The Belt and Road Trilemma: The Future of China’s Role in International Development Finance

This working paper analyses the evolution of China’s role in international development finance and explores how that role might develop over the next five years. China's rise as one of the world economy’s leading trading nations over the past 25 years has been extensively analysed. The growth and persistence of unprecedented global financial imbalances—reflecting in part the so-called “China shock” to the world trading system—is also well documented. China’s emergence in more recent years as the single largest bilateral official lender to developing country sovereigns under the auspices of the Belt and Road Initiative (BRI) has also been the subject of detailed academic and policy research. This working paper seeks to add value by demonstrating the connections between these three trends, and by analysing how they relate to the recent evolution of international financial flows—and especially private financial flows to developing countries—more broadly. The working paper concludes that as a result of the reversal of private capital inflows since 2021, China is increasingly confronted by a policy trilemma, according to which it will be forced to choose between (1) scaling back lending under the Belt and Road Initiative; (2) delaying or abandoning its commitment to the internationalization of the Chinese yuan; or (3) making domestic policy adjustments to revive capital inflows. Precisely because China is now such a dominant player in global trade and finance, whichever choice it makes will imply systemic consequences for the international monetary and financial system. As a result, China’s future role in international development finance will depend significantly on the increasingly contested geopolitical context for global trade and finance generally.