COVID-19 has devastated the developing world. The world’s poorest countries account for more than three quarters of global COVID-19 cases. Currencies are plummeting. Debt is projected to soar — and debt payments to stall. To offer something of a cushion, G-20 members pledged in April to suspend interest collection for loans to 77 of the world’s neediest countries.
China professed to adopt the pledge. But Beijing put a caveat on its commitment. Beijing exempted preferential loans issued by the China Export Import (EXIM Bank), declaring that those would be adjusted only through bilateral negotiations with recipient countries. Opaque even under normal conditions, EXIM Bank loans are China’s major form of lending to developing countries. Beijing has remained mute on what, if any, adjustments it has made to these loans in response to the COVID crisis, for which beneficiaries, or on what terms.
China’s subtle circumvention of the G-20 pledge exemplifies Beijing’s neocolonial strategy in the developing world. Beijing’s legerdemain also highlights its asymmetric strategy vis-a-vis the developed world. Beijing does not just exploit developing nations to enrich itself and gain leverage over the developed world. Beijing also marshals the dependence of developing countries to subvert the international institutions and resources that might otherwise protect against its imperialism.
China, it is important to remember, has over $16 billion outstanding in loans from the World Bank, making it one of the bank’s major borrowers. Intended for developing countries, those loans typically come at an interest rate of just over one percent. Meanwhile, the “preferential” EXIM Bank loans that China offers the developing world tend to feature interest rates of four to six percent. As Benn Steil of the Council on Foreign Relations puts it, “there is very little logic for the world’s largest lender to be borrowing on very concessionary terms, for their own projects, from the World Bank. If you accept that money is fungible, for all intents and purposes China is borrowing cheap from the developed world and turning around and loaning that money at higher interest rates to the developing world.”
EXIM Bank loans undergird Beijing’s international industrial program. They have financed more than 1,800 global infrastructure projects, accruing a balance of over $141 billion. EXIM Bank financing in Africa alone exceeds $84 billion in a total of at least 46 countries. Steil explains that Beijing’s Belt and Road Initiative operates entirely through the EXIM Bank. The Belt and Road might itself be conceived of as a bumper sticker for a program that the EXIM Bank has been implementing for decades.
EXIM-backed projects serve Beijing’s industrial program at the literal expense of target countries. EXIM Bank usually requires that these projects be undertaken — and often, upon completion, operated — by Chinese companies, most of them state-owned. Of the dozens of documented EXIM-financed port and airfield projects in Africa, all are undertaken by state-owned enterprises (SOEs). Chinese government policy mandates that EXIM Bank-financed infrastructure projects import materials, technologies, and services from China totaling at least 50 percent of loan value. These policy documents note explicitly that EXIM Bank preferential loans are used to support “economically productive projects that drive the export of China’s electromechanical products and complete sets of equipment.”
Well before COVID-19, China’s “preferential” lending threatened to cripple developing economies. Between 2006 and 2017, Kenya accrued almost $10 billion in infrastructure loans from China. Some 87 percent of Nairobi’s bilateral debt servicing payments go to Beijing. Much of that debt stems from the EXIM Bank-financed, $4.7 billion Mombasa-Nairobi-Navaisha Standard Gauge Railway (SGR), built and operated by Chinese SOEs. Completed in 2019, the SGR is Kenya’s most expensive infrastructure project since its independence. The railway cost about three times the international average per kilometer. And the SGR has lost money since its launch. Its profitability hinged on Beijing’s plans to build an industrial park along the route; Beijing has since suspended those plans. Nairobi was counting on revenue from the railway to repay Beijing.
Now, as COVID-19 continues to wreak havoc, Kenya’s economy is crumbling. Remittances have plummeted. Agricultural exports have been halved. Tourism has collapsed. (That is not to mention locust invasions and historic floods.) And no public information indicates that Beijing intends to offer loan relief.
The conventional term for China’s approach is “debt trap diplomacy.” “Debt-propelled neo-colonialism” might be more apt. EXIM Bank loans exist within a larger apparatus that builds complete, Chinese-controlled value chains on top of the developing world’s resources. The EXIM Bank-financed Benguela rail line — operating on Chinese rail standards and built with Chinese equipment — links Chinese-owned copper-cobalt mines as well as refining and processing plants in Zambia and the DRC to a Chinese-built mineral terminal at Angola’s Lobito Port. With these investments, Beijing generates demand for its industry. It also secures access to valuable resources.
And Beijing uses this approach to cement influence over the global system.
Some of Beijing’s means of influence are physical. Take cobalt, a necessary input for everything from new energy vehicle batteries to aeroengine superalloys to advanced medical equipment. The DRC produces over 60 percent of the world’s cobalt. China invests in more than half of the DRC’s cobalt-endowed mines and — thanks to EXIM-financed infrastructure projects — connects those to Chinese transportation infrastructures, processing facilities, and trade hubs. These investments allow Beijing to import more than 85 percent of the DRC’s cobalt ore and concentrate exports, and to produce more than 60 percent of the world’s refined cobalt.
China has already shown its willingness to use equivalent mineral dominance for coercive ends. In 2010, Beijing cut off rare earth exports to Japan in retaliation over territorial disputes. More systemically, control over raw material inputs grants Chinese players an advantage in their industrial application: How can Ford compete with Nio over new-energy vehicles if it relies on cobalt controlled by Beijing? How does the U.S. implement the Green New Deal if Beijing governs supplies of the raw inputs necessary for renewable energy technologies?
Beijing also uses the developing world to generate virtual forms of influence. Countries dependent on China comprise a formidable voting bloc in democratic international institutions. In a July 2020 UN Human Rights Council vote, 52 countries, not including China, supported Beijing’s new national security law for Hong Kong. Twenty-seven opposed it. The supporters were predominantly developing countries in Africa, the Middle East, and Asia; 43 are signatories of Beijing’s Belt and Road Initiative (BRI).