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China’s Soft Power Grab May Be Bad News For Emerging Economies

Beijing

China’s soft power is now of legendary proportions, and as it buys its way into key natural resource venues, the rest of the world should be worried.

It’s not invasions or occupations that give you lasting leverage over your country of choice: it’s state-run business, friendly contracts and loans. A military move might get you into your choice of destabilized nation, but it won’t keep you there. Money does both, and China is willing to spend lavishly.

China has been providing foreign assistance to the developing world  since the 1950s. But it wasn’t until well into the new Millennium that it started doling out substantially higher amounts of foreign aid and loans to poorer nations in Europe, Asia and Africa.

Since the establishment of FOCAC (the Forum on China-Africa Cooperation) in 2000, China has increasingly cozied up to Africa, and the continent now accounts for half of all foreign assistance from the world's second largest economy.

Currently, all but four of Africa's 55 countries and scores of others in Europe and Asia receive hundreds of billions of dollars each year in the form of strategic loans from Beijing. And the four that don’t—well, they don’t have diplomatic ties with China.

Some 60 percent of Chinese concessional loans to Africa are directed towards physical infrastructural development, mainly in the forms of roads. But these projects are likely to be dwarfed, very soon, by China's ambitious Belt and Road Initiative (BRI).

The BRI is a hyper-scale project that aims to pump trillions of dollars into infrastructure projects in a bid to connect a labyrinth of countries across Asia, Europe and Africa. Belt and Road offers something that most poor nations will find hard to resist--ready financing for much-needed infrastructure.

(Click to enlage)

Source: CNN Money

While few will deny that many countries will benefit directly from this benevolence, the huge loans from China come with a big price tag, and the consequences of default.

A recent report by U.S.-based nonprofit think tank, Center for Global Development, says that at least 8 of 68 potential BRI  borrowers are at high risk of default already.

The report has singled out Pakistan as being at the highest risk of debt distress, with Djibouti and Kyrgyzstan coming in at second and third, respectively.

And, maybe these countries need to look no further than places like Tajikistan, Sri Lanka and Latin America for a few lessons on how China deals with deadbeat debtors. Related: Google Invests $300 Million To Combat Fake News

In the past, China has been quite generous in dealing with developing countries as it looked to rapidly expand its addressable markets as well as export excess domestic capacity in infrastructure and manufacturing. China has mainly achieved this by operating on a policy of non-interference and mutual benefit.

But Beijing is taking a tougher stance now, handling debt problems on a case-by-case basis rather than following the ''Rules of the Road'' policies laid out by Bretton Woods institutions.

In 2011, the country reportedly agreed to write off Tajikistan’s debt in exchange for disputed territory. In 2018, the country worked out a deal for a 99-year lease of a Sri Lankan airport after the latter defaulted on an $8-billion loan.

China is no longer keen to be seen as an unconditional lender of last resort.

There was a time when even the most fiscally incontinent autocrats in Latin America could count on Beijing coming through if the International Monetary Fund (IMF) or the World Bank turned down a loan request. But today, borrowers are lucky to have a repackaging deal with China after defaulting on earlier loans, as Venezuela discovered a few years back.

Which is probably to be expected since Beijing's own debt obligations have rapidly ballooned over the past decade.

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Source: Trading Economics

By David Craggen for Safehaven.com 

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