Loans to poor countries – China has strings attached

“China is a very aggressive and pernicious economic competitor with no morals. China is not in Africa for altruistic reasons. China is in Africa for China primarily.” This was the argument put forth by a confidential US State Department memo in February 2010, later published by Wikileaks.

The secret memo reinforced Western perceptions, not often publicly voiced, that the reform efforts of their development banks in poor countries are pervasively undermined by China. Rather than accept loans which require salutary political and economic reforms, developing country governments instead plump for cheap, “no strings attached” loans from China. In return, China secures a steady supply of oil and other resources to feed its energy-hungry economy back home.

Strings attached

But scholars of China’s international relations have long argued that the threat is vastly overblown. Now evidence from a new study of Chinese loans to Latin American countries by the Inter-American Dialogue adds heft to their claims.

China’s lending in Latin America is massive: In 2010 it loaned more to the region than the World Bank, Inter-American Development Bank (IDB) and the US Export-Import Bank combined.

But on the whole these loans had higher interest rates than those offered by the World Bank and IDB. Lending channelled through China Development Bank – 82% of the total dished out since 2005 – is set at more or less commercial rates. Only the minority of loans extended via China Export-Import Bank are cheap, with interest rates about 1-2% lower than comparable loans from US Export-Import Bank. But the contracts often require borrowers to use Chinese companies and equipment for their construction projects, adding to the overall cost.

The report turns the usual question on its head: Why would poor countries pass over the World Bank and IDB in favour of more expensive loans from China? To some extent, it is because they are not really competing. Chinese loans are on an altogether different (much larger) scale, and almost exclusively focused in the energy, mining, infrastructure, transportation and housing sectors. The World Bank and IDB, by contrast, focus more on smaller health, social and environmental projects. Where they do overlap, collaboration can be as likely to result as competition: Witness the joint fund announced in March between IDB and China’s Eximbank, which is expected to focus on medium-sized infrastructure and natural resources projects.

Pick your poison

More importantly, the bulk of China’s lending is to Bolivia, Ecuador and Venezuela. The World Bank and IDB have largely shunned these countries, and international bond markets charge them punitive rates (if investors are willing to lend at all). But China can use oil supplies and government-to-government pressure to mitigate lending risk in a way that no other creditor can. For poor countries, the choice is either to borrow from China or not at all.

Viewing China as just another investor bold enough – or dumb enough – to venture where development agencies and fund managers fear to tread makes the picture less threatening, but there is still scope for improvement.

Chinese loans have helped poor countries in many instances. For example, Ecuador has improved its infrastructure and put its financial house in order thanks to Chinese credit. But China’s US$30 billion-plus loans to Venezuela are channelled into a special fund controlled by the authoritarian-minded president Hugo Chavez – hardly an ideal arrangement.

Targeted Western pressure on China to amend the terms of its loans on a case-by-case basis is therefore realistic and warranted. Alarmism over its influence in developing economies is not.

China Economic Review

Categories: Finance & Economy

Tags: , , , , , , , , ,

6 replies

  1. Reblogged this on Craig Hill.


  2. Costa Rica, where I live, is a case in point. it had aligned itself with Formosa, which had paid it for its allegiance by by building them a big, expensive bridge they needed badly. Recently, all of a sudden, it switched to China. And, as a result China has built them, for free, a beautiful new sports arena (using only Chinese labor and technology).

    Ticos are not very bright, and cannot comprehend how they are playing into China’s hand. Like Americans (who they closely resemble) they are only interested in greed in the short run. They have forgotten about the long run: building for the future, which is what made them the most affluent country in Central American and the Caribbean.

    I keep telling my Tico friends that Costa Rica has no future – but they are not listening.



  1. Can China extend its colonisation to Africa? « China Daily Mail
  2. China’s firm grip in Africa – a lesser of two evils « China Daily Mail
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