Pundits and journalists have often argued that Chinese loans are expensive and harmful to recipient countries. But they fundamentally misunderstand how Chinese aid and investment works across different countries.
Criticisms of Chinese aid suffer from four crucial problems.
First, Chinese interest rates have been higher than the comparable loans from other Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) countries because China lends to states with low investment grades. Interest rates vary across different donors but loan parameters depend on the recipient country’s investment grade and the donor state’s funding programme. Put simply, DAC interest rates could have also been higher had these states funded similar projects.
Second, the DAC countries follow one set of criteria for loans while China follows another. For the DAC, a loan becomes a concessional project when interest rates and the grace period are about 25 percent cheaper than a comparable market loan. Although China’s concessional loans operate according to some DAC criteria, China’s Export–Import Bank often subsidises the interest of the project. As a result, the interest is charged to the Chinese government’s external assistance budget. In this loan agreement, the recipient country pays for the actual price of the project instead of the interest on the loan, departing from the DAC’s model. In other words, some of China’s loans are cheaper than the DAC alternatives.
Third, because the World Bank and other DAC countries have moved away from funding large-scale infrastructure while Japan has been wary of funding energy-intensive schemes, there are no other external funders willing to finance such projects in developing countries. China was the only willing financier of some crucial infrastructure projects in many sub-Saharan African and Latin American states.
Those arguing that Chinese interest rates have often been higher fail to acknowledge that unless a similar offer was put forward by alternative funders, ‘base’ market rates cannot be used for comparison. It is misleading to compare Japanese, Chinese and World Bank loans directly because the funding parameters of these projects were calculated under vastly different conditions.
And last, for all the criticisms that China gets, Western countries have been equally guilty of sending developmental aid and investment when these actions suit their national interest. The United States sends aid to states with questionable human rights records, including Saudi Arabia, Israel and Pakistan. Similarly, when they need to acquire strategic resources or cheap labour, the French and British invest in the Western Sahara and former colonies despite their questionable human rights and governance records. Indeed, the West remains the biggest source of debt, aid and investment for African countries.
Despite all this, China has been disproportionally painted as a ‘bad investor’ by major Western newspapers while drawing the public’s attention away from the involvement of Western companies.
Rather than a downward impact on gross domestic product (GDP) per capita or nominal growth rates, China’s rise in the global economy has pushed more countries from the periphery into the semi-periphery. Chinese companies invest in developing countries that are ignored by other major investors and target key sectors that have been overlooked by Western aid. China’s participation often increases competition among investors for key development projects, allowing the recipient countries to bargain more effectively for better returns.
This is not to say that China is the saviour of the developing world. Chinese aid brings potential negative implications but it is important for recipient governments and their constituents to recognise the evidence-based dangers rather than popular arguments with minimal empirics.
While pundits often misunderstand aspects of China’s economic engagements, academics and researchers have long recognised and debated three main dangers of China’s aid and investment.
China has asked for political returns in exchange for debt forgiveness. Apart from territorial expansion, China has been interested in acquiring ports located in the participant states of the Belt and Road Initiative, including in Sri Lanka, Djibouti and Malaysia. China’s territorial interests and port acquisitions have and will continue to elicit responses from competing states.
Another danger of Chinese investments and deals lies in the multiple actors involved in the process. China is not a monolithic actor, but comprises multiple state departments, state-owned enterprises, private corporations and citizens. While Chinese foreign direct investment has funded key strategic infrastructure, it has also spurred de-industrialisation and environmental degradation. Chinese aid and investors can be good or bad depending on the type of Chinese actor and the recipient governments’ response.
Finally, Xi’s China presents host states with a greater risk of falling into a debt trap. In previous cases when developing countries could no longer repay loans, China has allowed debt forgiveness and loan restructuring or has asked for specific and negotiable political or economic returns. Ironically, this is distinct from the policies of the World Bank and Western countries that put much of the developing world in a vicious debt trap in the 1980s. But with China’s economic slowdown, changes of leadership and geopolitical ambitions, China may not be as forgiving in the future.
(Courtesy East Asia Forum)
(Alvin Camba is a doctoral candidate at the Department of Sociology, Johns Hopkins University. He also writes at the Alitaptap Collective)