Mckinnon reviews three books on China in the paper:
- Deborah Brautigam, University Press, 2009 The Dragon’s Gift: The Real Story of China in Africa, Oxford: Oxford
- Vivien Foster, William Butterfield, Chuan Chen, Natalyia Pushak: Building Bridges: Growing Role as Infrastructure Financier for Sub-Saharan Africa. China’sWashington: The World Bank, PPIAF, 2009.
- Stephan Halper, The Beijing Consensus: How China’s Authoritarian Model Will Dominate the Twenty-First Century New York, Basic Books, 2010.
These three books complement each other in describing the truly astonishing growth of China’s aid, investment, and trade in Sub-Saharan Africa since 2000. For China, foreign aid, investment, and trade are not really distinct categories. As Deborah Brautigam emphasizes, these parts are bound together by intricate financial arrangements under China’s Export-Import Bank with other commercial arrangements orchestrated by the Ministry of Commerce, within which the Department of Foreign Aid is nested. Foster, Butterfield, Chen and Pushak are World Bank economists who bring additional data to bear on aid by China compared to Western sources. Stephan Halper focuses more on the political implications of the remarkable rise of China, and worries about the decline of the United States and its “Washington Consensus” as a model for developing countries.
Now China has this very interesting foreign aid model. First the organisation structure is different from OECD countries. In OECD you have these dedicated departments like USAID in US, OFID in UK etc. So you have a formal donor-recepient relationship where the donor imposes certain conditions etc.
In China, all this formal structure is absent:
Because China is still fairly poor by most per capita income measures, and because most of its “aid” projects are mutually beneficial commercially, it largely escapes the stigma of a donor-supplicant relationship. Each project is designed and financed to be potentially in the mutual economic interest of both China and the recipient countries, most of which are in Africa. But China now has aid projects throughout the developing world in Asia and Latin America. In July 2010, the Chinese and Argentine governments announced a gigantic $10-billion project to rebuild Argentina’s huge but dilapidated railway network while providing finance for new locomotives—no doubt Chinese made. That Argentina had defaulted on its old debt did not hinder the agreement, but gave China an entrée.
What is more interesting is the conditions for bilateral Chinese aid. Usually the recipient returns the aid via payback of principal + interest. In China, they have a quasi barter system and payback usually happen in commodities and natural resources.
Generally China avoids giving or lending cash up front to the recipient countries. Rather, most deals are quasi-barter. Chinese construction and engineering companies, employing a large phalanx of skilled Chinese workers and some local workers, receive funding directly from, say, the China Export-Import Bank. Then over several years the host country agrees to repay the bank in commodity terms—oil or, say, iron ore, whose production and marketing may be facilitated by the construction project itself. To increase leverage in assuring repayment, China may also provide follow-on maintenance crews for the railway, port, or power plant—as well as dangling the possibility of complementary projects in the future.
Because of China’s huge and growing industrial production at home, its need to import vast amounts of industrial raw materials, foodstuffs, and other primary commodities is obvious. However, several years ago when first learning about these quasi-barter deals, i.e., infrastructure for commodities, with developing countries, I was puzzled. China produces a wide variety of consumer manufactures that it exports on a large scale without needing to undertake complementary overseas investments. By extension, China could just buy the commodity inputs it needs in organized world commodity markets—which often provide very convenient forward covering facilities against price risk. Undoubtedly, China still purchases many imported inputs in conventional open markets. But, increasingly, it secures access to minerals and some agricultural products by negotiating complex overseas aid and investment programs in return. Why?
The answer is as exciting. Basically increase in Chinese aid is because Chinese savings are more than investments. This flow if it comes back will lead to appreciating pressure on Chinese currency and undermine China’s export driven model. Hence, the need for government to intervene:
The upshot is that China’s central government steps in to intermediate and control the country’s saving surplus in several different ways.
1. The accumulation of huge liquid official reserves of foreign exchange, currently
about $2.5 trillion, in the State Administration of Foreign exchange (SAFE).
2. The creation of sovereign wealth funds, like the China Investment Corporation
(CIC) which invests overseas in bonds, equities, or real estate.
3. Encouraging China’s large state-owned enterprises such as SINOPEC to invest
in, or partner with, foreign oil companies in exploration and production.
4. Quasi-barter aid programs (the central theme of this paper) in developing
countries which generate a return flow of industrial materials.
Each of these techniques generates claims on foreigners that are in “safe” government hands. That is, they won’t be suddenly liquidated if, say, there is suddenly a new scare that the RMB will be appreciated. This minimizes, but does not eliminate, the possibility of hot money inflows back into China that could destabilize the exchange rate and make monetary control more difficult.
