China’s Loan Diplomacy | Heads I win, tails you lose

Apart from economic and financial domination, Beijing also seeks political domination of the nations to which it extends loans

Most of South Asia, barring India, is facing a deep macroeconomic crisis. Everything is going wrong in these countries: growth rates have slipped, inflation and deficits have surged, and there is a political turmoil. While the common cause in each of the countries is mismanaged economic policy, there is another common factor that has led to the crisis: they are all victims of China’s lending policy.

Beijing has been lending to select South Asian and African economies for a while now. This lending is driven by two purposes.

First, to counter the United States’ hegemony over global finance. Ever since the Chinese economy grew to become a leading global economy, Beijing is seeking a leadership position in global finance. This, however, is easier said than done because Washington not just controls most of the global financial institutions such as the World Bank and the International Monetary Fund (IMF), but the US Dollar dominates most global transactions.

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Beijing is trying to work around this problem by providing loans to economies that need financing but do not want to reach out to the US and the US-supported institutions. The Chinese also started working on a digital currency to counter the USD. Most of the South Asian and African economies which take Chinese loans have been managing their economies by getting loans from US-run agencies. The Chinese loans are more attractive as they do not come with conditions of improving macroeconomic policy. Instead, the Chinese seek a critical geographical location in the respective countries to build their military bases.

The second purpose follows the first. Apart from economic and financial domination, Beijing also seeks political domination. By providing loans and building bases, the Chinese are eventually exerting their political domination too. China’s funding frees the leaders of these recipient economies from following macroeconomic prudence, and they keep spending. There is continuous reliance on Chinese funds and in that process keep ceding political control to China. Slowly, but surely, these countries fall further into Beijing’s debt trap.

In economics and in life, nothing is forever. Eventually good times lead to bad times, and vice-versa. The same happened with China’s lending as well. The pandemic shocked the world economy, disturbing all these easy avenues of money. The South Asian economies were impacted more severely as they never really invested in creating economic opportunities as Chinese money was easily available. Economies such as Sri Lanka and Nepal also relied on tourism and remittances which also dried up. This implied that the South Asian economies needed more funds from their well-wisher China. Did they get the help from Beijing?

No. Rather the opposite took place. China stopped lending as its economy itself faced a crisis due to the pandemic and its zero Covid policy. Just like a typical neighbourhood moneylender, Beijing now had all these economies under its noose and demanded repayment.

The leaders of these recipient economies had to again go back to institutions such as the IMF they were trying to avoid all these years. As explained above, these economies did not undertake any economic reform, and hoped that the Chinese would keep giving them the money. As the Chinese money stopped, these leaders had to agree to even tougher macroeconomic conditions. The IMF loans usually come with riders such as lowering deficits and inflation, which in turn means lesser government spending. In a declining economy with no other driver working, the government spending was all they had and that is how they were buying time. Now with even government spending declining, the people are not getting the government benefits leading to public protests. It has become a highly vicious cycle for these economies.

China’s loan diplomacy has had an impact on an economy it has not lent to, which is India. China is not part of South Asia, but has gained tremendous control over the region. India, until recently, had an overarching influence over the region given the size of its economy, but China has pressed its way to replace India. Today Beijing yields undue influence over these countries and at times even influences these smaller South Asian nations against New Delhi. However, as the pandemic struck and Chinese funding stopped, these nations have turned to India. Barring Pakistan, India has lent a helping hand to these countries in their time of need.

When it comes to China’s loan diplomacy with these nations the dice is always loaded in Beijing’s favour. The economic realities post-Covid-19 has made these nations realise this reality, but it is too late. In William Shakespeare’s Merchants of Venice, Portia saved Antonio from Shylock. Who will be the Portia for these economies?

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH