Strange Brew: China International Inc. and the Third World

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September 23 2009. By David Caploe PhD, Chief Political Economist. Yesterday, we talked about some of the more positive aspects of Chinese political control of the banks, in sad contrast to the US, where, it seems, the banks have more control of government and its policies towards them than vice-versa.

September 23 2009. By David Caploe PhD, Chief Political Economist. Yesterday, we talked about some of the more positive aspects of Chinese political control of the banks, in sad contrast to the US, where, it seems, the banks have more control of government and its policies towards them than vice-versa.

At the same time, it would be irresponsible to ignore negative aspects of such a structure, a few of which were noted yesterday, but others also need attention, as this disturbing article, the third in a New York Times series examining China’s emergence as a global superpower, Uneasy Engagement, indicates.

As discussed yesterday, China’s huge and essentially legitimate trade surplus with America – petty complaints about tires and “artificially” undervalued currency aside – has earned it an immense supply of dollars with which they are buying up both real assets all over the world and paper assets in the US.

From Pakistan to Angola to Kyrgyzstan, China is using its enormous pool of foreign currency savings to cement diplomatic alliances, secure access to natural resources and drum up business for its flagship companies. Foreign aid – typically cut-rate loans, sometimes bundled with more commercial lines of credit – is central to this effort.

In general, this strategy has met with approval from Third World governments – democratic and less so – who are happy to find themselves courted by the Chinese government and companies in basically uncritical fashion.


Leaders of developing nations have embraced China’s sales pitch of easy credit, without Western-style demands for political or economic reform, for a host of unmet needs.

The results can be clearly seen in new roads, power plants, and telecommunications networks across the African continent – more than 200 projects since 2001, many financed with preferential loans from the Chinese government’s Exim Bank.

Increasingly, though, experts argue that China’s aid comes with a major catch: It must be used to buy goods or services from companies, many of them state-controlled, that Chinese officials select themselves.

Competitive bidding by the borrowing nation is discouraged, and China pulls a veil over vital data like project costs, loan terms and repayment conditions. Even the dollar amount of loans offered as foreign aid is treated as a state secret.

Now before Americans and other Westerners get too high-and-mighty about these sorts of practices, they should remember China is simply travelling a path blazed for decades before by US / European / and Japanese companies.


Until recently, wealthy nations could hardly hold themselves out as an example of how to run foreign aid, either. Many projects turned out to be tainted by corruption or geared to enrich the donor nation’s contractors, not the impoverished borrowers. But over the past 10 or 15 years, some 30 developed nations under the umbrella of the Organization of Economic Cooperation and Development (O.E.C.D.) have made a concerted effort to clean up their assistance programs.

They demanded that foreign money be awarded and spent transparently, using competitive bidding and outlawing bribery. Increasingly, they also are also pushing to give borrowers more choice among suppliers and contractors, rather than insisting that funds be recycled back to the donor nation’s companies.

China, which is not a member of the O.E.C.D., is operating under rules that the West has largely abandoned. It mixes aid and business in secret government-to-government agreements. It requires that foreign aid contracts be awarded to Chinese contractors it picks through a closed-door bidding process in Beijing. Its attempts to prevent corrupt practices by its companies overseas appear weak.

Some developing nations insist on independently comparing prices before accepting China’s largesse. Others do not bother. “Very often they are getting something they wouldn’t be able to get without China’s financing,” said Chris Alden, a specialist on China-African relations with the London School of Economics and Political Science. “They presume that the Chinese are going to give value for money” …

Deborah Brautigam, the author of a coming book on China’s economic ties with Africa titled “The Dragon’s Gift,” says Beijing is hesitant to hobble its companies with Western-style restraints before they have become world-class competitors.

“The Chinese are kind of starting out where everyone else was years ago, and they see themselves as being at a disadvantage,” Ms. Brautigam said. “The Chinese don’t particularly want a big scandal. That doesn’t further their interests. They just want their companies to get business.”

