China Growing In Bank Diplomacy

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Western narrative of “debt trap” about China’s diplomacy seems fallacious among investors and experts.

Written by Lucas Leiroz, researcher in Social Sciences at the Rural Federal University of Rio de Janeiro; geopolitical consultant.

China is becoming the most attractive lender in the world, despite Western efforts to slander Beijing’s strategy of “bank diplomacy”. Experts believe that the Western narratives about China sounds fallacious and does not seem to have credibility among state and private investors in developing nations, for whom China appears to be the best option for obtaining credit.

According to reports from the Group of Seven, more than half of the world’s low-income countries are currently in a bad credit situation, with accumulated debt and over-debt. In its statements, the Group urged creditor countries to “contribute constructively to the necessary debt treatments” – which seemed to be a direct message to China.

Beijing is the world’s largest bilateral creditor and has particularly intense and relevant business relations with developing nations, which of course includes low-income countries. The Asian country mainly lends money to infrastructure projects that are somehow related to its Belt and Road Initiative – a global platform of cooperation between developing states. Large Chinese banks, such as the Export-Import Bank of China and the China Development Bank, are primarily responsible for financing the construction of strategic facilities around the world, such as solar, coal and hydroelectric power plants, seaports, airports, highways, and railway lines. There are countries in debt to China throughout Africa, Asia and Latin America – in addition to Europe itself -, which reveals the inestimable relevance of Beijing to global business today.

In recent years, this Chinese strategy of financing infrastructure abroad has been classified by Western analysts as a “debt trap”. According to these experts, Beijing manipulates its partner countries to adopt some kind of “pro-China stance” in world geopolitics.  It is also claimed that China places in its contracts some specific clauses of abusive content, which guarantee to the Chinese government control over the national assets of the nations in debt. Interestingly, however, these same analysts do not classify in the same way the attitudes of western creditor organizations, such as the International Monetary Fund and the World Bank, which are notoriously known for precisely demanding neoliberal measures from in-debt countries.

This type of evaluation in double standard, which condemns China and absolves Western creditors, is one of the reasons why the G7’s speech has lost value and relevance among investors around the world, who are increasingly attracted by China. Renowned researchers have described Chinese banking practice as truly pragmatic and not related to political and ideological schemes – typical of Western banks and the ‘Washington Consensus’.

For example, Thomas W. Pauken II, a consultant on Asia-Pacific affairs, geopolitical analyst, and author of “US vs China: From Trade War to Reciprocal Deal”, said: “China takes a different approach to its lending to other countries, especially the emerging markets, than, say, with the World Bank and International Monetary Fund (…) The major difference is the political issues involved. A lot of times the IMF and WB place a lot of requests for reforms and to make a lot of structural changes to a country’s economy. And a lot of times those structural reforms are not pragmatic or helpful to those countries. Therefore, China basically does loans more like a business person would. Is the country able to pay it back? If not, are these projects capable of generating revenues both for the country they’re doing business in as well as for the Chinese investors”.

In the same vein, political and financial analyst Angelo Giuliano also explains that it is the banks linked to the Washington Consensus that usually demand radical changes from countries in debt, directly violating state sovereignty, while China has another praxis, marked by unconditional respect to the political and financial sovereignty of the countries.

“[Waestern banks] make conditional loans at often higher rates and for the purpose of debt trap and push for political and economic reforms that often take place in the form of drastic privatizations and loss of sovereignty (…) While China has another approach of loaning with no strings attached, it is offering an alternative that respects countries’ sovereignty and that is gaining political support and allies that are uniting in a single front against old imperialistic ways”, he said.

In addition, it is necessary to mention that in several contracts Chinese banks establish decreasing interest with the possibility of extinguishing the debt in case of non-payment. China does this because it always seeks to lend money to private and state investors whose projects are somehow beneficial to Beijing and its BRI. Chinese praxis of “bank diplomacy” consists of looking for the final result of investments and not using credit as a tool for international political projection – even more considering the international neutrality typical of the Chinese State.

G7’s speech and the warnings issued in their last summit have a single objective: to try to make investors from developing countries move away from China and look for western banks, opting for the project “Build Back Better” – the global platform proposed by the G7 – instead of the Chinese BRI. But this kind of result can only be achieved through concrete and positive offers to developing countries, not through fallacious speeches.

You can follow Lucas on Twitter.

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