Is the Chinese Yuan Now Buying More Friends Abroad Than the U.S. Dollar?

While the West is concerned with how to cut onerous debt and support its societies, China has been on a little-publicized spending spree. Whereas dollar, and to a lesser extent euro, diplomacy was once the name of the game in the developing world – the transfer of wealth from the developed to the developing in exchange for political and economic incentives – there has been a subtle, and perhaps inexorable, shift of influence from New York and London, to Beijing and Shanghai. This rise of yuan diplomacy is, arguably, for the better.

The signs are on the ground — in concrete and steel — and in the nascent signs of promising economic connections. Unlike Western poverty-alleviation schemes — that may or may not come to long-term fruition — there is something compelling about the brash and bold, like the Chinese-funded Malawian parliament and Costa Rican stadium.

With a certain righteous irony, Western commentators decry China’s rising influence in South-South relations (as opposed to the developed North). "Empire-building," they chide, about two centuries of genocide and plunder too late. China’s perceived neo-colonial attitudes towards Latin America and Africa are threatening to the West’s privileged position, while Chinese diplomats wean local politicos away from the teat of their former colonial "masters."

China’s influence, as a whole, is still fairly limited. Western corporations and financial institutions continue to dominate the money game. But Chinese money is shifting the nature of the political landscape away from a past (and present) dominated by old imperial lines. If Chinese money keeps flowing this will present a great opportunity to the countries with which China does business.

Chinese capital tends to address the demand from borrowers Western institutions have already blacklisted. These tend to be the governments racked by previous debt to Western agencies. In some cases, like Ecuador, these governments have even defaulted and have — essentially — become financial pariahs. Chinese money helps to ease not just these borrowers’ immediate financial concerns but also open doors to more diversified sources of capital — access to Chinese money makes previously risky odds look less dangerous to other investors. 

Chinese investments also take a seemingly old-fashioned approach, especially if you subscribe to the orthodoxyof the World Bank and International Monetary Fund, to international development by going towards infrastructure projects. Unlike what Western development gurus might prefer, Chinese money flows into the sort of areas developing governments want, following the well-trodden route of infrastructure and government services-led development that China herself (and her East Asian antecedents) took. This may lead to unglamorous roads and power stations — and not photo-op worthy village cooperatives — but these are the sort of projects developing governments desperately want.

Importantly, Chinese money rarely comes with "conditionalities," that dreaded rash of policies and measure dictated by the international financial institutions as requirements before the cash can flow. These conditionalities often include painful "structural adjustment programs" and "austerity measures," and, just when those economies are at their weakest, "trade liberalization" which opens the wounded economy to the predations of far wealthier (and ruthless) international speculation. The free market isn’t free, as Greece can attest as it convulses from its euro diktat.

However, China isn’t in the business of charity, attaching its own strings to its pre-packaged deals. Most onerous has got to be the oft-cited requirement for investment projects to utilize Chinese goods and employ imported Chinese labor. This type of employment requirement causes quite understandable resentment in local populations – who see jobs flit away – and is seemingly used by the Chinese government as stop-gap relief valves to counter growing unemployment concerns at home.

Not immediately worrying, but potentially even more dangerous down the line, is China’s investment focus on the developing world’s primary resources. China’s investment are strategic to its own economic goals, putting big money into areas of production that China is dependent on – food, energy, minerals – and less on potential competition (and pathways to development) like manufactures and light industry. There is an implicit danger that China is fostering a cyclical dependency on primary resources, "locking" a country at a lower rung of development.

In that respect, China is no different from fellow neo-colonial powers.

China also isn’t one to shy away from investing in non-democratic regimes, an action many see as bolstering unsavory governments. China’s well-worn excuse is that it "does not interfere in the internal affairs of others." The proverbial "highly-placed Chinese official" may also snidely comment that the West isn’t above propping up its own friendly dictators. Two wrongs, however, don’t always make a right.

But it also says something about just how appealing Chinese money is and to the extents governments are willing to court Chinese capital. Previous generations of developing world policy makers were more than willing to go down the rabbit hole of neoliberalism — the set of policies most blamed for Latin America’s "Lost Decade" — mainly because that was the economics they learned in their Western graduate schools. These so-called "Chicago Boys" employed the latest in economic ideology to the detriment of their compatriots.

This generation of politicos is unencumbered by these alma mater biases and, if anything, should be turned off to China’s old-fashioned "bricks and mortar" investment deals. Nevertheless, developing world governments hold fetes in the Chinese’s honor, scrape and bow — perhaps a little too profusely — for a whiff of yuan. As Western money withdraws, perhaps the Chinese want is becoming a Chinese need.

And therein lies the trap. For better or worse, Chinese money - all foreign money - is a tool, not a crutch.

Photo Credit: DavidDennisPhoto