The hegemonic power of China’s loans

Parsa Keshavarz Alamdari, Columnist

With its population reaching 1.4 billion in 2020, China is the most populous country in the world. It also has the second-largest economy in the world. These are all valid reasons for the West to fear its growing influence in world affairs. However, there is something else that worries them: China is giving out more loans to low-income countries than ever.

This is something we really need to talk about. The economies of low-income countries need cash flow to flourish, cash that they don’t have right now due to a long history of subjugation, colonialism and racism towards the Global South. Now China wants to lend them money. However, China’s intentions aren’t exactly innocent. Nothing in international relations is truly altruistic.

Many have argued that China is becoming a neo-colonial country. They say that China gives out these loans on assumption that they won’t be paid and China will use that as leverage against those countries. While this argument is broad and might not be true, China is ultimately abusing these countries for its own gain. 

“Debt trap policy” is a term coined to explain the phenomena. A famous example of this is the port of Hambantota in Sri Lanka. It was financed by a Chinese bank and constructed by a Chinese firm.

The most popular story about this port claims that China seized the port because Sri Lanka was unable to pay back its debt. The reality begs to differ. In fact, Sri Lanka leased the port to CMPort, a Chinese company, to use the profits to pay off its debt. Meanwhile, Sri Lanka retains some control over the port.

China is a generous lender. They finance projects which the World Bank and other Western states refused to. Many grand infrastructure projects in low-income countries wouldn’t be possible without Chinese money—and that’s arguably a good thing.

It is also important to remember that China isn’t the only country that lends generously to low-income countries. The United States government and several other high-income countries, along with global institutions such as the World Bank or the International Monetary Fund (IMF) have been doing that for decades.

While these loans come with low to no interest rates, they usually come with certain conditions such as government stability, implementation of laws supporting human rights and economic feasibility of the project. Chinese loans come with none of that, but usually with high interest.

However, low-income countries usually are more likely to be unable to pay off their debts. And many lenders are aware of that fact. Therefore, sometimes, they include arbitrary terms to favor them in the future.

Nowadays, most of this financing comes from its belt and road initiative (BRI)—a multi-million-dollar international strategy to invest in over 100 countries. It is the centerpiece of President Xi Jinping’s foreign policy.

While China’s massive investment in many low-income countries has provided great benefits to those countries, the biggest criticism of China’s investment policy is its lack of transparency. China is notoriously secretive, so it is very hard to know what’s happening in those projects.

What we know is that there have been some reports of human rights violations in projects financed by China. It has also been accused of bribing foreign officials.

Meanwhile, China uses its financial leverage to control other countries’ foreign policy. It has been claimed that African countries with a diplomatic relationship with Taiwan receive less funding for their projects. Meanwhile, if those countries vote in line with China in the United Nations, their projects are more likely to get financed.

China is a new global hegemonic power. It seeks attention and allies. And so far it has managed to secure those using its soft power via its generous loan policy. China now seeks to do what the US and the Soviet Union did during the cold war: use money and technology to make new allies.

However, China is also looking for something even more valuable. Something that our modern way of life strictly relies on: rare earth metals (REEs). These are elements that are crucial in making computers and cellphones.

China holds a worldwide monopoly on rare earth metals. As of 2019, the US imported 80 percent of its rare earth metals from China. To keep its monopoly, China is looking for more, mainly in Africa and Latin America.

The recent expansion of China’s economic influence should come as no surprise. China has a lot of money to give. While many institutions such as the World Bank or International Monetary Fund define many criteria or requirements for loan-receiving countries, China’s loans seem like free money.

And many countries are more than willing to take it. In 2018, more African leaders attended President Xi’s China-Africa forum than the UN general assembly, which was happening at the same time.

These loans stimulate their economies to grow, create new jobs and become more significant on the world stage. It seems like a win-win situation.

The US and other Western countries are no saints. They keep doing this all over the world. France still has troops in sovereign Western African states. IMF and the World Bank are also accused of keeping low-income countries in debt. We should be talking about that sort of stuff as well.

However, the fact that China uses its loan money as a political tool is something that we need to pay close attention to. China’s more-than-unsatisfying track record in transparency and human rights is why we need to keep a close eye on its expanding influence.