China’s three-way strategy
China is taking over the IMF's role within its partner countries.
- Monday, 29 June 2015
In January 2015, China promised Venezuela $20 billion (€17.5bn) through bilateral agreements and allocated another $7.5 billion (€6.5bn) to Ecuador. This means Beijing has now become the main foreign investor in these countries, following years of other agreements and loans. Over time, the main purpose of this Chinese political strategy has always been the need to acquire raw materials, essential to satisfy its domestic needs. Chinese Communist Party leaders are continuing down already fairly well worn paths with these tactics.
An example is in Africa where China was given resources in exchange for building infrastructure and funding major works, such as roads and hospitals. However, the problem is that China plays the game according to its own rules: building site workers are Chinese and the companies awarded the tenders are Chinese, while worker safety and environmental issues often go by the board.
This has put an end to the "honeymoon" between China and Africa — as experts in relations between China and the African continent have defined it — and the relationship is now changing. Some governments (another typical Chinese trait is not to be too concerned about those with whom it trades, meaning it can end up funding dictators and corrupt governments) have started to put a spanner in the works for some of China’s activities. Local discontent among citizens is rising.
So, Beijing has been turning to other countries that need its money, willing to exchange investment for resources, first and foremost oil. This January, The Wall Street Journal wrote that “China has increased its diplomatic clout throughout Latin America by extending more than $100 billion (€87.7bn) in credit to the region since 2005, according to figures from Boston University’s Global Economic Governance Initiative.
Chinese President Xi Jinping said China’s foreign investment in Latin America would hit $250 billion (€219.5bn) over the next decade, without offering details”. Since 2007, China has given Caracas a credit lifeline of $50bn (€43.7bn), in exchange for guaranteed oil. It also committed funding of more than $12bn (€10.5bn) to Ecuador between 2009 and 2014. The situation is such that international political commentators have been describing China as the new International Monetary Fund (IMF).
But things move quickly in China. Before there was even time to analyse some of the problems of this new system in South America (following the collapse of oil prices and the complex political situations there, particularly in Venezuela), China then pulled another rabbit out of its hat, establishing the Beijing-led Asian Infrastructure Investment Bank (AIIB).
This body only came into being with all its founder countries in April 2015. But it has already radically turned the tables. China is now officially competing with the US-led World Bank and with Asian Development Bank led by Japan. Britain's entry into the AIIB as a founder member caused considerable irritation in Washington. And while assessments continue as to whether the new bank is a sign of strength or weakness, people are obviously starting to consider the possible repercussions of this new Chinese financial and economic model.
For example, some relations with this new Chinese monetary fund have already cooled. China is no longer so keen on Venezuela and not only because of how Caracas handles Chinese money. “The once-voracious appetite for oil and base metals that drew Beijing and Latin America into a clinch has now dissipated as the Chinese economy slows”, according to the Financial Times. Indeed, David Rees, an analyst at Capital Economics, told the British newspaper, “While countries such as Venezuela have previously enjoyed something of a special relationship with China, the Chinese government does not appear to have the appetite to write a blank cheque to bail them out now that lower commodity prices have exposed strains in their balance of payments”.
Faced with this new international scenario, China — like the IMF — is diversifying. After Africa and Latin America, it has now struck a major deal with Russia. In addition to the treaty guaranteeing Beijing gas supplies from Moscow for the next 30 years, China has taken advantage of another ongoing situation. European sanctions against Vladimir Putin over the Ukraine crisis have damaged the Russian economy, and Beijing is ready to help its ally. During the Moscow celebrations for the 70th anniversary of the end of the Second World War, Beijing handed over a cheque for $25bn (€21.8bn) to help Russian companies suffering as a result of Western economic sanctions. What’s more, the two countries have signed other agreements for the construction of infrastructure facilities along the new gas pipeline and cooperation on oil.
Another deal sees China’s Development Bank promising the Russian Sberbank a credit line amounting to almost $1 billion (€870 million) for use in trade projects, though, this ‘package’ will be managed by the Chinese institution. These further strategic funding and investment moves will enable Beijing to make progress on a longerterm project: China becoming the leader of all those countries who seem unwilling to accept the political and economic dominance of the Western world.