China Using Global Investments to Develop a World of its Own

Speaking before African leaders at the Forum on China-Africa Cooperation (FOCAC) summit last week in Johannesburg, Chinese President Xi Jinping announced $60 billion of assistance and loans targeted toward the development of the African continent. A major trade and investment partner to Africa over the past decade, China will commit zero-interest loans—as well as scholarships and training—for thousands of Africans through this assistance.

FOCAC
Chinese President Xi Jinping meets with heads of state from 35 African countries to discuss long-term Chinese investment in the African continent

Among the 35 African heads of state attending FOCAC was South African President Jacob Zuma, who proclaimed, “China has become Africa’s largest trade partner—and Africa is now one of China’s major import sources and fourth largest investment destination.” Welcoming China’s continued trade interest in the region, Zuma stated, “[President Xi’s] partnership can only yield further positive results for Africa’s development.” Xi shared Zuma’s sentiment, describing Africa’s rapid growth as “unstoppable.”

Though Chinese investment in Africa to date has focused primarily on infrastructural advancement, these new loans center around ten different aspects of development—including industrialization, agricultural modernization, financial services, green development, and peace and security—which demonstrates China’s broadening interest in Africa. The announcement of this hefty assistance is particularly noteworthy because of its long-term nature.

ChinaInAfricaMap
Chinese loans and labor are responsbile for much of Africa’s recent economic and infrastructural development. China has subsequently gained strong alliances with many of these countries

Despite a notable economic slowdown currently underway in China—causing a sharp decline in imports from African nations—this pledge of $60 billion suggests that China is committed to African development for the long haul. This considerable financial investment in Africa has enabled China to solidify itself as a leading trade partner in the global south—a term often used to describe less developed regions of the world.

Yet, China’s sweeping economic influence extends far beyond Africa. In fact, over the past decade, China has displaced the U.S. and Europe as the leading financial partner throughout most parts of the developing world.

Chinese Investment in the Global South

Between 2005 and 2013, China’s global investments grew nearly tenfold, accounting for 57% of all foreign investment in Ecuador, 70% in Sierra Leone, 79% in Afghanistan, 82% in Zimbabwe, and 93% in North Korea—just to list a few examples. Perhaps even more significant than the investments themselves, however, has been a growing trust toward China throughout the developing world. China’s substantial and ever-growing financial investment in these regions has garnered new allies, strengthened trade relations, and increased access to oil and other natural resources among these resource-rich countries.

NYTChinaInvestmentMap
Over the past decade, China’s share of net foreign investment has been substantial, developing strong investment and trade ties with countries maintaining questionable political regimes and poor credit histories

Though China’s rapidly expanding influence in the developing world is truly impressive, particularly striking is the pace at which these trade relationships are growing. In 2005, China had no major investments in Africa, while investments in other parts of the global south were minimal. Yet, in only ten years, China has become the preeminent trade and investment partner for a large number of these countries.

Chinese Foreign Investment Requirements: Non-Existent?

China’s bolstered position as the lead financier of the developing world is due in part to two fundamental differences with the West in conducting trade. China—unlike its Western counterparts—has shown a consistent willingness to invest in countries that (a) are governed by politically risky and legally dubious regimes, and (b) maintain questionable credit records. These lax criteria are quite apparent when examining the developing countries that have benefited most from China’s lending practices.

While most Western countries, abiding by World Bank expectations, avoid lending to countries with undemocratic practices and a history of default on past loans, China has shown no qualms in offering new investments to these countries. For example, Ecuador’s access to major sources of Western capital was significantly limited in 2008, when it defaulted on several debts. At this time, China offered loans and investments worth nearly a quarter of Ecuador’s economic output, in exchange for access to the country’s resources. These investments have included billions of dollars worth of infrastructural projects—including hydroelectric plants, oil drilling, and copper mining. Similarly, in Argentina, Chinese companies are building dams, railways, and nuclear power plants, while China has lent more than $50 billion to Venezuela—endorsing a democratically disputable regime—in exchange for oil.

ChinaAfricaConstruction
The vast majority of infrastructural development in many countries throughout Africa is being build buy Chinese in exchange for natural resources

This trend is also similar in Africa, where China has been a proactive trade partner with countries that are rich in resources, yet struggle economically and are controlled by autocratic governments. China has targeted large investments in Angola, which is now primarily dependent on selling oil to China, while a Chinese oil company invested $5 billion in Niger—roughly equal to the country’s entire GDP. In Zimbabwe, a country that has received sanctions from the West for undemocratic practices, China has invested in coal and solar power.

Further north, a Chinese state-owned oil company controls access to oilfields in Yemen—the poorest country in the Middle East. Simultaneously, while the U.S. and its allies combat dangerous regimes and pursue complex nation-building strategies throughout the region, China makes up 79% of foreign investment in Afghanistan, 38% in Iraq, and 30% in Syria. At this time, China is the largest investor in five of the world’s 10 most risky and unstable countries.

