Development Dispatch: China-US rivalry plays out in development finance

Great power rivalry is back, and with it economic diplomacy is coming to the fore as the arena of choice for pitched battles between the US and China.

Trade was the first area in which the rising power and the faltering powerhouse came to a confrontation. Diplomacy is, admittedly, perhaps too refined a term for an exchange of restrictive trade policies formulated with about as much forethought as a schoolyard brawl. On a recent trip to China, both Chinese and American companies expressed exasperation with their governments for pushing ahead with tariffs that are detrimental to both sides.  

But if the trade war can be characterised by mutual petulance, development finance presents more nuanced opportunities for one-upmanship. A rival race to place capital in challenging markets presents opportunities for foreign investors.  

As I noted in my previous column, the US is poised to create a new development finance bank with a $60bn lending cap. That is now even closer to becoming a reality. The Better Utilization of Investments Leading to Development (Build) Act passed in the Senate on 3 October. It now only needs a Senate vote and presidential seal of approval to become law, and the White House has already pledged its support.

Updating the US approach to development finance is a welcome and necessary step. The new US development bank will have double the firepower of Opic, its predecessor, as well as the ability to take equity stakes in projects.

Mostly, however, US policymakers – particularly those on the right of the spectrum – are interested in countering China.

Thinking a single institution will do the trick is misguided. Pakistan alone has attracted more than $60bn in funding for China-led Belt and Road Initiative (BRI) infrastructure projects. Conservative estimates put the price tag on BRI in the range of $1000bn, and this is by no means a comprehensive tally of all China-led development projects globally.

As researchers at CSIS have noted: “Participation in the BRI is not a prerequisite for doing related business with China, nor is participation a guarantee of more business.”

While private companies play a role, the majority of this money is being leveraged by China’s vast quasi-state machinery of banks, overseas financing institutions and contractors. State control may lead to repression at home, but on projects abroad it means all players are pulling in the same direction. Democracies cannot boast of the same singularity of purpose, for better or worse.

China’s global economic diplomacy campaign is not going smoothly, however. Countries across Asia have turned against Chinese-financed projects. Sri Lanka, Malaysia, Pakistan and the Philippines have all turned sour on BRI projects, citing huge financial burdens and poor development outcomes. Malaysia has cancelled several projects. Pakistan’s government says it will renegotiate its terms.

In April, IMF president Christine Lagarde warned that much-needed infrastructure financing through BRI “can also lead to a problematic increase in debt... and creating balance of payments challenges”.

Those who accuse China of purposely signing up developing countries to predatory lending agreements on purpose are probably going too far. While there is no doubt China is making a global power play, structuring projects to fail seems a roundabout way to gain influence. It also doesn’t generate any long-term good will, and soft power is something China’s leadership is attuned to and spends a lot of money on (even if it isn’t particularly good at it).

It is ironic that even as the US turns its back on soft power under the Trump administration – with Build a notable exception – China is still failing to replicate US success.

China doesn’t have global consumer brands such as Coca-Cola or Apple, and Chinese consumers fetishise Western products as status symbols. And while developing countries are happy to take China’s money in droves, it doesn’t seem to have bought them solid allies.

For investors, while this rivalry is proving disruptive on trade, it could be beneficial for those looking to bridge into new and challenging markets. There is a massive amount of rival development capital out there looking for placement in well-structured projects. They may find themselves spoiled for choice.

Adrienne Klasa is the development finance editor at fDi Magazine.