The Research Group on Economy-Security Linkages #4
"Research Reports" are compiled by participants in research groups set up at the Japan Institute of International Affairs, and are designed to disseminate, in a timely fashion, the content of presentations made at research group meetings or analyses of current affairs. The "Research Reports" represent their authors' views. In addition to these "Research Reports", individual research groups will publish "Research Bulletins" covering the full range of the group's research themes.
Introduction - The Challenges of China's Rapidly Increasing Economic Cooperation
China's economic growth has been remarkable in recent years, and its expanding political and economic influence has become a global issue. In particular, China's rapidly increasing external economic cooperation (aid and investment) with developing countries is having significant impacts on their economic development, politics and society. The Belt and Road Initiative (BRI) launched by President Xi Jinping in 2013 and anounced in 2017 as an official policy of the Chinese government have had significant economic impacts on Southeast and South Asian countries.
On the other hand, issues arising from related projects and increasing debt burdens have been discussed internationally as a "debt trap". There have been several reports in recent years questioning the risk of borrowing large amounts of money from China for projects related to China's BRI and facing future repayment difficulties1. In the United States, there has been growing criticism of China's rapid expansion of economic cooperation as "predatory2".
As for individual projects led by China, there have been a number of cases in which projects had to be reconsidered in the face of opposition from residents because of land expropriation or environmental problems. One of the problems with China's economic cooperation is that most of it is provided in the form of loans tied to the participation of Chinese companies. In addition, some of China's loans and projects have been reconsidered in response to political changes in recipient countries such as Myanmar, Malaysia, and Sri Lanka.
How does China respond to the challenges it faces in host countries as it expands its aid and investment? As mentioned later, there may be signs of changes in China's aid and investment policies and attitudes that constitute a transformation of the "norm" of economic cooperation. Let us consider the possibilities and factors behind these changes.
1. The "Norm"of International Assistance and China's Stance
The international development assistance community, led by the Organisation for Economic Co-operation and Development/Development Assistance Committee (OECD/DAC), has long pursued common aid principles among donors. These include disclosure of information on aid policies and practices, standardization and observance of common rules and guidelines, democratization of developing countries, and eradication of corruption. However, China's aid has been conducted on the principle of "noninterference in internal affairs" and thus has been differentiated from the above-mentioned international common practices among traditional donors. As aid coordination has progressed, China has not participated in sector meetings hosted by the receipient countries in which major donors take part, but instead has emphasized bilateral negotiations with partner governments. In addition, China's absence in the framework of aid coordination aimed at standardizing and streamlining aid rules initiated by the DAC and the World Bank has undermined their pressure on developing countries not only to democratize their political systems but also to improve their development policies3.
Therefore, international pressure is mounting on China to disclose information, standardize rules, and comply with them at the minimum. From a practical point of view, issues pertaining to formulating appropriate financial plans for projects, making decisions based on economic rationality, ensuring transparency in the decision-making process, eliminating corruption, and implementing appropriate environmental assessments have been pointed out. As a result, the need for "high-quality" infrastructure development has been advocated internationally with regard to China's projects in developing countries in recent years. At the G20 meeting held in June 2020, six principles including environmental and social considerations and infrastructure governance were approved as the "G20 Principles for Quality Infrastructure Investment" among the participating countries.
2. Signs of a Change in China's Economic Cooperation "Norm"?
Looking back on the history of aid, some argue that China's current approach to aid is similar to that of Japan during the 1960s and 1970s.
For example, there is in its approach an emphasis on economic interests such as securing resources and expanding markets, an emphasis on the pursuit of national interests through bilateral assistance rather than through multilateral frameworks, "noninterference" in the political systems and domestic affars of the recipient countries, and a kind of pragmatism. The economic cooperation "trinity" of aid, trade and investment was also Japan's approach to economic cooperation advocated by the Ministry of International Trade and Industry of Japan in the 1970s. Since the 1990s, however, Japan's aid policy has become harmonized with the aid stance of traditional donors in Europe and the United States in terms of its aid philosophy (a decline in the pursuit of economic interests), its emphasis on education and health as priority areas, its untying of loans, and its support for democratization, and has also been in line with international aid coordination with these donors.
On the other hand, as an extension of the aforementioned argument that Japan's aid policies have changed with the times, it could be hypothesized that, as China "matures" as an aid donor, it will more seriously address issues such as anti-corruption and environmental and social considerations, and place importance on cooperation with the international aid community. Indeed, there are signs that the "norm" of China's economic cooperation may be changing.
