Introduction

This October, the mandate for one of the US government’s most effective tools in its global competition with China is set to expire. The International Development Finance Corporation (DFC) was created under the first Trump administration with the goal of mobilizing private capital to promote economic development in low-income countries (LICs) and lower-middle-income countries (LMICs) while advancing US foreign policy interests.

In the Better Utilization of Investments Leading to Development (BUILD) Act, the bill that first established DFC, China is never mentioned by name. But China’s shadow looms large over references to “debt sustainability” and providing countries with an “alternative to state-directed investments.” When the BUILD Act was written seven years ago, US policymakers were just starting to take note of China’s growing presence in LICs and LMICs. Since then, China has become the top trading partner of 145 countries, making up roughly 70 percent of the world’s population. Between 146 and 150 countries have joined the Belt and Road Initiative (BRI), Xi Jinping’s $1 trillion flagship lending program. China is the world’s largest official creditor, and its lending initiatives have won Beijing significant geopolitical influence.

However, in the last seven years, DFC has turned the United States from a passive observer of China’s meteoric rise as a development lender into a serious contender in an intensifying front of competition with Beijing. DFC is making good on its mandates: advancing development objectives in LICs and LMICs, furthering US foreign policy goals, and winning deals that China wanted. Its lending has exceeded $50 billion to 114 countries, impacting more than 200 million people and businesses worldwide. This includes multiple cases in which DFC stepped in to provide financing that outcompeted Beijing, from the Elefsina Shipyard in Greece to the acquisition of a telecommunications company in the Pacific Islands and the Lobito Corridor railway in Zambia, Angola, and the Democratic Republic of the Congo (DRC).

DFC is one of the United States’ few remaining tools of positive economic statecraft to compete with China in global development—and it must be protected. Congress has an opportunity to fine-tune DFC’s operations and set it up for even greater success before the reauthorization deadline on October 6. In that spirit, this brief explores three case studies in Chinese development lending, what they teach us about why China’s lending programs succeed—and fail—and how Congress can make DFC an even sharper tool.

Case study 1: Jakarta-Bandung railway

China’s approach: Flexible mandates, high risk tolerance

When Beijing is asked to participate in multilateral debt relief initiatives, there is an insistence that one of its two state-owned policy banks, the China Development Bank (CDB), is a commercial lender, and not an official creditor. As a state-owned bank acting purely in its own commercial interests, Beijing argues, CDB is not furthering the PRC’s foreign policy goals, and it should not be subject to the same transparency requirements as other official lenders.

As revealed in an AidData analysis of CDB lending practices, the bank often behaves like a commercial institution adhering to standard commercial lending practices such as lending at floating market interest rates. However, when Beijing deems a project strategically important, CDB will suddenly change its practices, offering unusually concessional lending terms.

CDB came across one such strategically important project in 2014, when the Indonesian government announced a bid to finance a high-speed rail line connecting two of its largest cities, Jakarta and Bandung. Just a few months earlier, during a trip to Indonesia, Xi had announced his intention to build a “21st Century Maritime Silk Road” to enhance connectivity throughout Southeast Asia. This proposed maritime silk road became the “road” in “One Belt, One Road,” the lending program now known as the Belt and Road Initiative. The Indonesian government’s newly announced rail project presented an opportunity to develop a strong early example to showcase Xi’s new initiative in action.
From January 2014 to May 2017, CDB and the Japan International Cooperation Agency (JICA) submitted competing bids to bankroll the Jakarta-Bandung High Speed Rail project. JICA offered to finance 75 percent of the project at a 0.1 percent interest rate, contingent on the Indonesian government providing a sovereign repayment guarantee. CDB’s counteroffer was to finance 100 percent of the project at a 2 percent interest rate, with a lower overall cost and shorter construction timeline, provided the Indonesian government guaranteed repayment.

Indonesian President Joko Widodo surprised observers by rejecting both offers, citing a desire to avoid taking on substantial sovereign debt. JICA responded with a 50 percent reduction in the debt that the government would need to back with a sovereign guarantee. But CDB offered the winning bid: an arrangement that would require Indonesia to take on no debt whatsoever. Instead, the bank would create an off-government balance sheet by lending to a special purpose vehicle, a separate legal entity jointly owned by Chinese and Indonesian state-owned enterprises, created solely for the purpose of financing and building the Jakarta-Bandung High Speed Railway. This would allow CDB and Widodo to work around the Indonesian government’s debt ceiling. The final loan was far more concessional than CDB’s typical offers, and far more concessional than the minimum standards the Organisation for Economic Co-operation and Development uses to define concessionality.