 

Institutional Implications: The Asian Infrastructural Investment Bank

Indifference toward countries with politically undemocratic regimes and histories of debt default has positioned China as the up and coming premier global lender. In fact, this growing influence is so substantial that it has even had strong institutional implications—as a predominantly U.S.-influenced World Bank has begun to subtly yield systematic authority over global lending practices. China’s “no strings attached” approach to investment in many of these undemocratic and danger-ridden countries of the global south are making it more challenging for Western-led financial institutions to demand economic reforms and environmental standards among borrowers.

A general view of the signing ceremony of the Asian Infrastructure Investment Bank at the Great Hall of the People in Beijing
The signing ceremony of the AIIB at the Great Hall of the People in Beijing. The AIIB is evidence of China’s growing global economic institutional influence

This gradual transformation is no small development, as the institutional landscape for global lending appears to be experiencing a subtle, though consequential, paradigm shift. While institutions such as the World Bank and the Asian Development Bank (ADB) will undoubtedly continue to maintain great influence over global lending practices, these Western-created and substantiated institutions will now have to compete with new-wave global financing institutions that do not necessarily require the same rigid standards for loan recipients.

These new institutions include the Asian Infrastructure Investment Bank (AIIB), which was first announced by President Xi and Chinese Premier Li Keqiang in 2013—and effectively launched in 2015. A multi-lateral development bank capable of serving the evolving 21st century needs of the developing world, the AIIB is expected to grow in prowess—a new competitor to the World Bank, the ADB, and other long-established institutions. Heavily influenced by China, 57 nations have signed on as founders and the AIIB is set to continue broadening the momentum and scope of China’s global economic clout.

Indeed, through the AIIB, China’s global influence is suddenly amplifying from bilateral trade-focused leverage to an institutionally-regulated dominance. Garnering resounding worldwide support toward the AIIB from developed and developing countries alike, China will now serve as a pioneer with respect to global development and investment standards and trends. Many believe that the AIIB’s immediate popularity and capacities will subsequently apply pressure on the World Bank to be more lenient in its lending practices toward developing countries.

AIIBWorldBank
The launch of the AIIB signals the beginning of new era in which the Chinese-dominated AIIB will gradually weaken the longtime global influence of the US-dominated World Bank

Yet, what this trend really means is that the current geo-economic landscape as we know it is currently undergoing a major structural adjustment. It is morphing into a bi-polar model in which a U.S.-dominated World Bank and a China-dominated AIIB will now play tug-of-war with one another for supremacy over the methods and regulations by which lending and investments are made in the developing world.

Of course, the creation and cultivation of the AIIB has not occurred without significant backlash from the U.S.—as American leaders are not pleased about this recent adaptation to the international monetary system. In fact, citing concerning operational features and practices of the bank before its launch, the U.S. tried to weaken the jurisdiction of the AIIB altogether by strongly discouraging European and Asian partners from joining. However, this effort backfired, with leading allies such as Australia, South Korea, and—most notably—Britain each signing on as founding members. This outcome has caused the U.S. to now watch from the sidelines instead of serving as a primary influencer as the bank is launched. This failed attempt by the U.S. to undermine the AIIB serves as a relative embarrassment—suggesting an inability to overcome China’s economic appeal regarding major institutional considerations.

The positive international response to the AIIB also serves as a symbol of China’s inevitable and, perhaps, unstoppable financial momentum—as the rising giant grows into a global economic hegemon. Perhaps even more importantly, the AIIB may indeed prove hugely influential and effective in practice. Many speculate that the bank will have the ability to dispense significant infrastructure funding throughout Asia that extends well beyond the current capacities of the World Bank or ADB. Should this speculation become a reality, the AIIB may very well play a paramount role in the accelerating growth of many of the world’s long underdeveloped and impoverished regions.

The potentially positive and productive impact of the AIIB, with China facilitating from the driver seat, would only further strengthen China’s reputation among developed and developing nations around the world. An outcome of this sort would catapult China to the forefront of global economic progress and would certify this increasingly influential country as one of the premier players in future global initiatives. The launch of the AIIB is a momentous event as China is cementing itself as a fundamental and invaluable driver of economic stability and growth throughout the world—winning diplomatic allies, near and far, in the process.

Implications for U.S. Economy

Yet, though the long-term hegemonic implications of China’s growing economic clout may intimidate the U.S., the developed world, too, has certainly been a benefactor. Indeed, Chinese investment is also playing a notable role in improving the economies of developed countries, including that of the U.S. Chinese investment in the U.S. is expected to exceed $10 billion for the third consecutive year, after reaching $12 billion last year and $14 billion in 2013. Though total Chinese annual investment in the U.S. has declined over the past two years, due in large part to China’s anticipated economic slowdown, these investments have served as an important stimulant to the economies of the U.S. and many of its global north partners.

