China’s global ambitions, with loans and strings attached

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El Chaco, Ecuador

: Where the Andean foothills dip into the Amazon jungle, nearly 1,000 Chinese engineers and workers have been pouring concrete for a dam and a 24km underground tunnel. The $2.2 billion project will feed river water to eight giant Chinese turbines designed to produce enough electricity to light more than a third of Ecuador.

Near the port of Manta on the Pacific Ocean, Chinese banks are in talks to lend $7 billion for the construction of an oil refinery, which could make Ecuador a global player in petrol, diesel and other petroleum products.

Across the country, Chinese money is going to build roads, highways, bridges, hospitals, even a network of surveillance cameras stretching to the Galápagos Islands. State-owned Chinese banks have already put nearly $11 billion into the country, and the Ecuadorean government is asking for more.

Ecuador, with just 16 million people, has little presence on the global stage. But China’s rapidly expanding footprint here speaks volumes about the changing world order, as Beijing surges forward and Washington gradually loses ground.

While China has been important to the world economy for decades, the country is now wielding its financial heft with the confidence and purpose of a global superpower. With the centre of financial gravity shifting, China is aggressively asserting its economic clout to win diplomatic allies, invest its vast wealth, promote its currency and secure natural resources.

It represents a new phase in China’s evolution. As the country’s wealth has swelled and its needs have evolved, President Xi Jinping and the rest of the leadership have pushed to extend China’s reach on a global scale.

China’s currency, the renminbi, is expected to be anointed soon as a global reserve currency, putting it in an elite category with the dollar, the euro, the pound and the yen. China’s state-owned development bank has surpassed the World Bank in international lending. And its effort to create an internationally funded institution to finance transportation and other infrastructure has drawn the support of 57 countries, including several of the US’ closest allies, despite opposition from the Obama administration.

Even the current stock market slump is unlikely to shake the country’s resolve. China has nearly $4 trillion in foreign currency reserves, which it is determined to invest overseas to earn a profit and exert its influence.

China’s growing economic power coincides with an increasingly assertive foreign policy. In a contested sea, China is turning reefs and atolls near the southern Philippines into artificial islands, with at least one airstrip able to handle the largest military planes. The US has challenged the move, conducting surveillance flights and discussing plans to send warships.

China represents “a civilization and history that awakens admiration to those who know it”, President Rafael Correa of Ecuador proclaimed on Twitter, as his jet landed in Beijing for a meeting with officials in January.
China’s leaders portray the overseas investments as symbiotic. “The industrial cooperation between China and Latin America arrives at the right moment,” Prime Minister Li Keqiang said in a visit to Chile in May. “China has equipment manufacturing capacity and integrated technology with competitive prices, while Latin America has the demand for infrastructure expansion and industrial upgrading.”

But the show of financial strength also makes China—and the world—more vulnerable. Long an engine of global growth, China is taking on new risks by exposing itself to shaky political regimes, volatile emerging markets and other economic forces beyond its control.

Any major problems could weigh on China’s growth, particularly at a time when it is already slowing. The country’s stock market troubles this summer are only adding to the pressure, as the government moves aggressively to stabilize the situation.

While China has substantial funds to withstand serious financial shocks, its overall health matters. When China swoons, the effects are felt worldwide, by the companies, industries and economies that depend on the country’s growth.

In many cases, China is going where the West is reluctant to tread, either for financial or political reasons—or both. After getting hit with Western sanctions over the Ukraine crisis, Russia, which is on the verge of a recession, deepened ties with China. The list of borrowers in Africa and West Asia reads like a who’s who of troubled regimes and economies that may have trouble repaying Chinese loans, including Yemen, Syria, Sierra Leone and Zimbabwe.

With its elevated status, China is forcing countries to play by its financial rules, which can be onerous. Many developing nations, in exchange for loans, pay steep interest rates and give up the rights to their natural resources for years. China has a lock on close to 90% of Ecuador’s oil exports, which mostly goes to paying off its loans.

“The problem is we are trying to replace American imperialism with Chinese imperialism,” said Alberto Acosta, who served as Correa’s energy minister during his first term. “The Chinese are shopping across the world, transforming their financial resources into mineral resources and investments. They come with financing and technology, but also high interest rates.”

China also has a shaky record when it comes to worker safety, environmental standards and corporate governance. While its surging investments have created jobs in many nations, experts worry that Beijing is exporting its worst practices.

Chinese mining and manufacturing operations, like many US and European companies in previous decades, have been accused of abusing workers overseas. China’s coal-fired power plants and industrial factories are adding to pollution problems in developing nations.

Issues have already surfaced in Ecuador. A few kilometres from the site of the hydroelectric plant, the Coca river vaults down a 480ft waterfall and cascades through steep canyons towards the Amazon. It is the tallest waterfall in Ecuador and popular with tourists. When the dam is complete and water is diverted to the plant, the San Rafael falls will slow to a trickle for part of the year. With climate change already shrinking the Andean glacier that feeds the river, experts debate whether the site will have enough water to generate even half the power predicted.

Ecuadoreans on the Chinese-run project have repeatedly protested about wages, healthcare, food and working conditions.

Last December, an underground river burst into a tunnel at the site. The water flooded the powerhouse, killing 14 workers. It was one of a series of serious accidents at Chinese projects in Ecuador, several of them fatal.

