Why US can’t challenge China dominance in lending to developing countries

August 21st, 2019

By John Okeke

China has one of the biggest global development footprints in the world. The only country with bigger official international finance flows is the United States.

Still, Washington spent over four times more than Beijing on Official Development Assistance. The lion’s share of China’s official money flows falls under Other Official Finance and is mostly spent on loans for projects in infrastructure, energy, and communications.

These projects are part of the Belt and Road Initiative (BRI), China’s main vehicle for spurring development both at home and abroad. Through infrastructure investments, Beijing aims to better connect China to other parts in the world and to increase trade along the road.

Five years after President Xi Jinping announced his plans for the BRI, China has spent about $25 billion on related infrastructure projects.

U.S. president Donald Trump signed the Better Utilization of Investments Leading to Development, also known as the BUILD Act, into law on October 5th, creating a powerful new development finance organization that is aimed at challenging China’s dominance in lending to developing countries. The law combines two existing organizations, the United States Overseas Private Investment Corporation (OPIC) and USAID’s Development Credit Authority to form a new entity called the International Development Finance Corporation (IDFC) with $60 billion in its coffers.
“Instead of giving them a fish, we want to teach them how to fish. “They’ll have to stand on their own two feet. So we’re not in making loans or doing projects that don’t make economic sense.” — Ray Washburne, OPIC CEO
Although U.S. officials and other IDFC supporters often tout the new agency as an alternative for developing countries from borrowing money from China, the reality is that this new agency will actually compete very little, if at all, with China’s development finance institutions.

The U.S. and Chinese approach to development finance will differ in three critical ways: Whereas the Chinese prefer to lend to governments, the IDFC will only provide funds for companies and other private sector entities; Chinese funding is often used to underwrite large infrastructure projects but the IDFC loans will instead focus on providing capital for businesses and Market considerations typically do not factor very high in China’s lending priorities, whereas IDFC loans will be intended to fill gaps in the market that are otherwise unfulfilled.

Supporting business in Africa, Asia and other developing regions is definitely part of the IDFC’s mandate, but the agency is also unapologetically designed to support U.S. businesses in these markets. “The IDFC will offer US companies more assistance as they enter new, challenging markets and will act as a critical catalyst in new investments helping to mitigate risk,” said Aubrey Hruby, a Washington, D.C.-based Africa analyst at the Atlantic Counciland an avid IDFC supporter.

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