Deep Dive: In defense of China

Famous Catalan economist, Xavier Sala-i-Martin, loved telling everyone about his trips to Africa. His go-to comment was always about his observation of hotel lobbies. There are only two groups of people he would say, Westerners and Chinese, both there for entirely different reasons. The westerners were there working for non-governmental or non-profit organizations to save Africa, and the Chinese were there for business, to make money. This anecdote, at least my opinion, explains the fundamental difference that lay at the heart of two global influence models.

We have seen the west’s model of influence of foreign aid through the IMF and World Bank for decades. However, many are far less informed when it comes to the growing Chinese influence in the world, and are naturally highly skeptical of its rapid expansion. I am undoubtedly a Sino-optimist and for good reason. In this piece, I aim to discuss and break down, into understandable terms, the greatest criticisms of China and their ever increasing role in international development.

Part 1: The ‘selfish’ Chinese

Often in discussion of Chinese influence, opposers would be fast to point out that ‘China is only investing in Africa and Asia for their own benefit’. My favorite reply is ‘Yes exactly!’ to which I often receive a bewildered response.

Allow me to explain. China’s billions of dollars of investment into Africa and into the Belt & Road initiative are not merely just for the development of these regions, the Chinese are doing this to generate profits for their own companies. It is the magic of the free market right before our eyes: China is acting in their own self-interest, and it is creating waves of economic progress in the regions in which they are involved.

1111
The path of the Belt & Road Initiative unveiled by President Xi in 2013. Chinese investment in the project is expected to be upwards of USD 1 Trillion.

If we look at the seemingly more ‘benign’ approach, the West’s foreign aid model (not to be confused for humanitarian aid), it has achieved close to nothing in decades. In fact, according to economists such as Dambisa Moyo, William Easterly and Angus Deaton, foreign aid has likely been a great hurdle in African nations achieving growth. When we try to do things merely for the benefit of others, the law of unintended consequences is likely to distort the results we wished for.

Ultimately, regardless of what intuition may say, if we look at some of the largest undertakings and largest investments occurring in Africa and Asia, they are mostly being supported by Chinese money. Through these ventures, millions are being pulled out of poverty through business creation, trade and investment.

Part 2: Projects ‘favor’ Chinese companies

Those against China will be quick to point out that a majority of these projects are carried out by Chinese construction companies. That is true, but that does not necessarily represent an unfair bias towards Chinese companies. If it were true that infrastructure projects in Africa and the Belt & Road systematically and unfairly favored Chinese companies, we would see less projects being undertaken as local governments would not tolerate that.

Projects are being carried out by Chinese construction conglomerates to a disproportionate degree. This is not because of favoritism but instead the Chinese companies are simply more competitive in bidding for these projects. Early stages of investment in railroads in East Africa, or a port as part of the Belt & Road will have zero to no short term returns with incredibly high risk created by political and economic instability.

11

The investor markets in Europe and North America are far too short sighted to invest in a company that is only looking at generating returns on their capital over a 15 year period. This is a large reason for many non-Chinese firms not bidding for these projects.

A prime example is the massive undertaking near Johannesburg in South Africa.  Shanghai Zendai Group are orchestrating a 20 year development project, New Modderfontein City. Yes, one Chinese company is overseeing the construction of a new city. A project of this scale and nature provides huge risk with little upside in the near future. South African construction companies simply do not currently have the capacity nor the risk tolerance to oversee such a colossal  project. These smaller companies are not entirely cut out of the deal though, as they may be benefitted by having smaller roles to play as subcontractors to Zendai.

2222
One of the possible designs of New Modderfontein City, near Johannesburg which is estimated to be home to over 100 000 inhabitants.

Of course in an ideal world, construction projects would be carried out by only local firms, but as I have mentioned, local firms in these regions do not yet have the capacity nor the funding to carry out these large scale long run projects. Does this mean they should not allow the involvement of Chinese companies?

Surely not. In the process of Chinese construction, the skills transfer to local construction workers and  firms will significantly boost self-sustainability in the future. Furthermore, we must remember that even if local and other international companies are not involved in the building of these construction projects in Africa and Belt & Road nations, they will benefit from the improved environments in those countries, that arise from these developments.

Part 3: The Debt Trap

The debt trap argument is one of the most frustrating ones I often encounter. The idea of China practicing debt-trap diplomacy is a greater indication of Western anxiety than a reflection of African and Asian realities. We have been told over and over again through media headlines that China is using debt to create favorable geopolitical outcomes, but does the evidence substantiate these claims?

