China's global reach: lending more than the World Bank
- 9 December 2011
- From the section Business
European officials may have flown to Beijing with their begging bowl underarm, but for developing countries, China's cheque book comes to you.
Over the past few years, delegations from China's big banks have been criss-crossing the globe signing a plethora of billion dollar deals with some of the world's poorest nations.
"Last year China provided more loans to the developing world than even the World Bank," says Jamie Metzl from the US-based Asia Society. "The role of China is large, it's growing and it's critically important."
As the lender to go to for credit-poor governments, China's yuan is replacing World Bank dollars as the cash behind new roads, power stations, hospitals and other infrastructure.
Where to invest?
In 2010, the World Bank agreed $11.4bn worth of loans to some 36 African countries. China also agreed a host of loans to African governments. One of them, a loan facility to Ghana, reportedly is worth almost $13bn alone.
But as Dr Zhao Changhui from China's Export Import Bank happily points out, his country has $3tn sat waiting to be spent. The nation's politics may be red, but the balance sheet is most definitely black.
So where to invest?
"Countries all across Latin America are surely the most eye catching in the last few years, but on top of that countries in Africa and Asia are also very pleasing," replies Dr Zhao.
Those eye catching projects may include the vast hydro power dam being constructed in the Coca River in Ecuador. The project has been on the table for decades - seen as vital to helping improve the nation's energy supply. But cash was a problem.
"Because Ecuador has defaulted on its debt in the past, the international markets are not ready or willing to buy Ecuadorian debt," explains Quito-based economist Ramiro Crespo.
"Without international organisations, without foreign investment, without international markets, then you have to look for another source. That happens to be China, which has a lot of reserves and extra money," he points out.
The multi-billion dollar loan from China that's helped turn the hydro dam project into a reality is to be charged at an interest rate of 6.9%.
"The risk and the appetite for risk of Chinese companies is different to other companies," suggests Hannah Erdinger from the Johannesburg-based financial consultancy firm Frontier Advisory.
She has witnessed a swift and large push into Africa by Chinese banks. "Traditional partners of the continent such as those with colonial links or development partners have moved out of infrastructure financing and it's a gap that's been left and needs to be filled," says Ms Erdinger.
China has found the gap to its liking. In countries like Zambia and Angola, the activities of Chinese construction firms are hard to avoid. Billboards, road signs, even cash machines are now displaying Chinese symbols.
In Angola, China has been offering loans since 2003 when the nation emerged from civil war. To date, it has extended credit lines to Angola worth $15bn as Chinese companies come over and build new infrastructure in the country. In return, Angola sends China its oil.
China's circular cash
But this particular arrangement has flaws, argues Chris Alden from the China in Africa Project.
"Essentially the money stays in China - it's focused on the project, rather than producing a knock-on effect to the economy. The point is the money doesn't circulate into Angola but rather stays within the Chinese project circles."
This belief - that much of the money stays within China - may explain some of the resentment rumbling against the Chinese in Africa, suggests Zambian civil society researcher Chilufya Chileshe.
"With the high rates of unemployment and destitution in the country, Zambians have looked to this high influx of Chinese into the country as an explanation to why they have some of the problems they have."
Those problems are acute. Two thirds of the population remain in poverty and only 10% have formal employment.
The perceived failure of China's cash to significantly boost development in credit-poor nations has led to accusations that the "condition-lite" loans are undermining the efforts of the World Bank.
Billion dollar concerns
Jamie Metzl from the Asia Society is among those who believe that China is neglecting a moral duty to ensure its loans come with requirements that improve the long term health of a nation's economy.
"China needs to do much more to demonstrate its global responsibility and commitment to building an international system that benefits everybody," he claims. Mr Metzl wants to see China work with the World Bank to ensure loans come with tougher conditions on transparency, anti-corruption and human rights.
It is an argument Dr Zhao from China's Export Import Bank believes is unfair.
"These allegations have always been pushed forward by many in the West - but in reality things are much more complicated," he notes, suggesting China's willingness to deal with countries ostracised by Western nations - such as Zimbabwe - helps the people, and will reap benefits in the end.
No strings attached
Whatever the eventually outcomes, it's clear China is reducing the influence of the World Bank, says Mr Metzl, who cites an example from a few years ago.
"Cambodia was considering a $600m loan from the World Bank that had conditions about transparency and anti-corruption and accountability. The Cambodians basically told the World Bank to go to hell and the next day they received a $601m loan from the Chinese with no conditions."
Despite the criticisms, Dr Zhao is not going to apologise for China's growing influence in the economies of the developing world.
"The mind set has been influenced too much in one direction - the Western conception, the Western ideas, the Western way of doing business," he argues. The world should not close its ears to China's philosophy and wisdom he suggests.
"So long as an economy is growing steadily, healthily, and the people can eventually benefit in a much better well-being, then these sort of models should at least be welcomed."
Additional reporting by Irene Caselli in Ecuador and Louise Redvers in Zambia.
'China: the world's sub-prime lender' can be heard on the BBC World Service's One Planet programme