We have a similar case of Singapore which also does the same thing:
Tiny Singapore is also an immature creditor whose own currency is not used for
international lending and whose government, like China’s, tightly controls overseas financial intermediation. Singapore’s net saving (current account) surpluses have been persistently the world’s largest at about 15 to 20 percent of its GNP. To prevent hot money flows, it essentially nationalizes the internal flow of saving by requiring all Singaporeans to deposit what had been as much as 30 percent of their personal incomes into the Singapore Provident Fund—a state-run defined-contribution pension scheme. Then, beyond financing internal investments within Singapore, the proceeds from the Provident Fund are lent to two giant sovereign wealth funds: the Government Overseas Investment Corporation (GIC), which invests in fairly liquid overseas assets, and Temasek, which is more of a risk taker in foreign equities and real estate.
Singapore has larger trade surplus as a % of GDP but does not get criticised as China. Japan has also followed similar policies in the past:
This “Singapore Solution” to international financial intermediation by an immature creditor country, while preserving monetary control, was described in McKinnon (2005, ch. 8). Singapore is too small for Americans and Europeans to complain about its disproportionately large trade (saving) surplus, and demand that the Singapore dollar be appreciated. China (and Japan before it) are not so lucky. Although China’s trade surpluses are proportionately much smaller than Singapore’s, their large absolute size draws the ire of American mercantilists in the form of “China bashing” for the RMB to be appreciated. Although the common theory that exchange rate appreciation will reduce a saving surplus of a creditor country is wrong (Qiao 2005, McKinnon 2010), the fear of appreciation still induces large hot money inflows into China despite the immunization of its overseas investments—as described by points 1 to 4 above.
Surplus-saving Japan is also an immature international creditor because the yen is not much used to denominate claims on foreigners. But, unlike China’s or Singapore’s, the Japanese government does not dominate the international intermediation of its saving surplus as much. How then is Japan’s saving (current account) surplus financed internationally?
Large Japanese corporations make heavy overseas direct investments in autos, steel, electronics, and so on. But, in addition, Japanese banks, insurance companies, and pension funds, have become big holders of liquid assets, at different terms to maturity, denominated in many foreign currencies such Australian, New Zealand, as well as U.S. dollars —which until fairly recently had much higher yields than yen assets.This part of the Japanese system for overseas investment is vulnerable to hot money flows. Over the last 20 years, carry trades out of low yield yen assets have been commonplace with a weakening yen. But they can suddenly reverse. The Japanese economy is then vulnerable to sudden runs from dollars (largely owned by private Japanese financial institutions) into yen that create damaging sharp appreciations in the “floating” yen/dollar exchange rate. Investment within Japan is inhibited while making it more difficult for the stagnant economy to escape from its zero-interest liquidity trap (McKinnon 2007).
Really really fascinating.
The authors then discusses how China is moving into African infrastructure space:
Chinese finance often goes to large-scale infrastructure projects with a particular focus on hydropower generation and railways. At least 35 African countries are engaging with China on infrastructure finance deals, with biggest recipients being Nigeria, Angola, Ethiopia, and Sudan. The finance is channeled primarily through the China Export-Import Bank on terms that are marginally concessional, though significantly less so than traditional official development assistance. A large share has gone to countries that are not beneficiaries of recent debt relief initiatives. ….Chinese financial commitments to African infrastructure projects rose from around US$.5 billion in 2001-03 to around US$1.5 billion in 2004-05, reached at least US$7 billion in 2006—China’s official “Year of Africa”—then trailed back US$4.5 billion in 2007.” (Foster et al, 2010, xi-xii).
Finally there is another very interesting aspect of China. Now, like other developed countries have certain conditions for giving aid. They have been called (read criticised) as Washington Consensus. Does China have its own Beijing consensus?
The Beijing Consensus is hard to write down as a precise set of rules because of its pragmatism involving “a commitment to innovation and constant experimentation” (Ramo 2004)—as per the old Chinese saying “crossing a river by feeling the stones”. It is also associated with China’s specific commercial interests in, say, investing for extracting minerals on favorable terms—which enhances sustainability on both sides. In contrast, the Washington agencies in principle are more selfless (at least since the end of the Cold War) in aiming to raise per capita incomes and welfare in the recipient countries—but run the risk that aid recipients become permanent supplicants.
Now most people criticise Washington consensus (WC) saying China and India have grown without following them. Even posterboys of WC like Korea, Taiwan etc did not follow WC if we look at them carefully (Dani Rodrik has said this in so many papers). McKinnon says the reverse is true:
20 years later, should the meteoric rise of socialist China—both in its own remarkable growth in living standards, and in the effectiveness of its foreign “aid” to developing countries, undermine our confidence in Williamson’s Washington Consensus?
Surprisingly, no. The Chinese economy itself has evolved step-by-step (feeling the stones) into one that can be reasonably described by Williamson’s 10 rules! Chinese gradualism avoided the “big bang” approach to liberal capitalism, with the financial breakdowns that were so disastrous for Russia and some smaller Eastern European economies in the early 1990s, while retaining financial control in a model textbook sense (McKinnon 1993). So let us look again at Williamson’s 10 rules to see how well they fit China today in comparison to the United States.
He then shows how China’s reforms closely follow WC! Waiting for Rodrik to write a paper contradicting the claims.
But what a paper. So many insights on China…