When the research arm of China’s cabinet scheduled an economic development conference this spring, the global financial and corporate elite came to Beijing. The heads of major banks and pharmaceutical, auto and oil companies mingled with top Chinese officials.

Some had large investments in the country and wanted to protect their access to the domestic market. Others came to court business, as Beijing channelled more of its money overseas.

At the event, the International Monetary Fund managing director Christine Lagarde commended China’s efforts to engage globally through investment and trade, as well as to enact economic reforms. It “is good for China and good for the world—their fates are intertwined,” she said in her address.

China produces 2 million cars a month, far more than any other country. It mirrors the broader transformation of the economy from an insular agrarian society to the world’s largest manufacturer. While the change has showered wealth on China, it has also brought new demands, like a voracious thirst for energy to power its economy. The confluence of trends has compelled China to look beyond its borders to invest those riches and to satisfy its needs.

Oil has been on the leading edge of this investment push. Energy projects and stakes have accounted for two-fifths of China’s $630 billion of overseas investments in the past decade, according to Derek Scissors, an analyst at the American Enterprise Institute.

China is playing both defence and offence. With an increased dependence on foreign oil, China’s leadership has followed the US and other large economies by seeking to own more overseas oil fields—or at least the crude they produce—to ensure a stable supply. In recent years, state-controlled Chinese oil companies have acquired big stakes in oil operations in Cameroon, Canada, Kazakhstan, Kyrgyzstan, Iraq, Nigeria, São Tomé and Príncipe, Sudan, Uganda, the US and Venezuela.

“When utilizing foreign resources and markets, we need to consider it from the height of national strategy,” Prime Minister Li said in 2009, when he was a vice-premier. “If the resources mainly come from one country or from one place with frequent turmoil, national economic safety will be under shadow when an emergency happens.”

“What Ecuador wants are sources of capital with fewer political strings attached, and that goes back to the personal history of Rafael Correa, who holds the US directly or indirectly responsible for his father’s death and suffering,” said R. Evan Ellis, professor of Latin American studies at the US Army War College Strategic Studies Institute. “But there is also a desire to get away from the dependence on the fiscal and political conditions of the IMF, World Bank and the West.”

The Ecuadorean foreign minister calls the shift to China a “diversification of its foreign relations”, rather than a substitute for the US or Europe. “We have decided that the most convenient and healthy thing for us,” said foreign minister Ricardo Patiño, is “to have friendly, mutually beneficial relations of respect with all countries.”

The Chinese money, though, comes with its own conditions. Along with steep interest payments, Ecuador is largely required to use Chinese firms and tech on the projects.

International rules limit how the US and other industrialized countries can tie their loans to such agreements. But China, which is still considered a developing country despite being the world’s largest manufacturer, doesn’t have to follow those standards. It is one reason that China’s effort to build an international development fund, the Asian Infrastructure Investment Bank, has faced criticism in the US. Washington is worried that China will create its own rules, with lower expectations for transparency, governance and the environment.

While China has sought to quell those fears over the infrastructure fund, its portfolio of projects around the world imposes tough terms and sometimes lax standards. Since 2005, it has landed $471 billion in construction contracts, many tied to broader lending agreements.

In Ecuador, a consortium of Chinese companies is overseeing a flood control and irrigation project in the southern province of Cañar. A Chinese engineering company built a $100 million, four-lane bridge to span the Babahoyo river near the coast.

Such deals typically favour the Chinese. PetroChina and Sinopec, another state-controlled Chinese firm, together pump about 25% of the 560,000 barrels a day produced in Ecuador. Along with taking the bulk of oil exports, the Chinese firms also collect $25-50 in fees from Ecuador for each barrel they pump.

China’s terms are putting countries in precarious positions. In Ecuador, oil represents roughly 40% of the government’s revenue, according to the US energy department. And those earnings are suddenly plunging along with the price of oil. With crude at around $50 a barrel, Ecuador doesn’t have much left to repay its loans.

“Of course, we have concerns over their ability to repay the debts—China isn’t silly,” said Lin Boqiang, the director of the Energy Economics Research Center at Xiamen University in China’s Fujian province and a government policy planner. “But the gist is resources will ultimately become valuable assets.”

If Ecuador or other countries can’t cover their debts, their obligations to China may rise. A senior Chinese banker, who spoke only on the condition of anonymity for diplomatic reasons, said Beijing would most likely restructure some loans in places like Ecuador.

To do so, Chinese authorities want to extend the length of the loans instead of writing off part of the principal. That means countries will have to hand over their natural resources for additional years, limiting their governments’ abilities to borrow money and pursue other development opportunities.

China has significant leverage to make sure borrowers pay. As the dominant manufacturer for a long list of goods, Beijing can credibly threaten to cut off shipments to countries that do not repay their loans, the senior Chinese banker said.

With its economy stumbling, Ecuador asked China at the start of the year for an additional $7.5 billion in financing to fill the growing budget deficit and buy Chinese goods. Since then, the situation has only deteriorated. In recent weeks, thousands of protesters have poured into the streets of Quito and Guayaquil to challenge government policies and proposals, some of which Correa has recently withdrawn.

“China is becoming the new company store for developing oil-, gas- and mineral-producing countries,” said David Goldwyn, who was the state department’s special envoy for energy affairs during Barack Obama’s first term. “They are entitled to secure reliable sources of oil, but what we need to worry about is the way they are encouraging oil-producing countries to mortgage their long-term future through oil-backed loans.”
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