G7's $600B infrastructure bid to counter China

• Over the last two decades, China's morphed into the single largest lender to lower- and middle-income countries, igniting Western concerns that it’s using its coffers as a tool for influence and control over countries badly in need of development funds.
• "Competition between the US [and its partners] and China is increasing. China's international posture has become much more visible and assertive," says Jeremy Mark, senior fellow with think tank the Atlantic Council. "And China is miles ahead of the U.S. in any number of countries — because of the attention they pay and the assistance they lavish."

The big picture: China’s ambitious lending program, The Belt and Road Initiative (BRI), launched in 2013. It was a way for China to invest its massive surplus of dollars, while creating buyers for things like steel and aluminum that it produced — and securing access to key natural resources that it lacked.

But the BRI is now in a state of crisis as sovereign debt distress spreads. For example: 60% of BRI loans are to countries now in financial distress compared to 5% in 2010.

• Meanwhile, 35% of the BRI infrastructure project portfolio faces a major implementation problem, according to AidData, which maintains one of the most comprehensive datasets on Chinese development finance.
• During its peak years, BRI was lending about $85 billion per year, per AidData; that’s down to about $14 billion last year, Bloomberg reported.

The intrigue: The most destructive part of BRI, critics say, is the "debt trap" it lays for poor nations who will be forced to turn over possession of key infrastructure to China when they can't repay their loans.

• Although that kind of asset seizure has not actually taken place (as The Atlantic explains), China's loans have in many cases saddled poor countries with too much debt — and it's been unwilling to engage in constructive restructuring talks.
• At the same time, BRI projects have had a mixed effect on local public opinion about China; and their presence can make local governments nervous about pushing back on things like environmental standards.
• Taken together, these developments create an opening for the G7 to make a move, says Brad Parks, AidData's executive director and lead China researcher.

Meanwhile, a re-branding: This week’s PGII announcement was really a re-launch of the Build Back Better World partnership announced at the June 2021 G7 meeting.

• That program struggled to sign on international partners — and was saddled with a name that evoked President Biden's failed domestic legislation.
• As part of the fresh PGII, the U.S. pledged to mobilize $200 billion over the next 5 years, via a combination of federal financing, grants and private sector investments. Flagship projects detailed in the re-boot announcement show U.S. companies will benefit from contracts to complete some of the work.

Given how debt-saturated many lower-income nations are, the program will probably need to lean more heavily on investments than on lending.

• "The question is, can you pull together mixed sources of financing to continue an infrastructure push in countries that have basically reached their limits in terms of debt," Mark says.

Between the lines: If PGII is a play to significantly boost U.S. influence, it's probably too little, too late, given the numbers involved, he adds.

• But if implemented well — an open question, given the tangle of U.S. agencies involved, and coordination with other G7 countries — the plan could offer a small minority of the 140 BRI recipient countries a viable alternative to Chinese purse strings.

The bottom line: "I think [the G7] are trying to change the narrative, create more choice in the infrastructure financing market — and pick off some of the countries that have a bad taste in their mouth from their experience with BRI," says Parks.