With many Chinese infrastructure projects in South Asia white elephantsThe project approval process in China is increasingly under scrutiny in the region.
Many projects in Sri Lanka turned out to be economically unviable. Financing decisions for an airport in Sri Lanka’s Mattala (the city lies in the middle of nowhere), the Lotus Tower in Colombo, the tallest self-supporting building in South Asia, and several buildings such as the Hambantota Convention Center seem somewhat bewildering. There are many similar examples in other South Asian provinces as well and these projects have caused China great losses in the court of public opinion.
So what is the approval process for Chinese projects and how has China’s development experience in the 1980s played a role in how it deals with other countries in the 21st century?
Chinese project approval process
The approval process for the Chinese project is flexible and faster than that of the OECD Development Assistance Committee (DAC). Since most politicians work with electoral cycles in mind, this is one of the reasons why many countries want to get Chinese business loans.
Let’s take a look at how the Chinese government sources and screens project proposals before they are approved. In most cases, the process begins when the government that needs funding for the project approaches the Economic and Commercial Counsel’s Office (ECCO) attached to the Chinese diplomatic mission with a proposal. ECCO determines whether a proposal meets the minimum feasibility criteria. If so, ECCO submits the proposal to the Ministry of Commerce and the Ministry of Foreign Affairs in Beijing.
Then a team of technical experts from the Ministry of Commerce arrives in the country to assess the feasibility of the project and the budget. This is done in consultation with the local authorities. When the Ministry of Commerce team returns to Beijing, they prepare a final project proposal for consideration by the State Council. If the project is approved by the State Council, the Ministry of Finance will transfer the funds to the Ministry of Commerce and begin the procurement process.
There are many weaknesses in this process. Unlike institutions like the World Bank, which usually negotiate projects with technocrats in the executive ministries of recipient countries, China works with the office of the president or prime minister to prepare and submit project proposals. This gives political leaders a lot of freedom. The Chinese themselves recognized the flaws in the project approval process and the need to change it.
Japanese in China in the 1980s
In the first decades of its existence, the People’s Republic of China provided aid in the form of grants or interest-free loans. For example, between 1965 and 1973, when China’s per capita income was about $200, the government spent nearly $12 billion on outside help. However, after Deng Xiaoping’s reorientation of the Chinese economy, China began to extend commercial loans, mainly through the Preferential Buyer Credit Instrument, although it was still below market rates.
When the country reoriented its twenty-first century development finance strategy toward bankable projects, it drew on its own experience as an aid recipient during the late 1970s, 1980s, and 1990s.
Once Deng conquered the country, a large number of Japanese companies began to operate in China, and Tokyo financed large-scale development projects through On-demand system Project identification and approval. In the 1980s, Japanese companies operating in China would develop project proposals and Show them to Chinese officials. Chinese officials will then ask Japanese development finance institutions to support these proposals.
The Japanese also introduced China to the concept of commodity-backed loans. For example, in response to the 1973 oil crisis, Japan sought to secure access to reliable oil supplies. Realizing the possibility of finding reliable oil supplies in China’s Daqing oilfields, Japan exported new technologies to China and these were paid for by Chinese oil exports.
In 1978, China signed 74 decades With Japan to finance the turnkey projects that would form the backbone of China’s modernization, all of which are paid for with oil. The Chinese never perceived these commodity-backed loans as coercive or exploitative.
These features are now among Beijing’s primary lending instruments. Chinese aid agencies and state-owned banks will not give the green light to a development project unless they first receive a formal request from the host government. It also offers commodity-backed loans.
While these project approval system features allow China-funded projects to respond to the needs and preferences of political leaders in host countries, they also make these projects vulnerable to political appropriation, corruption, and artificially inflated costs. These were the problems we saw in Japan’s demand-driven system of the twentieth century, and now plaguing China’s development projects in the twenty-first century.
when country “Out” For the first time and they made major investments in developing countries, such as the United States in the 1920s, the Soviet Union in the 1950s, Japan in the 1970s, etc., they made the same set of mistakes. Like them, China, operating in a time of rapid growth and high commodity prices, has underestimated risks and overestimated the value of its domestic experiments and strategies.
Chinese companies, state-owned or otherwise, had little experience with southern commercial lending and stuck to a high-risk, high-volume model, and ended up with a pile of debt. In 2022, it became clear that most of this debt was unsustainable, and recent attempts at debt restructuring in Zambia and Sri Lanka showed just how inexperienced and prepared Chinese lenders are.
In the past, China has rejected offers to join the Paris Club and bring its lending policies more in line with the Development Assistance Committee of the Organization for Economic Cooperation and Development. China also does not participate in international reporting systems, which makes it difficult for scholars and policy makers to study how Chinese development financing is allocated across space and time. However, in recent years China has shown a degree of willingness to increase coordination with Western powers through trilateral cooperation programs and the newly established Multilateral Cooperation Center for Development Finance.
A much-needed change in development project selection mechanisms should also be a priority for Beijing, in and of itself, to ensure that it is not seen as a rogue donor or lender that threatens the coherence and stability of the global development finance system.