ChineseBuyingUSRealEstate
For the first time ever, Chinese families were the largest group of overseas homebuyers in the U.S. during 2015. This influx of Chinese wealth is having drastic impact on the U.S. real estate market, as well as other sectors

The majority of these investments have targeted the U.S. real estate, automotive, entertainment, insurance, and information and communications technology sectors. They include “greenfield” investments, which enable parent companies to start new ventures in the U.S. by building new facilities.

While investment in the real estate market initially targeted coastal economies—where Chinese have bought up luxury condos in Manhattan and mansions throughout Silicon Valley—these funds are now focused further inland, where prices are far more modest and market potential is strong. In 2015, Chinese families were, for the first time, the largest group of overseas homebuyers in the U.S. These purchases are providing great economic stimulation for the country’s inland regions. However, they are also contributing to increasingly unaffordable housing prices in dense coastal cities, such as New York, San Francisco, Boston, and Washington. At the same time, Chinese money is having dramatic impact on the economies of developing and developed countries around the globe.

Social Implications

These investments are only a part of China’s profound influence on these economies. In the global south, Chinese are not merely providing funding for such infrastructural development, they are also on the ground, building facilities and living in the communities in which they invest. Therefore, China’s worldwide investment efforts have also brought about significant social implications.

ChinaAfricaBadRelations
China’s investment in the global south has led to a rise in Chinese workers living within developing countries. Reports suggest that clashing foreign differences among Chinese and their local counterparts have caused some social friction

With an influx of Chinese investors and workers living throughout Africa, South America, and Southeast Asia, large numbers of Chinese nationals are suddenly exposed—in high volume—to local populations like never before. Simultaneously, many newly affluent Chinese, migrating to the U.S. and other developed regions of the world to enjoy higher standards of living—and to avoid China’s choking pollution—are, similarly, now living alongside local populations in increased numbers. These recent trends have had interesting ramifications, with reports of friction between Chinese expatriates and local residents.

To understand the intricate social implications of this trend, context is important. The Chinese people represent a country with an impressively longstanding civilization of dynamic history, culture, and rituals. However, because China spent 30 years in insolation during the Chairman Mao era—followed by another 40 years of development, necessary to alleviate the masses from poverty—Chinese citizens have only more recently again begun to participate in, what has become, an unprecedentedly globalized society.

ChairmanMao
China was completed isolated from the outside world during the era of Chairman Mao. Only after 40 years of post-Mao development are Chinese now rejoining the global community in larger numbers

Many of them, particularly the Chinese workers who are building this new infrastructure around the world, do not necessarily wish to assimilate into the extremely foreign local cultures or communities where they are based. Likewise, some affluent Chinese living in developed countries have been known for entitled or ethnocentric behavior that disregards the standards of long-settled local populations. This has led to reports of poor relations, often incited by racist or nationalistic views among expatriate Chinese, who come from vastly different cultural backgrounds and lifestyles.

These sentiments seem to be fairly consistent across the board regarding Chinese living in Africa, South America, and Southeast Asia. Interestingly, yet perhaps not surprisingly, these very attitudes are also consistent with reports regarding Chinese relations with Tibetans—who are predominantly Buddhist—as well as with the Muslim Uyghurs of Xinjiang. These two provinces are historically, culturally, ethnically, and socially separate from the majority Han Chinese who are currently developing the infrastructure and economies of these regions. Such similar trends demonstrate that, whether abroad or in minority regions of China, ethnic tensions are surfacing as a considerable consequence of Chinese investment.

Conclusion

While this drawback is no small detail, Chinese investment is, nevertheless, having a profound impact on increasingly swift global economic development. Developed and developing countries alike are reaping the vast benefits from such loans and investments. All in all, though these funds will continue to carry negative social and—sometimes even economic—baggage in the future, their immediate effect has been impressively positive and far-reaching.

RMBDevelopment
China’s substantial investment in the developing world is setting the stage for strategic long-term economic and political global influence

Thus, despite increased clarity regarding China’s slowing economy, President Xi’s recent pledge at FOCAC to continue substantial investments in Africa is proof that Chinese commitment to this region of the world is long-term. As China braces itself for a new era in which its economic capacities are no longer as boundless as they were during the initial years of the new millennium, this already economically influential giant is evidently planting the seeds of a dynamic future throughout the African continent.

This tactic may ultimately be a model for China’s approach to other parts of the developing world as it outlines its post-slowdown economic agenda. However, should these long-term investments in both the global north and south pay off, as many experts believe they may, China will be well positioned for enormous influence over international policy and trade. As the U.S. and its Western allies come to terms with this new reality, governments and lending institutions must begin to consider a future in which an autocratic China exercises equal, if not greater, power than the West regarding major global economic decisions and policy.



About the author:

David Solomon, a 2013 graduate of Skidmore College, lived in China for three years, where he pursued Mandarin language, history, political, and environmental studies at Tsinghua University, Beijing Foreign Studies University, and Suzhou University. He has also worked in Chinese economic development and has traveled extensively throughout China and other parts of Asia. David currently resides in Washington, D.C., where he works in U.S.-China trade relations.

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