Yes, Chinese loans may result in a debt trap, but only in the way that your credit card may result in your bankruptcy. In other words, yes the Chinese loans create the potential for a nation to fall into a downward spiral of debt, but to say that is their intention because that is a possible outcome is inherently flawed. People and firms often cannot repay their debt and have to file for bankruptcy, do we accuse banks of creating debt traps in order to claim our assets?

For the last half a century, the West has done exactly what China is now being accused of. Through the IMF and World Bank, we have seen countless countries spiraling into debt  and have needed relief or restructuring of their debt. The term debt trap already arose in a 1986 paper (PDF), after African leaders insisted that their economic situation was the worst in history.

1111111111
Although less common today, cartoons such as this were very common in the 1980s and 90s.

It was the IMF and World Bank providing loans back then, not the Chinese. I am not accusing the IMF and World Bank of debt-trap diplomacy either, but rather that the inability to repay loans is a natural outcome in a world of credit markets. The similarities between the two cases are worth noting – both lending schemes have created situations where nations are unable to pay their debts. The IMF most often waives or restructures the debt and China historically did too (over 100 times) (PDF), but we may be seeing the end of this.

CHina Africa debt
Although only containing data until 2015, the graph shows that overall African debt to China is not yet at a critical level.

Even in 2018, as China’s influence in Africa continues to grow, African nations remain far more indebted to multilateral development institutions than they do to China and on that basis there is not yet enough evidence to suggest that China is pushing an agenda of debt-trap-diplomacy.

Part 4: Political interference

While we are on the IMF, the idea of political and economic interference is relevant. China has been accused of using financing as a political tool, however when we compare China’s political involvement to that of the IMF or other foreign donors, the evidence is feeble.

The IMF is well known to have placed far reaching conditionality on their loans, with a one-size-fits-all approach under the Structural Adjustment Program. Although contestable, there is evidence that these programs to a large extent hurt recipient countries more than it benefitted them (think Jamaica as prime example).

Further, if we look at substantial parts of foreign aid during the Cold War era, the United States not only funded along political lines, but they actively funded corrupt leaders who sided with capitalist ideals (look no further than Zaire). The consequences of political agendas pushed by western money in the past, remain evident in these countries today. This is not merely a matter of the past, in Donald Trump’s General Assembly address in September, he threatened to withdraw aid from countries who did not side with the US in United Nations votes. This is what it looks like to use money for political gain.

China and President Xi on the other hand, have made it clear that they are in these regions to do business and not meddle in politics, and the evidence supports this. Their projects are often done in countries without care for the type of regime in power, or how they handle human rights issues. This, has on occasion also resulted in poor governments receiving loans that they later cannot repay, but the Chinese are firm on their stance of staying out of local political issues.

1
Chinese President Xi has been one of the most globally oriented leaders in recent decades, a stark contrast to President Trump.

No discussion of Chinese political or geopolitical interference is complete without noting the two cornerstones of ‘evidence’. Firstly, the Sri-Lankan port, the most famous ‘evidence’ of the debt trap or China ‘taking-over’ countries. In short, China financed the port, and the Sri Lankans were not able to generate the funds necessary to pay. Instead of forcing repayment, the Chinese offered to control the port on a 99 year lease, an offer the Sri Lankan government accepted.

China is starting to put their foot down on no payments, as collective default on Chinese debt in 2018 could put their very own economy at severe risk. If you do not repay your loans, your bank too will reclaim your assets, because if the bank does not, they put their own business model at risk. China means business, they are not here for charity work.

The only possible concession I see the Chinese making, is partial debt relief to the very poorest countries in exchange for free access to markets for an extended period of time, which at the end of the day will repay the loans to the overall Chinese economy, albeit in a different way.

Another cornerstone of the growing Chinese geopolitical influence is Djibouti. China has set up a contract with the government of Djibouti to operate a military base in their port, which is at a prime location in the Red Sea. This appears to be a red flag until we realize that the United States and France too, have military bases in Djibouti. The government of Djibouti does not mind the military presence because it provides them with revenue streams in addition to bringing significant security to a region otherwise plagued by instability.

3.jpg
Chinese soldiers in the port of Djibouti.

If we are talking about China using their financing abroad for political gain, we are yet to see convincing evidence that what they are doing, is significantly different from that of other nations. Their international investments to a large extent have been made in order to allow Chinese construction firms to continue growing amid slowing demand back home.

