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CHINESE FINANCIAL INSTITUTIONS DUPLICATING THE IMF

Introduction

China is among the oldest civilizations in the world and is recognised as one of the cradles of civilisation due to its unbroken history spanning thousands of years. China is standing at 2nd in world rankings of economies with around 17.50 trillion US dollars, China may be on course to overtake the United States as the world's largest economy by nominal GDP in the years to come with annual growth that routinely exceeds that of the US. Over the past four decades, China's economy has gradually opened up, leading to significant advancements in both economic growth and living standards.


Over the last few years China have become a powerful, stable economic country, emerged as a global loan provider, which could be due to its some or the other benefits. Since the beginning of 2000s, China has distributed huge amount of loans to low and middle income countries. Numerous recent studies have looked into these loans from China, but there are many aspects of it that no one is aware of, such as how the loan contracts are drafted and what terms and conditions are included in the contract. The text of these contracts is neither been disclosed by China nor by the borrower countries. China has lent much of its financial resources in financing projects under 'Belt and Road Initiative (BRI)'. The initiative has formidable presence and influence which has led other western countries to accuse China of pursuing a 'debt-trap' diplomacy through it. According to an estimate, China lends as much as 6% of Global GDP, these lending are official which directly comes from the government sources. According to Harvard Business Review (HBR), China has lent as much as $ 1.5 Trillion to 150 countries in form of direct credit and loans. From which China have left behind many international organisations like World Bank, International Monetary Fund (IMF), Economic Co-operation and Development etc. China does not report international lending institutions and adopt opaque lending methods to escape from traditional data-gathering institutions. A report combines by Harvard Business Review (HBR) from 2000 loans and 3000 grants from 1949 to 2017 suggests that the Chinese loans are mostly concentrated in energy, infrastructure, and mining sector in form of large-scale investments. In process borrower side debt is increase. As per HBR 50 main developing countries borrow loan from China, in 2005 stock of debt is country's 1% GDP, Now In 2017 near by 15% of GDP. The debt of the payee nations is significantly rising as a result of Beijing loans. In some cases, some countries owe China as high as 20% of their respective national GDP like Djibouti, Laos, Cambodia, Republic of Congo, Niger, Maldives, Kyrgyzstan, Zambia, Samoa etc are there.



What is Debt Trap Diplomacy?

This type of diplomacy involves giving states projects or loans with repayment conditions that are too onerous for them to meet, ultimately pressuring them to make political or economic concessions. Simply defined, being in the debt trap means being compelled to take out more loans than necessary in order to pay off previous debts. Experts claim that because most underdeveloped economies lacked adequate infrastructure, institutional investors tended to ignore them. Countries that did not want to go to the IMF for a bailout rather moved to China. The majority of African and Asian governments experienced problems after independence. During the post-World War II recovery, colonists just sucked up their finances. Of course, providing loans for infrastructure development is not always a negative thing. The initiatives that China is funding, however, frequently have little to do with helping the local economy and more to do with helping China gain access to natural resources or expand the market for its subpar export goods. China even deploys its own construction workers in many instances, reducing the amount of local employment that are produced. Many of the completed projects are currently losing money. For instance, the world's emptiest airport is Sri Lanka's Mattala Rajapaksa International Airport, which completed in 2013 close to Hambantota. Magampura Mahinda Rajapaksa Port in Hambantota and Pakistan's multibillion-dollar Gwadar Port are both similarly mainly empty. . However, for China, these initiatives are going exactly as planned. Chinese attack submarines have repeatedly docked in Sri Lankan ports, and two Chinese warships have most recently been called upon to provide protection for the Gwadar port. The projects' failure is, in a way, even better for China. After all, China's own leverage increases in proportion to how much smaller countries are burdened with debt.



What is BRI?

