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Outbound, Inbound, and Future Trends in Financial Statecraft

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Outbound, Inbound, and Future Trends in Financial Statecraft December 16, 2015 China’s Development Finance: Outbound, Inbound, and Future Trends in Financial Statecraft Sabrina Snell, Research Fellow, Economics and Trade The author thanks Deborah Bräutigam, Lucy Corkin, and Erica Downs for their review of an earlier draft of this report. These experts do not necessarily agree with or endorse the staff report’s assessments and statements contained herein, and any errors should be attributed to the author. The author also thanks Matthew Snyder and Nicole Stroner for their assistance in preparing the report for publication. Disclaimer: This paper is the product of professional research performed by staff of the U.S.-China Economic and Security Review Commission, and was prepared at the request of the Commission to support its deliberations. Posting of the report to the Commission’s website is intended to promote greater public understanding of the issues addressed by the Commission in its ongoing assessment of U.S.- China economic relations and their implications for U.S. security, as mandated by Public Law 106-398 and Public Law 108-7. However, the public release of this document does not necessarily imply an endorsement by the Commission, any individual Commissioner, or the Commission’s other professional staff, of the views or conclusions expressed in this staff research report. Table of Contents Executive Summary....................................................................................................................................................1 Acronyms and Abbreviations .....................................................................................................................................5 List of Tables and Figures ..........................................................................................................................................6 Introduction ................................................................................................................................................................7 Contextualizing Official Development Finance .........................................................................................................8 The OECD Development Finance Regime ............................................................................................................8 The Chinese Development Finance Regime ........................................................................................................10 China’s Outbound Development Finance .................................................................................................................14 From Mao to Mutual Benefit – The Evolution of Chinese Development Finance ...............................................14 Development Finance Flows out of China – ODA-Like Finance ........................................................................15 Development Finance Flows out of China – OOF-Like Finance .........................................................................23 China as a Development Actor .............................................................................................................................37 Implications for the United States ........................................................................................................................39 China’s Inbound Development Finance ...................................................................................................................41 Justifying Development Finance for the World’s Second-Largest Economy ......................................................41 Development Finance Flows into China – ODA and OOF ..................................................................................43 Case Study: The Global Environment Facility .....................................................................................................49 Case Study: The International Finance Corporation ............................................................................................52 One Country, Two Flows – An Analysis .............................................................................................................54 Is China Unique in its Dual Status? ......................................................................................................................55 Implications for the United States ........................................................................................................................57 Future Trends in Financial Statecraft .......................................................................................................................58 China’s Multilateral Financial Statecraft ..............................................................................................................58 Traditional Multilateral Development Bank Reform ...........................................................................................63 Implications for the United States ........................................................................................................................67 Conclusions ..............................................................................................................................................................69 Appendix: Data Sources ...........................................................................................................................................71 U.S.-China Economic and Security Review Commission Executive Summary Over the last decade, China has steadily increased its officially supported development finance, providing countries across Africa, Asia, and Latin America with billions of dollars in concessional and nonconcessional finance. The overwhelming majority of this activity has resulted from high-level bilateral negotiations between Chinese leadership and recipient governments. The past year, however, has seen the formation of two new China-led multilateral financial institutions: the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB). In effect, China has adopted a progressively more assertive outward posture and presented the existing global economic governance regime with its first major test since its establishment at the end of World War II. Despite China’s substantial overseas engagement and recent multilateral action, the country still receives development finance from a variety of national governments and international institutions. From a development perspective, China thus challenges convention and, like other middle-income countries (MICs), straddles the divide between a developing nation requiring external assistance and an emerging power assuming global leadership roles. This report examines China’s concurrent positions as a recipient and a provider of development finance, evaluating the objectives driving global finance flows and assessing the impact of these flows on U.S. economic and diplomatic interests. It also explores the growing connection between these two flows as inbound finance is increasingly directed at enhancing China’s outbound activities. In this pursuit, it aims to provide U.S. policymakers with a comprehensive view into Chinese development finance, ensuring the United States successfully navigates global finance for the benefit of national interests and the development community at large. China’s Outbound Development Finance 1) Estimates of China’s official development assistance (ODA) show that in just one decade, the country has advanced from the sixteenth- to sixth-largest provider of ODA in the world. At the same time, China utilizes a diverse array of development finance tools, not just grants and concessional loans typical of ODA. These other official flows (OOF)—such as export credits, nonconcessional loans, and overseas investment support— outstrip China’s ODA-like finance. The United States, meanwhile, is still the world’s largest provider of ODA, but the level of its contribution has remained unchanged since 2005. Furthermore, in terms of OOF, the United States is far behind China. The multilateral development banks, likewise, have not kept pace with Chinese official finance. 2) Aside from its dramatic growth, China’s officially supported development finance has generated contentious debate on the following issues: • China vis-à-vis the OECD Regime: Chinese development finance largely operates outside the current governance regime led by the Organization of Economic Co-operation and Development (OECD), rendering ODA criteria outdated and inhibiting regulation. Limited transparency regarding the quantities involved and their terms further complicates the situation; indeed, most figures for China’s development finance are estimates. The OECD is currently crafting a new measure of total official support for sustainable development (TOSSD) in an effort to modernize its statistical framework and facilitate the monitoring of new finance flows. • Commercially Oriented Official Flows: Whether as export credits, outward foreign direct investment lending, or tied concessional loans, a significant portion of China’s government-backed finance is trade U.S.-China Economic and Security Review Commission 1 facilitating. Such flows help Chinese enterprises boost exports and establish overseas market presence, potentially creating long-term international trade advantages to the detriment of U.S. and other foreign companies. The United States likewise offers official trade-related finance, but under OECD-regulated terms and in smaller quantities than
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