China’s rep­u­ta­tion as de­vel­op­ment fi­nancier on the line

Large-scale pro­ject fund­ing from Bei­jing brings ben­e­fits but also raises risk of dis­tress in vul­ner­a­ble clients

The Star (St. Lucia) - Business Week - - FRONT PAGE - BY THE FT ED­I­TO­RIAL BOARD

Chi­nese of­fi­cials have long talked up the “win-win” at­tributes of their en­gage­ment with other de­vel­op­ing coun­tries. China wins con­tracts, mar­kets and ac­cess to raw com­modi­ties. Its part­ners win in­fra­struc­ture and in­vest­ment

Chi­nese of­fi­cials have long talked up the “win-win” at­tributes of their en­gage­ment with other de­vel­op­ing coun­tries. China wins con­tracts, mar­kets and ac­cess to raw com­modi­ties. Its part­ners win in­fra­struc­ture and in­vest­ment, and an ally that, un­like western coun­tries, es­chews ob­vi­ous po­lit­i­cal con­di­tion­al­ity in re­turn for loans. The mu­tual ben­e­fits can in­deed be great. A grow­ing num­ber of the re­cip­i­ents of Chi­nese credit are dis­cov­er­ing, how­ever, that the pur­ported “win-win” for­mula also cre­ates losers.

US of­fi­cials now see a dis­turb­ing pat­tern in which Bei­jing has en­cour­aged in­debt­ed­ness in or­der to gain con­trol of strate­gic as­sets when debtors de­fault on re­pay­ments. Whether China is do­ing this de­lib­er­ately or not — and Bei­jing strongly de­nies this — the ef­fect in parts of Africa and Asia is as such.

For good rea­son, Pak­istan plans to rene­go­ti­ate agree­ments signed un­der Chi­nese Pres­i­dent Xi Jin­ping’s Eurasian African in­fra­struc­ture roll­out known as the Belt and Road Ini­tia­tive. Malaysia has gone fur­ther and can­celled about

$3bn worth of pipe­line projects linked to the same Chi­nese pro­gramme. Kuala Lumpur had al­ready sus­pended an­other $20bn in BRI schemes and is in­ves­ti­gat­ing links in some of them to the scan­dalplagued 1Malaysia De­vel­op­ment Ber­had in­vest­ment fund.

It is in the in­ter­est of both coun­tries to re­view how strate­gic, com­mer­cially sound and clean these projects are. Pak­istan is in the throes of a bal­ance of pay­ment cri­sis brought on in large part by the scale of its bor­row­ing un­der the $62bn China-Pak­istan Eco­nomic Cor­ri­dor plan — the most am­bi­tious part of the BRI. This risks be­com­ing the spark for a row be­tween Bei­jing and Wash­ing­ton, which places the IMF in the un­en­vi­able role of ar­biter of the com­pet­ing in­ter­ests of two of its three largest share­hold­ers.

Last month, mem­bers of the US Se­nate ac­cused China of “weapon­is­ing cap­i­tal” and called on the Trump ad­min­is­tra­tion to en­sure the IMF does not leap to the res­cue of coun­tries strug­gling to re­pay Chi­nese loans. There is a whiff of hypocrisy in this, given the reck­less na­ture of past US lend­ing. If the real con­cern in Wash­ing­ton is to main­tain US in­flu­ence in the de­vel­op­ing world in the face of Chi­nese ri­valry, it needs to raise its own game.

But there are also valid rea­sons for US con­cern. No doubt, Chi­nese fi­nanc­ing is sup­port­ing growth in Africa and Asia. No doubt too it is in­creas­ing the risk of dis­tress in vul­ner­a­ble clients. A de­tailed re­cent study by the Cen­tre for Global De­vel­op­ment found this was the case in 23 of 68 coun­tries with BRI fund­ing, eight of which al­ready have un­sus­tain­able lev­els of sov­er­eign debt.

Sri Lanka sur­ren­dered a 99-year lease to a Chi­nese con­glom­er­ate for a port fi­nanced with loans from Bei­jing that failed to gen­er­ate much in­come. Ports in Pak­istan and Dji­bouti, where both the US and China have mil­i­tary bases, are vul­ner­a­ble to sim­i­lar takeovers.

It is not the role of the IMF to safe­guard Amer­ica’s na­tional se­cu­rity in­ter­ests. But it is the IMF’s job to sound the alarm over ir­re­spon­si­ble lend­ing and bor­row­ing.

Al­though dis­cred­ited by its fail­ures to do this cor­rectly in the past, there is no rea­son that it should not at­tempt an im­prove­ment in fu­ture. It should also lean on China to join the Paris club of in­ter­na­tional cred­i­tors, or at least sub­scribe to the same stan­dards of sus­tain­abil­ity and trans­parency.

The bur­geon­ing prob­lems as­so­ci­ated with opaque Chi­nese lend­ing have global im­pli­ca­tions. China’s rep­u­ta­tion as a de­vel­op­ment fi­nancier is on the line.

US of­fi­cials now see a dis­turb­ing pat­tern in which Bei­jing has en­cour­aged in­debt­ed­ness in or­der to gain con­trol of strate­gic as­sets when debtors de­fault on re­pay­ments. Whether China is do­ing this de­lib­er­ately or not — and Bei­jing strongly de­nies this — the ef­fect in parts of Africa and Asia is as such.

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