The People's Republic of China  launched the Belt and Road Initiative (BRI), a plan to connect Asia with Africa and Europe through land and sea networks in an effort to strengthen regional integration, boost commerce, and foster economic progress. China's President Xi Jinping came up with the term in 2013, drawing inspiration from the idea of the Silk Road, a network of trade routes that connected China to the Mediterranean across Eurasia for centuries approximately 2,000 years ago. One Belt One Road is another name for the BRI that has been used in the past. The BRI has been linked to a significant investment programme for the construction of transportation infrastructure, including ports, highways, railroads, and airports, as well as telecommunications networks and power plants. As of March 2020, 138 nations had joined the Belt and Road Project by signing an MoU with China, making it an increasingly significant umbrella structure for China's bilateral commerce with BRI partners. According to some experts, China is trying to increase its political and economic power through the Belt and Road Initiative. According to experts, along with the Made in China 2025 economic development vision, the BRI is one of the cornerstones of a more audacious Chinese foreign policy under Xi. According to Xi, the BRI is both a means for China to create new investment possibilities, foster export markets, and increase Chinese incomes and domestic consumption, as well as a response to the much-discussed U.S. China now aggressively strives to influence international institutions and norms and aggressively emphasises its presence on the world scene. China is also driven to strengthen ties between its historically underserved western provinces and the rest of the world economically.


IMF vs China

Since China started providing significant loans to poor nations in the middle of the 2000s, rumours have circulated that these loans are in direct competition with those provided by the International Monetary Fund (IMF), providing identical sums of money in exchange for quite different promises. China often provides funding for specific infrastructure projects that are carried out by Chinese enterprises, in contrast to the IMF, which bases its loans on commitments to economic reform. Critics of the IMF might applaud China's lending as a source of "policy space" for governments to pick their own development strategy, while those who think the IMF's recommendations for economic reform represent the most certain path to reliability and prosperity express alarm that China could perhaps condemn these nations to another cycle of debt and default. Regardless of their normative interpretation, observers generally concur on the fundamental reasoning at work: Chinese loans offer a fresh option for nations that would prefer to avoid the IMF.


Let’s take an example, how does China challenge the IMF’s power in Africa?

The example addresses the issue by examining how China's commercial loans to African nations pose a threat to the IMF's authority. It specifically addresses the IMF's ability to create standards for the management of state debt.


First, the relationship between debt and development is conceptualised differently by the IMF and China's financial institutions. Because repayment is made through the state budget and borrowing nations frequently have limited state revenues, the IMF's public debt standard, which is incorporated in its debt limitations framework, contends that low-income nations should predominantly take out concessional, low-cost loans. Contrarily, under the Chinese public debt standard, low-income nations are permitted to take out commercial, expensive loans as long as repayment is guaranteed by the profits from profitable commercial endeavours like mining or hydroelectric plants, or by the sale of goods like cocoa and oil.


The second stage entails a clear example of one particular incident when a Chinese loan questioned the authority of the IMF, specifically the 2007–2009 controversy over the so-called Sicomines accord in the DR Congo. Through the Sicomines Agreement, China Exim Bank provided a substantial loan to fund infrastructure development and a mining project in the DR Congo. The IMF's debt restrictions framework was tested since the loan was extended under commercial conditions. The Sicomines Agreement was reduced by the Congolese government in 2009 from its original value of around US$ 10 billion to US$ 3 billion. The dissertation indicates that the IMF also distorted its own estimation of the cost of the Chinese loan based on interview data and contract analysis.


The IMF specifically characterised the renegotiated Chinese loans as a low interest, concessional credit. Calculations suggests that it is still a pricey commercial loan. The thesis contends that the IMF made this covert concession because it was hard for it to push the DR Congo to further reduce the Chinese loan due to the political and economic significance of the Chinese credit. The Chinese loan prevented the DR Congo from moving forward with its debt relief plan, therefore the IMF had to find a compromise in order to assist the country. The IMF's public debt norm was challenged by China in Angola (2009) and Ghana (2011–2012), and the IMF's debt limitations framework underwent formal adjustments in 2009. These are only a few of the minor case studies that make up the third and final stage of the empirical research. The  concessions made by the IMF in each of the three cases that are similar to those the organisation made in the DRC.


