The great lending game: IMF vs China

Lending is at the forefront of the emerging game of power politics between the West and China that looks set to define the 21st century.

Beijing began offering huge loans to countries in the developing world in the early 2000s, and since then “suspicions have swirled that these loans compete with the International Monetary Fund, offering comparable amounts of money in exchange for very different promises”, said Boston University’s Global Development Policy Center.

The IMF’s approach has proved “deeply unpopular” over recent years, said the Financial Times (FT), but now there is growing concern at Beijing’s opaque lending practices and accusations it is pursuing a deliberate policy of entrapping emerging countries in a vicious debt-cycle for strategic leverage.

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What conditions do IMF loans carry?

Founded as a central pillar of the post-war “Washington consensus”, the US-based International Monetary Fund (IMF) has functioned as the primary lender of last resort for nation states around the world for more than 70 years.

Yet since the collapse of the Bretton Woods system in the 1970s the organisation has been synonymous with a form of neoliberal free-market “shock therapy”. As part of its strict “conditionality” requirements, countries must agree to bailout terms that include open markets, scrapping government subsidies, deregulating key sectors, privatisation and debt management.

“The strings attached to an IMF loan, which officially go by such deceptively innocuous-sounding names as ‘conditionalities’ and ‘structural adjustment programmes’, have in the past created social chaos across the globe, all the while making claims that it develops the economy of whatever host country it attaches itself to,” said The Business Standard.

“For years the IMF prevented low-income countries from taking up non-concessional, large-size commercial loans,” argued Good Governance Africa. “As other Western lenders often rely on the international financial organisation’s assessment of countries’ macroeconomic policies and readiness for reforms,” added the non-profit, developing countries especially are “increasingly looking elsewhere for finance”.

How does this differ from Chinese loans?

Over the past two decades China has sought to grow its economic influence around the world by offering specific long-term loans for infrastructure projects, predominantly in emerging countries in Africa, South East Asia and South America.

Between 2000 and 2016, for example, China delivered an estimated $125bn in loans to African countries, according to the China-Africa Research Initiative at the Johns Hopkins School of Advanced International Studies. This process has been turbocharged since 2013 through Beijing’s flagship $838bn Belt and Road Initiative, “a programme that made it the world’s biggest financier of public works, eclipsing the World Bank”, said the FT.

In recent years, China, through its state-controlled agencies and policy banks, has changed strategy. It has “shelled out tens of billions in opaque ‘emergency loans’ for at-risk nations, indicating a shift to providing short-term emergency lending rather than longer-term infrastructure loans”, said Fortune.

“Critics of the IMF might cheer China’s lending as a source of ‘policy space’ for governments to choose their own development strategy,” said BU’s Global Development Policy Center, but “whatever their normative interpretation, most observers agree on the basic logic at play: Chinese loans present a new option for countries that would rather not go to the IMF”.

‘Debt-trap diplomacy’

There is growing concern among Western policymakers that this is part of a deliberate “‘debt-trap’ policy, trying to ensnare low and middle income countries in dependency”, said James Sundquist in Development and Cooperation.

So-called “debt-trap diplomacy” was first coined by Indian academic Brahma Chellaney in 2017 to describe what he called China’s predatory lending practices. Through these the country “exerts bilateral influence by bankrupting partner nations with unsustainable debt and then demanding steep concessions as part of the debt relief – or so the thinking goes”, reported The Diplomat.

“In retrospect, China’s designs might seem obvious,” Chellaney wrote in 2017. “But the decision by many developing countries to accept Chinese loans was, in many ways, understandable. Unable to secure financing from Neglected by “institutional investors”, they welcomed Chinese overtures. “It became clear only later that China’s real objectives were commercial penetration and strategic leverage; by then, it was too late, and countries were trapped in a vicious cycle.”

‘Opaque and secretive’ lending practices

The opaque and secretive terms of lending from Beijing is also causing concern at a time when “pressure is rising on China to take a more active role in helping strained economies ease their debt crises”, reported Asia Financial.

“Unlike the IMF, which announces the details of its credit lines, debt relief and restructuring programmes to debtor countries, China operates largely in secret,” said the FT.

“As global interest rates rise and concern about developing world debt risk swirls, ‘sustainability’ and ‘transparency’ have become buzzwords at organisations like the IMF and World Bank,” reported South China Morning Post, putting Western financial institutions on a collision course with China.