Part 5: Interest on Loans

The argument that China mostly charges interest on their loans, and that the IMF and World Bank don’t, often draws attention. First, some factual clarity, Chinese financing to Africa in particular takes several parts. Grants, interest-free loans, interest-bearing loans and private investment. Fortunately (for interest haters), China is increasing the amount of preferential loans, and private investment fearing international resentment against their interest-bearing loans.

Although China is giving into this international pressure, I am still a supporter of competitive interest rates. Econ 101ers will know that interest rate is simply the price of money. I believe that it is vital that we charge a price on this money, because the money will be used in a significantly better manner if the government is aware that they need to generate the returns needed to repay the loans plus interest. Think about how differently you would treat something if it were given to you for free or if you paid for it. Yes, there is an argument that weak governments are not going to create policy and make the investments needed to generate these returns to repay the loans, but that is an institutional problem, not a Chinese problem.

If a government knows that they do not have projects in the pipeline that are able to generate the returns needed to service the debt, they should not borrow. This is a trend picking up in the East Asian region as several governments have started cancelling on plans to take Chinese loans as they fear not being able to generate the returns to service their debt.

Part 6: The media bias

A large reason, in my opinion, for the discontent towards China’s growing ambitions, is the very one-sided media reports. Zambia’s President slammed media headlines as ‘reckless propoganda’ last month, as the media falsely reported that China was seizing the Zambian state utility company. It is understandable though, that the US media portrays China in poor light as their economy continues to grow and compete with that of the United States. The biggest example of China being unfairly painted with a negative brush is on pollution and climate change.

China is often called out as the world’s largest polluter, but as the world’s most populous nation they ought to be the largest polluter. However, on per capita terms, the United States pollutes more than China, and we do not hear this fact quite as often. In attempts to unshackle their label as ‘dirty China’, they have  become the new global renewable energy giant, amid the United States’ coal addicted political interests. According to the World Economic Forum, China is now leading the world in terms of renewable energy – they lay a football pitch of solar panels every hour, produce 67% of global solar panels, sell 50% of all electric vehicles and are far exceeding any global targets. It is the Chinese government driving these changes with incentive schemes both for innovating new technology and using it.

4

I truly do not mean to come across as a conspiracy theorist, I really am no ‘flat-earther’, but the media cherry-picks what they report about China. Its understandable though as China is starting to lead the global charge in both development and renewable energy, a seat that the United States and its allies have relinquished.

Part 7: The Fear of China

There is certainly a growing fear of China. Whether it is President Xi’s lifetime term in office, or growing government censorship, it is scaring us. As I have hinted at earlier, the western world is feeling day by day how their control is slipping. Africa, in particular has a huge and growing population and will be one of the biggest markets for exports in the coming years. China is not only dominating this playing field, but as populism and isolationism continues to strangle the rest, China may soon find themselves the only investor playing on African soils. The United States for the first time in many decades feels intimidated.

Second, very few people have actually been to China, and this brings into play a huge fear of ‘otherness’. The idea that for the first time in the memory of anyone alive, a non-white nation may soon dominate the global political and economic spheres may be daunting to some.

Part 8: China’s Imperfections

As Sino-Optimistic as I am, I will call out China on their flaws. Although China’s ascension to the WTO has mostly impacted global trade in a positive way, there are exceptions. Mexico for example, has seen increased drug violence (PDF) since they opened their borders to Chinese goods and China is guilty of violating WTO trade principles on dumping and intellectual property. Although I acknowledge it is vastly more complex, the ongoing trade war is in part China being punished for these violations.

8
The current trade war is likely to set the scene for Sino-American relations for the coming years.
 

Further issues on human rights and freedom of expression back in China remain highly questionable. I do not intend to undermine these issues, but they are irrelevant when discussing the model of Chinese global influence. I do not judge a snooker player on his outfit, and in the same way I am not delving into Chinese domestic issues when we are analyzing their impacts abroad.

If a time does come where Chinese expansion infringes on the way people in other regions live their lives, or if the Chinese start limiting freedom in the countries in which they invest or exert influence, I will be the first to ring the alarm bells.

Part 9: Where to from here?

China knows and understands the situation African economies face today, having been there themselves not too long ago. Their influence in Africa in particular over the last 10 years has lifted more millions out of poverty than the failed aid regime ever did. At least for now, let’s embrace one of the fundamental ideologies of the West. Let’s allow China to be innocent until proven guilty. Proven guilty by fact, not by fiction.

What are your views on China and their growing global influence? As always I am open to discussion and criticism. Please leave your comments below!

 

 


If you enjoyed reading and would like to be notified when a new post is published, please leave your details here!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s