been a clear pre- and post-COVID divide in focus.

Q. To what degree are there similarities between the recipient countries?

A. While “low- and middle-income countries” can function as umbrella terms, there are also links between the political structure of a country and the level of demand for Chinese spending. Most noticeably this appears to be in countries where there is a high level of state ownership in the corporate sector, combined with a high reliance on the ability of political leaders to deliver resources to specific groups.

In turn, this occurs most prominently in what would be called ‘semi-competitive’ political territories, which tend to be countries that have a dominant ruling party and allow for opposition, but those opponents don’t typically get that many seats in the legislature—Malaysia and Singapore are both good examples.

Q. What is your sense of the impact of Chinese spending on recipient countries over the last decade?

A. The impact varies, and in a large part that can depend on the political structure of the recipient country. If you’re in one of the semi-competitive territories or even a non-competitive one such as the UAE, there is often less voice given to concerns about environmental impact or local community impact, and this will change various aspects of the overall impact of the project.

But when you get to these more competitive jurisdictions such as Indonesia, for example, you see more concerns being expressed over such issues, and you end up seeing more thought being given to solutions. The Piraeus port in Greece is a good example, as China was very aware of the need to proactively address certain issues in a country such as Greece to placate local concerns, and they did a good job there.

In general, though, spending has largely been beneficial. Projects, as long as they are finished, have positively contributed to growth in many of the low- and middle- income recipient countries. There are, of course, some important caveats such as debt and project quality, but generally there is a positive correlation.

In advanced economies, the OECD countries for example, there has also been a bit of blowback due to concerns over China’s ownership of various strategic assets, including ports or companies producing certain technologies.

Q. China has been criticized by some for the conditions attached to its loans. To what degree is this criticism valid and what changes, if any, do you expect in the future?

A. A vital part of the argument in the book is that these loans and projects are primarily driven by the interests of the recipient countries. China has obviously offered help to complete projects, but it is the recipient country that will initiate the discussion.

In many cases, the loan itself is not necessarily full of difficult caveats, it more depends on how and why the projects are being implemented. There are a number of examples of China-financed projects being undertaken for the domestic leaders’ own political gain, without consideration for the broader economic gains, and there is then a potential for these projects not to deliver as well as perhaps they could.

One such example is the railway project in Kenya. They had four options to choose from in terms of price, and the World Bank recommended the second least expensive, but Kenya, with China as the contractor and financier, went for the most expensive option. This choice was not made because of Chinese pressure, which is often how it is portrayed; it was because the Kenyan government preferred that option as it would provide solid political credit for the upcoming election in the country, rather than producing the best long-term ROI for the country as a whole.

Q. To what degree is digital infrastructure an important part of China’s overseas investment strategies?

A. It is becoming increasingly important. The initial impetus for the BRI was the export of surplus infrastructure capacity, alleviating debt burdens and maintaining employment. But that quickly transitioned into introducing Chinese digital infrastructure like 5G Wireless, telecommunications and related services such as e-commerce and logistics etc., which were either introduced as part of the infrastructure projects, so smart infrastructure, or as additional or complementary digitally-related projects. And this has really become the main driver of outbound spending in recent years and economically where a lot of the big opportunities lie.

These opportunities are for Chinese companies to enter foreign markets, to introduce smart manufacturing into host economies and for the local economies themselves. And in many cases, it is as simple as getting these places connected to the rest of the global economy.

Another big strategic benefit for China is that introducing its technical standards through the export of digital products such as 5G towers often locks users into future purchases or continued Chinese project management. Many of the technologies tend to only be compatible with other products using Chinese standards and may not be compatible with Western devices, meaning long-term benefits for China.

Q. To what extent has China’s investment been successful in terms of creating new markets for Chinese goods?

A. An interesting case study here are the number of semi-competitive jurisdictions in Africa and Central Asia that have displayed a high demand for Chinese infrastructure spending, which in turn contributed to an elevated demand for Chinese digital technology imports. Initially this was largely bilateral between China and each recipient country, but because there’s a concentration of them regionally, it led to the opportunity to create a regional economy where countries can trade or communicate and engage in all kinds of services and other related economic functions with each other. China is playing a central role in all of that because they are the one providing the infrastructure and hardware, but also software and cloud services.

Q. To what degree are the types of projects important for China when compared to the overall benefit of being an investor?

A. It really depends on which company or SOE is involved on the Chinese side. But more generally, China is looking to upgrade its manufacturing capabilities and is therefore interested in promoting the building of industrial parks in foreign locations, where companies can take advantage of low-cost labor and relocate their low-skilled manufacturing. This allows China to upgrade its domestic manufacturing sector whilst maintaining some control of the lower end of the supply chain. There is also the securing of natural resources that has a high level of importance, which in turn requires solid infrastructure. And of course, digital exports.

The key is that China is looking for long-term projects. The project is not just about constructing the asset, but also managing the asset and these tend to be public-private partnerships. Take a port, for example. China will build the port in three to five years and will then manage it for another 20 years. It is quite a notable long-term commitment and this helps sustain the relationship, as well as helping with initial interest from the Chinese side.

Q. Given the recent announcements of a shift in BRI strategy and China’s various economic headwinds, how do you expect the BRI approach to shift?

A. There is a clear need for sustainable infrastructure investment over the next few decades and much of this demand will come from developing countries. The challenge is finding investable projects where the risk is not too high, the product is well specified etc. But I do also think the reason China is placing an emphasis on the “small yet beautiful” projects is because it is concerned with its own capacity to fund larger projects, as well as the recipient country’s ability to carry debt.

Q. To what extent have there been international responses to the BRI and how effective have they been?

A. There has been the American B3W [Build Back Better World], and other initiatives by the EU and Japan, as well as joint initiatives like those between Japan and India. Japan has arguably been the most successful in its attempts, but it has been limited and it is certainly not on the same scale as what China is doing with the BRI. Additionally, with the Asian Development Bank it’s more of a multilateral initiative, rather than the hybrid bilateral approach of the BRI.

There is a recognition, particularly in the West, that this is a hugely important topic and there needs to be some sort of response, because when you look at the share of global GDP coming from low- to middle-income countries it’s now around 60%, and rising quickly. We’re currently in a moment where, over the next 25 or so years, there will be a complete change in the structure of the global economy relative to the past 75 years.

So, the advanced economies recognize they need to do something to compete with China during this period of change, and given that these emerging economies are likely to become major economic powers, maintaining influence is critical. But although they recognize this, so far they’ve not been particularly successful.

Q. How do you see Chinese spending targets and motivations changing over the next five to 10 years?

A. There are some basic trends in the global economy that favor China and in some ways, they are independent of what China’s domestic economic policies are. The first relates to the non-democratic nature of many developing countries, which is not in the interests of the OECD and, by default, is in China’s interest. The second relates to their speed of growth, which given China’s involvement, proves beneficial to China.

The third point is urbanization, which is happening predominantly in these low- and middle-income countries, especially Sub-Saharan Africa. And this urbanization creates a demand for sustainable or smart infrastructure which is precisely what China is good at. Never mind whether China can meet all of the demand, you can be confident the West won’t, or at least will do so with conditions that the leaders of recipient countries will not favor. If that’s the case then China is the only real alternative at this time. I do think that China will be able to address a larger share of the demand than many expect because of its surpluses in exports, manufacturing, and forex.

Interview by Patrick Body