CDB blurs the lines between its commercial, developmental, and geostrategic purposes and, as a result, Beijing gets to have it both ways. CDB protects its balance sheet, evades its responsibility to participate in multilateral debt relief initiatives, and lends at far below-market rates when an opportunity arises to advance the government’s policy objectives.

Lessons for the United States

Flexibility can be a strength. DFC has a dual mandate: support sustainable development in LICs and LMICs and advance US foreign policy interests. This has implications for where DFC operates, and there is currently widespread disagreement among experts on this front.

The conversation around DFC’s reauthorization is bifurcated between two camps. In one corner, development practitioners voice frustration with DFC’s gradual shift toward lending to richer countries. These observers rightly argue that US foreign policy interests have led DFC to stray from its original mandate to prioritize LICs and LMICs. In the other corner, national security analysts advocate harnessing DFC’s demonstrated effectiveness to respond to the short-term foreign policy challenges of the day.

Dealing with China means swimming in murky waters. Beijing blurs the lines between the commercial, the developmental, and the geostrategic, and a heavily siloed US system will not meet the multifaceted and overlapping challenges that the United States must address. While DFC should not neglect its development mandate, it should also have the flexibility to respond to challenges where they occur.

High risk tolerance is critical. Risk tolerance is an oft-cited advantage for Chinese lenders, and an oft-cited disadvantage for DFC. DFC’s cautiousness limits its ability to move quickly and lean into opportunities where the returns are nonmarket geostrategic wins.

Case study 2: DRC Sicomines copper-cobalt deal

China’s approach: Extreme high-volume financing

In 2007, the Export-Import Bank of China and two Chinese state-owned construction firms signed an agreement with the government of the DRC for the nation’s largest resources-for-infrastructure (RFI) deal. RFI deals, in which loans for infrastructure development are repaid with natural resources, are commonplace for China.

Under this deal, the Chinese parties would provide a staggering $9 billion of loans—more than three times the DRC’s annual government budget of $2.7 billion. The deal included $3 billion earmarked for developing and operating the Sicomines copper-cobalt mine, with the Chinese consortium owning 68 percent, and $6 billion earmarked for postwar rebuilding projects following the Second Congo War.

Ultimately, the deal was renegotiated several times. In 2009, the International Monetary Fund (IMF) called for a renegotiation due to concern over the DRC’s capacity to repay the loan. In 2021, the deal faced renewed public scrutiny, and DRC President Félix Tshisekedi launched an audit that found that the agreement presented “an unprecedented harm in the history of the DRC.” China had only spent a fraction of the amount promised for postwar reconstruction projects—reaping $10 billion in profits and giving the DRC only $822 million in return. Last year, this gave the country leverage to renegotiate the deal once more and secure an agreement that increased the infrastructure budget by $4 billion and gave the DRC a greater share of mining revenues.

In this case, Beijing was willing to commit an astounding volume of capital to a highly risky endeavor, but China has lent far greater amounts to critical minerals over the last two decades, nearly $57 billion from 2000 to 2021.

It is difficult to overstate the geopolitical gains that have resulted from high-volume financing deals like this one, which have enabled Beijing to capture over 70 percent of the world’s rare earths extraction and almost 90 percent of processing capacity. Beijing has unparalleled dominance over the essential inputs underpinning the construction of the modern world. To build everything from fighter jets to consumer electronics, MRI machines, and electric vehicles, the rest of the world is now, to some extent, dependent on Beijing’s good graces.

Lessons for the United States

The United States cannot compete with China on a dollar-for-dollar basis, but current resources are insufficient. The United States does not have to close the gap between what it and China can offer globally. US lenders can be strategic, focus on key sectors and countries, and double down on areas in which the United States has a competitive advantage. Narrow the gap it must, though. Small, strategic investments could not have won China supply chain dominance in critical minerals. The current level of resources dedicated to this challenge are not proportionate to the severity of the threat

Invest with foresight. China’s dominance in critical minerals was built over decades of placing strategic bets on resource rich countries with assets that have national security implications. Beijing pledged $9 billion for the Sicomines copper-cobalt deal in 2007, many years before terms like “critical minerals,” “electric vehicles” or “5G” entered the public lexicon. DFC should similarly aim to make strategic investments in the supply chains of the future.