One sign of this is that the Chinese government and state-owned enterprises engaged in economic cooperation projects are becoming more aware of the negative environmental impacts and restrictions on the relocation of residents associated with projects in partner countries4. Projects in partner countries involving the construction of infrastructure and the relocation of residents cannot be carried out with a unilateral decision by the government (unlike in China), and the projects sometimes fail due to opposition from residents and the public. For example, a railway construction project between Jakarta and Bandung in Indonesia was taken over by a Chinese company after beating out competition from Japan, but it has made little progress due to the relocation issue.
The second sign is how China is dealing with the debt problem. In 2000, the international aid community, led by the OECD/DAC donors of Europe, the United States and Japan, began to write off debts owed to heavily indebted poor countries (HIPCs), and subsequently began to provide assistance mainly in the form of grant aid. However, since 2000, China has provided large loans to many developing countries whose debts were thus written off. In this sense, China pursued its economic interests by free-riding into the international framework of debt relief for HIPCs. While Chinese money has been a useful source of funds for these developing countries, there are increasing cases in which debt has rapidly expanded, making it difficult to repay loans for large-scale projects supported by China. In addition, there are cases in Myanmar, Pakistan, and Sierra Leone, in addition to those in Malaysia and Sri Lanka, in which large infrastructure projects were reconsidered or scaled back by a new government because of concerns about the risk of future repayments for projects funded by huge loans from China. .
This is also a serious challenge for the Chinese government and state-owned enterprises, which have been forced to write off some of their loans to African countries having trouble paying their debt. The first debt reduction of interest-free loans by the Chinese government is said to have occurred in 2003, and such cases have expanded since then. In 2017, at the 7th China-Africa Cooperation Forum (FOCAC), China agreed to cancel government loans (interest-free loans from the Ministry of Commerce of China, etc.) to many African countries (except for loans from government-affiliated financial institutions such as the China Export-Import Bank and the China Development Bank).
Furthermore, in response to the spread of the Covid-19 in developing countries, the Chinese government announced in June 2020 that it would grant 77 developing countries and regions a moratorium on debt repayment and waive the repayment of interest-free loans from the Chinese government due at the end of 20205. At the November 2020 meeting of the 5th Plenary Session of the 19th Central Committee of the Communist Party of China, the 14th Five-Year Plan adopted a policy of "strengthening the lending structure based on international practices and debt sustainability principles".
A third sign can be seen in the operational practices of the Asian Infrastructure Investment Bank (AIIB). In 2015, China established the AIIB as an international framework led by China to provide infrastructure construction funds in Asia. Some argue that the establishment of the AIIB was the creation of a China-led multilateral framework in addtion to a framework of bilateral economic cooperation to realize China's economic interests, and the lack of transparency in the governance of the AIIB was questioned at the beginning. However, since the start of its services, the AIIB's loan projects have been mainly cofinanced with the World Bank and the Asian Development Bank (ADB). The AIIB shares similar environmental and social impact guidelines as well as procurement guidelines with these multilateral development banks.
3. Factors behind the Change in the "Norm"
In short, China's economic cooperation policy has recently tended to emphasize international standards and environmental and social considerations. If so, what are the factors driving this change in China's economic cooperation policy?
The first possible factor is growing international pressure and criticism. The criticism against China's economic cooperation policies and projects may have led China to the conclusion that its current approaches are not benefitting its position in the international community. In that sense, it can be said that international pressure and voices from international civil society, might have had some influence.
However, a more persuasive explanation is that, in the face of the reality that the conventional approach of focusing on its own interests does not work, Chinese policy has inevitably changed due to the practical necessity of implementing projects while pursuing the interests of China and Chinese companies to the extent feasible.
Of course, there are varying perspectives, stances and influences among the various entities involved in policy making in China (Communist Party leaders, the Ministry of Commerce, the Ministry of Finance, the People's Bank of China, etc.). The conclusion that there are signs of transformation in the "norm" arising out of practical necessity is not applicable to China's overall foreign policy. The practical change of "norm" in economic cooperation relates to the policies and attitudes of the ministries and implementing agencies involved in economic cooperation within China, and the strategic and diplomatic approaches of Chinese government leaders and the upper levels of the Communist Party are on separate agendas.
What impact the rapid economic rise of China is having on the existing international economic order, and how China intends to respond to the international order and rules that have been formed under the leadership of the traditional donors of Europe and the United States, are major issues that are currently being addressed and will require further research and study.