China’s Help, With Interest and Stipulations

China — and the world — vulnerable. China is exposing itself to shaky political regimes, volatile emerging markets and other economic forces beyond its control. Russia, which is on the verge of a recession, has deepened its ties with China. The list of borrowers in Africa and the Middle East reads like a litany of troubled regimes and economies that may have difficulty repaying Chinese loans, including Yemen, Syria, Sierra Leone and Zimbabwe.

And China is forcing countries to play by its financial rules. Many developing countries pay steep loan interest rates and give up rights to their natural resources for years. China has a lock on close to 90 percent of Ecuador’s oil exports, mostly to pay off its loans.

“The Chinese are shopping across the world, transforming their financial resources into mineral resources and investments,” said Alberto Acosta, Ecuador’s former energy minister. “They come with financing, technology and technicians, but also high interest rates.”

China also has a shaky record when it comes to worker safety, environmental standards and corporate governance.

Issues have already surfaced in Ecuador.

A few kilometers from the site of the hydroelectric plant, the Coca River vaults down a 146-meter waterfall, cascading through steep canyons toward the Amazon. It is the tallest waterfall in Ecuador and popular with tourists.

When the dam is complete and the water is diverted to the plant, the San Rafael falls will slow to a trickle for part of the year. With climate change already shrinking the Andean glacier that feeds the river, experts debate whether the site will have enough water to generate even half the electricity predicted.

Ecuadoreans on the Chinese-run project have repeatedly protested about wages, health care, food and general working conditions. Last December, an underground river burst into a tunnel at the site. The water flooded the powerhouse, killing 14 workers. It was one of a series of serious accidents at Chinese projects in Ecuador, several of them fatal.

China is the world’s largest buyer of oil, which gives it substantial sway over petropolitics. Its transformation into the world’s largest manufacturer has brought a thirst for energy to power its economy. In recent years, state- controlled Chinese oil companies have acquired big stakes in oil operations in Cameroon, Canada, Kazakhstan, Kyrgyzstan, Iraq, Nigeria, São Tomé and Príncipe, Sudan, Uganda, the United States and Venezuela.

In late 2008, President Rafael Correa of Ecuador called much of his country’s debt, largely owned by Western investors, “immoral and illegitimate” and stopped paying, setting off a default. Then Ecuador was in a bind. The global financial crisis was taking hold and oil prices collapsed.

Ecuador and Petroecuador, its state- owned oil company, started running low on money.

PetroChina, t he gove r n - ment-backed oil company, lent Petroecuador $1 billion in August 2009 for two years at 7.25 percent interest. Within a year, more Chinese money began to flow for other infrastructure projects.

The Chinese money, though, comes with its own conditions. Along with steep interest payments, Ecuador is largely required to use Chinese companies and technologies on the projects.

International rules limit how industrialized countries can tie their loans to such agreements. But China, which is still considered a developing country despite being the world’s largest manufacturer, doesn’t have to follow those standards.

It is one reason that China’s effort to build an international development fund, the Asian Infrastructure Investment Bank, has faced criticism in the United States. Washington is worried that China will create its own rules, with lower expectations for transparency, governance and the environment.

While China has sought to quell those fears, the fund’s portfolio of projects around the world impos- es tough terms and sometimes lax standards. Since 2005, the country has landed $ 471 billion in construction contracts.

In Ecuador, a consortium of Chinese companies is overseeing a flood control and irrigation project in the southern province of Cañar. A Chinese engineering company built a $100 million bridge to span the Babahoyo River near the coast.

Such deals typically favor the Chinese. PetroChina and Sinopec, another state- controlled Chinese company, together pump about 25 percent of the 560,000 barrels a day produced in Ecuador. They also collect $25 to $50 in fees from Ecuador for each barrel they pump.

In Ecuador, oil represents roughly 40 percent of the government’s revenue, according to the United States Energy Department. And those earnings are plunging along with the price of oil. With crude around $50 a barrel, Ecuador doesn’t have much left to repay its loans.

If Ecuador or other countries can’t cover their debts, their obligations to China may rise. A senior Chinese banker, who spoke only on the condition of anonymity for diplomatic reasons, said Beijing would most likely extend the length of the loans instead of writing off part of the principal. That means countries will have to hand over their natural resources for additional years, limiting their governments’ abilities to borrow money and pursue other development opportunities.

China has significant leverage to make sure borrowers pay. As the dominant manufacturer for a long list of goods, Beijing can credibly threaten to cut off shipments to countries that do not repay their loans, the senior Chinese banker said.

“China is becoming the new company store for developing oil-, gasand mineral-producing countries,” said David Goldwyn, who was the United States State Department’s special envoy for international energy affairs during President Barack Obama’s first term. “They are entitled to secure reliable sources of oil, but what we need to worry about is the way they are encouraging oil- producing countries to mortgage their long-term future through

oil-backed loans.”

Confident of China’s support, Ecuador has been moving aggressively on the refinery project in Manta. Ecuadorean workers have flattened 800 hectares for the Refineria del Pacifico. Workers are busy laying Chinese-made pipe. Ecuador has already spent $1 billion of its own money on the project.

But the pipes just go to several empty white sandy plateaus. The Chinese banks have not officially agreed to finance $ 7 billion of the project, which is expected to cost roughly $10 billion.

Depending on what happens, the refinery will either be the crown jewel of Ecuador’s relationship with China or an expensive monument to the limits of its largess.

While Chinese officials and executives have said they are interested in the project, the talks have stalled. Senior executives at PetroChina have misgivings. Even before oil prices started tumbling, the company cut investment spending sharply.

The prospects for the Ecuador refinery project now look hazy.

Several Ecuadorean energy experts question the economic sense of the project. Ecuador, they say, cannot justify the refinery unless the country significantly increases production. For that to happen, it must drill deeper into the Amazon, an environmentally risky and expensive proposition. “If there is no guarantee of more production, this refinery will be a white elephant,” said Mauricio Pozo Crespo, a former economy minister.

The uncertainty worries many in Ecuador.

“Correa says there is no limit to how much we can borrow from China,” said Mr. Acosta, the former energy minister. “But if the Chinese don’t put up the money, there will be no refinery. I have my doubts.”

So does Luis Kwong Li, a Chinese- Ecuadorean restaurateur in Manta.

“The president built up a lot of expectations,” Mr. Kwong Li said. “Maybe it will still happen, maybe in two years. There’s a big hope among the Ecuadorean people that the refinery will create business and jobs.”