Case study 3: 2025 Sino Metals Zambia dam disaster

China’s approach: Move fast, break things

This February, a dam built by Sino-Metals Leach Zambia, a Chinese state-owned mining firm, burst, spilling toxic mining waste into the Kafue River in Zambia. The damage was catastrophic and unprecedented. The river, now an acid-leached wasteland, had supplied drinking water for roughly 5 million people and supported the livelihood of roughly 20 million farmers, fishermen, and industrial workers.

The dam held waste from nearby mines that were slated to serve a critical role in meeting an ambitious development goal: triple Zambia’s copper output by 2033. As the Zambian government raced forward in pursuit of this objective, the country became increasingly reliant on the only international partner who could meet the speed and scale they required: China.

Over the last several months, Zambian civil society has demanded greater transparency and accountability in the government’s mining deals. Thanks to public pressure to disclose further information, we now have a detailed record of the negligence behind this disaster.

It’s clear now that prioritizing speed led the parties involved to overlook negligence in terms of environmental, social, and governance (ESG) standards. Sino Metals operated within the Zambia-China Economic and Trade Cooperation Zone, Africa’s first special economic zone designed to attract international investment through incentives like tax breaks and streamlined approvals, including environmental approvals. In 2014, a Zambian auditor warned that tailings dams, large embankments used to store mining waste, were being systemically mismanaged in Zambia’s Copperbelt. Nevertheless, Sino Metals decided to rely on a tailings dam to store copper mining waste from its Chambishi Leach Plant. Rather than building a new dam, it was faster for the company to raise the wall of an existing dam built many years earlier.

Once built, the company repeatedly failed to conduct routine inspections, and there is no evidence to suggest that the dam was managed by licensed engineers. Sino Metals’ sister company, NFCA Africa Mining, admitted to disregarding safety and environmental standards in an internal report. Zambian regulators and the Chinese project managers had many chances to prevent the disaster from happening. A 2017 study found that the groundwater near the Sino Mines facility was already contaminated. In 2022, Sino Mines expanded the dam once again.

Lessons for the United States

ESG standards and transparency are important competitive advantages for US-backed deals. The Sino Metals dam disaster was not a one-time occurrence. Beijing routinely scores own goals in the form of flagrant disregard for host countries’ environmental, labor, and anti-corruption standards. The Jakarta-Bandung high speed railway project managers sped through an environmental impact assessment that should have taken twelve to eighteen months in only seven days. The consequence: a fatal accident, flooded roads, ruined homes and farms, improper waste dumping, mass protests, and $1.49 billion in cost overruns.

Particularly in democracies sensitive to public opinion and countries facing civil society backlash against opaque Chinese deals, the United States should lean into this strategic edge.

Moving fast makes a difference. Paradoxically, speed is a commonly cited factor contributing to host countries’ preference for Chinese loans. While the United States should not save time by cutting regulatory corners, US-backed deals cannot afford to be burdened by needlessly lengthy bureaucratic timelines.

Policy recommendations

To promote thoughtful versatility:

• Rethink the guidelines on where DFC operates. The BUILD Act mandates that DFC prioritize the provision of support to countries that meet the World Bank classifications for LICs and LMICs. The resulting arrangement excludes many countries with significant development needs that are classified as upper-middle-income countries (UMICs), often because of socioeconomic disparities or remittances. Examples include Mexico, Brazil, Tuvalu, Thailand, and Malaysia. Rather than relying on the World Bank’s rigid income classifications, DFC should revisit its lending criteria, borrowing from other official lenders’ practices.
• Clarify the key terms of DFC’s dual mandate. The BUILD Act instructs DFC to “pursue highly developmental projects” and assess their “strategic value,” but does not put forward standard criteria to determine what is developmental or strategic. A Center for Strategic and International Studies analysis, which collected insights directly from US government development practitioners, found that different agencies apply varying standards for what qualifies as “highly developmental.” Setting standard definitions for these key terms will begin to bridge the divide between the two camps of development practitioners and national security analysts who have different visions for where DFC should operate.

