Statistics of China and debtor nations show China has in the past two years extended more loans to other emerging markets and developing countries than the World Bank. Why has China, a developing country itself, provided huge loans to other developing countries? What differences have Chinese loans made in debtor nations? People's Daily Overseas Edition spoke to Li Lianfa, an associate professor with the School of Economics of Peking University, and Lu Jialin, a Ph.D student there, about these questions.

Mutual needs

What are the reasons for China's increased lending to other developing countries?

Many economies around the world have plunged into a recession since the outbreak of the global financial crisis in 2008. China was able to maintain robust economic growth thanks to effective fiscal and monetary policies. While its trade surplus expanded, its foreign exchange reserves soared. On the one hand, most emerging economies and developing countries needed foreign loans to revitalize their economies in the aftermath of the devastating financial crisis. On the other hand, China was strongly motivated to invest in projects overseas in a bid to preserve and increase the value of its foreign exchange reserves. Give these mutual needs, China's lending to other developing countries increased.

Also, as China's net international investment position rose, there was a need for the country to increase portfolio investment overseas.

Before 2008, Chinese foreign exchange investment mostly went to developed Western countries. After the international financial environment deteriorated that year, investment in developed countries' financial institutions was no longer optimal. By contrast, investment in other emerging economies could produce a larger profit margin because of their resource and policy advantages. In this sense, China's decision to increase lending to other developing countries served its own interests.

Low-interest loans as assistance

How have Chinese loans helped developing countries?

China's loans are mainly used to finance infrastructure projects in other developing countries. For instance, China signed large lending deals with Russia, Venezuela and Brazil in exchange for oil supply. It financed an Indian company's purchase of electrical equipment. It built low-rent homes in Syria. It extended loans to Ghana for infrastructure construction. It also reached an agreement with Argentina on railway construction. Without a doubt, these projects will deliver huge economic and social benefits to other developing countries suffering from economic stagnation. In particular, China's low-interest-rate loans can help lift underdeveloped countries out of the "poverty trap." These loans are deemed a form of economic assistance from China.

Although it is a developing country, China is committed to helping other developing countries improve residents' living standards and stimulate economic growth. It will do its utmost to promote world economic recovery and push for an international financial system that benefits all parties.

Sustainable lending

How will China improve its lending system?

China should put in place an improved foreign lending risk management strategy to fend off risks. In the past, China faced significant risks when providing loans to other developing countries. Very often, Chinese loans could not be repaid because of changes in local political and social landscapes. Commercial banks must be cautious when lending to countries with poor solvency conditions.

First of all, banks should carry out strict assessments of proposed loan projects to ensure their quality. The key to reducing risks of lending to developing countries lies in the choice of projects. Banks should look at whether the implementation of the projects could bring direct benefits to debtor nations and whether it is conducive to their long-term economic growth.

The risks of a project are not determined by the size and terms of the loans, but by whether it can generate good returns and whether it will contribute to debtor nations' economic growth. If not, debtor nations will find the loans to be a burden, no matter how preferential the terms are.

Banks should not assess risks with a simplistic, static and isolated approach. "Give a man a fish, and you will feed him for a day; teach a man to fish, and you will feed him for a lifetime." This proverb conveys the message that banks should set strict standards for project selection and loan management. Unless debt-financed projects achieve anticipated results and give impetus to debtor nations' growth, it is impossible for the nations to ensure the sustainability of the debts.

Also, China should hedge against risks with collateral. It can consider using borrower nations' abundant natural resources as collateral to protect against default. While lending to other developing countries, China should always put loan security before profitability.