China expands influence with emergency loans

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China has been doing more than flexing its military muscles lately.
With a deployment target of $900 billion by 2048, the so-called national Belt and Road Initiative is arguably one of the largest capital allocation campaigns in history. Launched in 2013, it is the cornerstone of Beijing’s bid to expand its geopolitical influence with the ownership of highly strategic infrastructure-focused assets – in countries that, precisely, tend to be resource-rich whose world’s second largest economy needs.

Now, according to new data analyzed by the FinancialTimes, China goes even further. Adopting the role of first-choice lender of last resort, the communist nation emerged as a direct competitor to the International Monetary Fund, one of the pillars of the post-war financial system.

Move on, IMF

Among its many roles in the global economy, the IMF regularly serves as a lender to countries in financial difficulty. In 2021, loan recipients included Ukraine, Colombia, Egypt and Costa Rica, to name a few. Aid programs come in many shapes and sizes, but are essentially designed to help nation states avoid full-blown financial collapse.

In exchange for timely capital, the IMF usually demands deep economic reform – called “structural adjustments” – such as cutting government spending, liberalizing trade, and raising taxes. None of this makes the institution particularly popular among locals, especially politicians. According to reports from the FTChina is strategically channeling capital to many of the same, often resource-rich countries, but with far fewer strings attached:

  • Since 2017, Pakistan, Sri Lanka and Argentina have received $32 billion in Chinese loans, according to data compiled by AidData, a research lab at William & Mary University. Other countries receiving loans from Chinese institutions include Kenya, Venezuela, Ecuador, Angola, Laos and Egypt.
  • Although loans are far from grants – China charges a markup of about 3% above benchmark funding costs – they are not based on debt restructuring or economic reforms to which beneficiary countries are subjected by the IMF.

“It’s not about one loan or one country in particular. . . They want to have the ear of governments where the raw materials are, or the big markets, or the strategic ports, or where there is access to shipping lanes,” Sean Cairncross, a foreign affairs expert, told the FT. “It’s a way to narrow the strategic options for the United States and for the West, in terms of global access and influence.”

The good money after the bad? Analysts say much of China’s lending is aimed at preventing defaults on loans made under the broader Belt and Road Initiative, the name of which refers to the economic belt of the historic Silk Road trade route.

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