To strengthen risk tolerance:

• Establish an internal advisory council to provide guidance on projects that have the potential to generate nonmarket returns. The advisory council can weigh the project’s commercial viability against its implications for US strategic interests and judge whether the risk is acceptable to DFC’s balance sheet.
• Transfer the responsibility to approve exceptions to the LIC and LMIC preference from the president of the United States to the DFC’s Board of Directors. Under current law, exceptions to this rule—41.6 percent of investments made in DFC’s first five years—must go up a lengthy approval chain to the highest authority in the United States, who is then expected to parse through highly technical financial terms to evaluate the project’s risk-return profile and repayment terms. Instead, LIC and LMIC preference exceptions should be approved by DFC’s board, a group of development finance and foreign policy experts from across federal agencies. Particularly amid heightened political scrutiny of US government spending, professional oversight may empower DFC to take calculated risks with greater assurance.
• Evaluate investments at the portfolio level, not the individual project level. This creates space for DFC to take on, for example, a high-risk, high-reward mining project, provided the aggregate critical minerals portfolio is generating returns.
• Authorize DFC—permanently. The life cycles of many current DFC projects extend well beyond another seven-year reauthorization period. In contrast, BRI loans have been steady, providing highly concessional, long-term financing that complements LIC and LMIC governments’ long-term economic development plans. Repeated reauthorization cycles disincentivize DFC from pursuing partnerships that require a long-term steady commitment. DFC has built credibility that warrants a longer leash. Despite weathering a global pandemic, significant leadership turnover, and two highly tumultuous presidential transitions, DFC is delivering on its mandates: investing in LICs and LMICs, generating returns, and outcompeting China for key deals.

To boost finance volume:

• Triple DFC’s portfolio cap, from $60 billion to $180 billion. While this may sound like a hefty increase, $180 billion will only make up 12 percent of the $1.5 trillion infrastructure finance gap in LICs and LMICs. A larger portfolio cap will increase the total value of outstanding commitments that DFC can have at any given time and enable DFC to back bigger deals.
• Fix the budget rule accounting for DFC’s equity investments. The BUILD Act granted DFC the authority to make direct equity investments, an arrangement that grants the United States unique influence by giving DFC partial ownership in individual companies and projects. Oftentimes, this means DFC earns a voice in management decisions, enabling DFC to ensure projects align with development and US policy goals. Unfortunately, this authority has been underutilized due to an administrative rule with an outsized impact. Under current federal budget rules, DFC’s equity investments are treated as grants, assuming a total loss on 100 percent of DFC’s equity investments. Instead, DFC’s equity investments should be reflected using net present value scoring, which accounts for the likelihood of financial return over time to determine the true cost to taxpayers.
• Emphasize the importance of collaboration. The United States should pool funding with allies and partners’ development finance institutions to meet the scale and speed needed to match Chinese state-backed capital. DFC already has partnerships with Australia, Japan, and the Inter-American Development Bank; these partnerships should cut the burden of dealmaking in half, not double it. DFC should work with US partners to create standard due diligence requirements, term sheets, and agreements. This will create opportunities for more effective collaboration across institutions and help joint projects move forward faster.

To streamline operations:

• Increase the threshold of investments subject to congressional notification. While the notification process allows for additional oversight and gives Congress the opportunity to raise concerns, this bar is currently set at $10 million, an extremely low threshold that imposes a significant administrative burden for roughly 60 percent of DFC transactions.
• Improve staffing. DFC was built to be a lean and dynamic entity akin to a private corporation, but in practice, it has not been given the personnel and resources it needs to work efficiently. The Office of the Inspector General’s most recent report on DFC found that staffing was insufficient to perform robust site visits. DFC has been steadily growing its workforce and had a total of 675 employees in 2024, but the corporation has not released updated staffing figures since the US government terminated all probationary employees earlier this year. The World Bank has more than thirteen times as many employees managing a portfolio less than twice the size of DFC’s. Furthermore, the salaries of DFC’s investment professionals with prior deal experience are roughly a quarter of their private-sector peers’. Having more staff on board—and compensating them fairly—will help to move transactions through DFC’s project preparation workflows more efficiently.

Conclusion

The most common refrain in commentary on US-China competition in LICs and LMICs is that “don’t take China’s money” is not a policy. It is not tenable to beg host governments not to make deals with China, especially when China is the only option for meeting urgent development needs. For many years, experts have repeated the same recommendation to the US government: show up. Offer a US-led alternative to Chinese capital. DFC represents a major step in the right direction. The last seven years have been proof of concept. Now, Congress must scale it and commit resources that will allow DFC to live up to its full potential.

Staff

Caroline Costello

Assistant Director

Global China Hub

China Chinese

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Image: A laborer works at a high-speed railway viaduct construction site in Hefei, Anhui province January 4, 2011. REUTERS/Stringer