To sum up, Chinese commercial loans do certainly pose a threat to the dominance of the IMF in African nations. The Chinese loans, however, will only achieve this effect to the extent that they really materialise. The loans are not being disbursed in an effort to overturn and completely replace the IMF's public debt rule. Instead, they are only provided if Chinese businesses and banks believe a particular business opportunity is worthwhile and for commercial reasons. Chinese investors in the DRC have become increasingly cautious since 2010, and this trend appears to be widespread throughout Africa. As a result, although Chinese loans do put the IMF's authority in jeopardy, fewer of these issues are expected to arise in the future.


It was emphasised that the Chinese approach to development finance represents a full-fledged alternative to the IMF's strategy from a policy perspective. The Chinese view is that in order to maximise the impact of FDI and external debt on growth, commercial prospects in the sector of natural resources should be developed. Given that Chinese banks are cautious and will only make loans that they are confident in recovering, concerns about the debt sustainability that are frequently expressed in regard to Chinese loans to African governments may be overblown. Although the IMF's 2009 adjustments to its debt limit framework were undoubtedly motivated by realpolitik, it also appears that part of the Chinese perspective on debt and development has been included. This is an important example of how Western development policy norms have changed. The host state must actively direct the investments and make sure that the loans are being used where they will have the greatest impact if the Chinese loans are to fully realise their significant developmental potential.


Downfall of countries in recent years by Chinese loans,


The best example of this is Sri Lanka, though the current situation in Sri Lanka more or less is because of their government stands and the family dynasty corruptions. China supported economic growth while defending Mahinda Rajapaksa and his brother Gotabaya from allegations of human rights abuses committed during the conflict with the Liberation Tigers of Tamil Eelam (LTTE). When he was in office from 2005 to 2015, Mahinda Rajapaksa approved a number of Chinese development projects in exchange. Using the Hambantota project as an illustration, China pushed Sri Lanka to move forward with the project despite the port's lack of commercial feasibility. Beijing wanted the port as collateral while it failed to gather traction, so in 2017 it forced the Sri Lankan government to transfer management to a Chinese business on a 99-year lease. During the recent economic crisis, Beijing is following a wait and watch policy, rather they could have helped their so called friendly nation, but they left the nation in difficult time. Later, Sri Lanka was forced to ask for the loans from IMF.


Take another example of Pakistan, close ally of China, both are working on a project China–Pakistan Economic Corridor, it is a significant bilateral initiative to upgrade Pakistan's infrastructure for improved trade with China and for regional cooperation, CPEC is part of the larger Belt and Road Initiative. The current situation of the nation is, the economy of the nation is already plagued by a massive deficit, and inflation is spiralling out of control with a looming default danger. According to reports, the International Monetary Fund (IMF) plans to forbid Pakistan from taking out additional loans from China. The IMF's suggestions are now likely to be a deciding factor in Islamabad's decision to ask China for PKR 7.9 billion for projects related to the China Pakistan Economic Corridor (CPEC). The IMF has suggested Islamabad restructure its energy contracts with Beijing after objecting to Pakistan's loan from China and unreasonably high payments paid to Chinese independent power producers (IPP), according to Financial Post. Pakistan also demanded Chinese loans to pay off other loans like to Saudi Arabia and other countries.


Kenya knocks the door of IMF to pay off Chinese depts, Kenya is thinking about using IMF reserves to make up for Chinese loans it has to repay after the Treasury withdrew a previous request to postpone debt payments. The IMF is anticipated to help shape policies that will force the government to impose strict guidelines across a variety of industries. The terms are related to the multibillion shilling loan facilities provided by the fund to Kenya, where funds are directly deposited into the budget to bolster the public coffers.


The reforms demanded by the IMF included privatisation, debt management, liberalization of important industries, open markets, and the elimination of government subsidies. According to the IMF, nations must adhere to a debt limit framework in order to receive debt relief, and low-income nations must seek debt relief before looking for fresh loans. Instead of imposing strict reforms, China gives loan recipients the freedom to select and carry out infrastructure projects as they deem fit. Nations favoured the "nuance" of China's loans because they are based on a "win-win mentality," which allows countries to keep the majority of their policy-making flexibility.



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