The interesting thing here is the extent to which dubious Chinese practices are being contested by Third World governments and semi-public actors that themselves have struggled with corruption, in this case Philippines and Namibia, the former South-West Africa.


“China is using this financing to buy the loyalty of the political elite,” said Harry Roque, a University of the Philippines law professor who is challenging the legality of Chinese-financed projects in the Philippines. “It is a very effective tool of soft diplomacy. But it is bad for the citizens who have to repay these loans for graft-ridden contracts” ..

In 2007, the Philippines was forced to cancel a $460 million contract with [a] Beijing scanner company, Nuctech Company Ltd., to set up satellite-based classroom instruction after critics protested the company had no expertise in education.

As someone involved in on-line education myself, I can sort of see where lack of experience in education might be a problem in setting up satellite-based classroom instruction.


It also canceled a $329 million contract awarded to ZTE Corporation, a state-controlled Chinese communications company, after allegations of enormous kickbacks. ZTE denied bribing anyone, but the controversy has lingered. Last month an antigraft panel recommended filing criminal charges against two Philippines officials in connection with the contract.

A Manila-based nonprofit group, the Center for International Law, has mounted a legal challenge against still another Chinese contract in the Philippines, to build a $500 million railroad. Professor Roque, who leads the center, contends that the price of China’s state-owned contractor “was simply plucked out of the sky.”

Now, this is coming from the Philippines, which has had its own profound struggles with official corruption. So if they’re upset, that might not speak too well for how at least some in the Third World see certain Chinese practices.

Part of the problem, as many in China know but rarely say, is the well-connected position of those involved.


China has no specific law against bribing foreign officials. And the government seems none too eager to investigate or punish companies it selects if they turn out to have engaged in shady practices overseas.

Indeed, it has an added incentive to look the other way because of the state’s ties to many foreign aid contractors – connections that sometimes extend to families of the Communist Party elite.

In January, for example, the World Bank barred four state-controlled Chinese companies from competing for its work after an investigation showed that they tried to rig bids for bank projects in the Philippines.

But two of those companies remain on the Chinese Commerce Ministry’s list of approved foreign aid contractors, according to its Web site.

Which is where the Namibia connection comes into play – unfortunately.


The Namibia controversy is especially delicate because until late last year, the contractor’s president was Mr. Hu’s son, Hu Haifeng. The younger Mr. Hu is now Communist Party secretary of an umbrella company that includes Nuctech and dozens of other companies. As soon as allegations against the company surfaced this summer, China’s censors swung into action, blocking all mention of the scandal in the Chinese news media and on the Internet.

“This is a signal to everyone to back off,” said Russell Leigh Moses, an analyst of Chinese politics in Beijing. “Everyone goes into default mode, because once you get the ball rolling, no one knows where it will stop. No one wants their rice bowl broken.”

Nuctech has denied any wrongdoing in court papers filed here in Windhoek. A spokeswoman said the company had no comment because the matter was unresolved. China’s Commerce Ministry and other government agencies did not respond to repeated requests for comment.

The Times article goes into great detail about the Namibia situation, which we need not re-hash here.

The positive take-away is how fearlessly both private and official Namibians have pursued a – potentially – self-harming, at least in the short run, situation, which can only speak highly of developing public ethics in Africa and other parts of the Third World.

Less happily, one wonders if, by following their Western predecessors in handling the Third World, the Chinese elite – which has dealt with its domestic economic situation more clearly and decisively than at least the US – may soon be equally tempted to make the same mistakes at home.

For everyone’s sake, let’s hope China blazes its own unique political economic path, both at home and abroad, that can avoid the problematic dynamics that have made the current American, and hence global, situation so seemingly intractable and difficult to solve.

David Caploe PhD
Chief Political Economist,
Minerva School / ACALAHA


About David Caploe PRO INVESTOR

Honors AB in Social Theory from Harvard and a PhD in International Political Economy from Princeton.