China Is Bailing Out Its Bad Bets, and Handing the West a Geopolitical Opening

China has created its own subprime infrastructure crisis, and now it is trying to bail itself out. The rescue efforts are focused on loans for China’s much-touted Belt and Road Initiative, or BRI, Beijing’s trillion-dollar attempt to build global infrastructure and increase its influence throughout the developing world. These debt problems offer an opportunity for the West to approach developing economies with a better alternative. 

Issuing what have frequently amounted to junk bonds, China’s BRI made high-risk, often-unneeded billion-dollar infrastructure loans, with no conditionality, poor risk planning, shrouded in opacity and secrecy. Cash-poor developing countries that lacked the ability to pay and had long track records of corruption were particularly vulnerable. A recent report by researchers at the World Bank and several other institutions shows that China has funded $240 billion in bailouts for many of these subprime loans. 

It’s not surprising that so many of the countries that borrowed what looked like cheap Chinese cash for these global megaprojects are now at risk of defaulting on their loans. The seeds of project failure were sown from the outset by a lack of transparency, risk management, and viable controls to check corruption and incompetence. 

So why are these self-salvaging bailouts happening now? International rescue lending is risky. But as one of the authors of the new report explains, “Beijing is ultimately trying to rescue its own banks.” Beijing’s wild investments caused problems that it’s now trying to fix.

The rescue loans are also piling even greater indebtedness onto the target country. While International Monetary Fund rescue loans generally average around 2% interest, the Chinese “bailout” loans generally carry a rate around 5%—a substantial burden for countries that are already having difficulty making payments. This bilateral debt, in turn, increases dependencies upon China throughout the global south. 

This turn of events was predictable. China lent tens and even hundreds of billions of dollars to countries that it should have known had no realistic chance of paying the loans back. It selected countries that couldn’t afford major infrastructure projects and signed them up for massive, debt-loaded projects that were designed to play well for domestic politics. This is evident in the nations receiving rescue loans, such as Pakistan, Ecuador, Oman, Egypt, Venezuela, Kenya, and Sri Lanka—countries in debt distress in large part because of overly ambitious Belt and Road projects. 

Moreover, China encouraged these enormous loans to countries with massive corruption and kleptocracy problems. Beijing and Chinese companies often were accused of being involved in corruption, bribes, kickbacks, and embezzlement as core aspects of the arrangements. Corruption allegations have been a key feature of the BRI in many countries, such as Malaysia and Kenya, where Chinese officials have played central roles in high-profile scandals.

To call the $240 billion in losses on these loans a “bailout,” therefore, misses the mark. As a centralized, planned economy, China cannot point to another actor to blame for these subprime loans. This is Beijing’s own doing. 

Indeed, China has used its debt position to ensure access to critical raw materials from dependent nations as a means to pay back massive BRI loans. In Guinea, for instance, China extended loans valued at 200% of Guinea’s total GDP, backed by bauxite production. In the Democratic Republic of the Congo, China is taking vast portions of the country’s critical cobalt and copper production to pay off billions in infrastructure loans, despite China having built very little actual infrastructure.

BRI’s results have been middling. For every successful port, powerplant, and highway, there have been crumbling dams, empty airports, railways to nowhere, and crippling debt. Projects often failed to meet wildly optimistic revenue projections. And woven throughout the BRI has been a lack of transparency and widespread corruption, which China has tacitly fostered. 

Dependency on Beijing—and, therefore, geopolitical support for China’s global policies—is another central driver of the BRI. Leverage from BRI and similar development funding has allowed China to turn virtually all of Africa and Latin America against an independent Taiwan.

However, the BRI, while dangerous in design and faulty in execution, does identify a real and urgent requirement. The developing world is in desperate need of reliable, well-constructed, and modernized infrastructure. This helps explain why countless countries were willing to sign up to onerous financing terms.

The failures of the BRI have provided an opportunity for the West to step up and offer  a productive, well-built, and competitive alternative to the BRI. China skipped a comprehensive derisking strategy, to its detriment. The U.S. and its allies need to make a case that when transparency, conditionality, and sustainable debt are key pillars of development infrastructure and financing, the outcomes are better, and citizens gain. 

It’s hard to counter Beijing’s offers of fast cash, but it’s not impossible. If the U.S. and its allies step up their infrastructure game, they will likely find receptive audiences of leaders and citizens ready to step out of China’s debt-fueled shadow.

Elaine Dezenski is Senior Director and Head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.