China’s foreign policy is about to change, and not entirely by choice.
The country’s engagement with the developing world has accelerated markedly in the wake of the economic crisis. And for all the focus on Beijing’s relationship with Washington, it is Beijing’s relationship with the emerging world’s capitals, from Cairo to New Delhi, that may contain the greater surprise.
In the past months, a series of Chinese academics have proposed using the country’s foreign-exchange reserves to finance infrastructure projects in the developing world. The economist Xu Shanda has called for a Chinese “Marshall Plan” to boost demand for Chinese goods. A governor of the People’s Bank of China, Zhou Xiaochuan, has argued for establishing a supra-sovereign wealth fund to invest in the developing world.
It is an idea born of opportunism and necessity. The opportunism arises from the difficulties the emerging world has in financing infrastructure projects, especially as foreign banks retreat to their home markets. China benefits from such infrastructure, whether it is railways to ship copper from Afghanistan, or industrial parks to produce goods in Egypt.
Necessity stems from the challenges China faces in investing nearly $2.3 billion worth of foreign reserves. Over 65 percent are invested in U.S. assets, and thus exposed to the risks of a weak dollar or rising yields. Diversification is necessary. Investment in foreign infrastructure offers a useful alternative.
China may not have a choice in the matter. Its relations with the emerging world are about to face serious challenges, and development aid would be a positive response. How so?
China’s exports to the emerging world have surged from $190 billion to $670 billion in the past five years. China has captured market share in almost all emerging market countries to produce factory closures and job losses from India to Syria. Export subsidies and a currency effectively pegged to the dollar have only aided Chinese exporters in the past year.
For the past decade, China was seen as a natural leader of the emerging world, as it challenged the West’s economic hegemony. But China is now of a sufficient size to challenge the emerging world itself. And China’s image will deteriorate markedly unless the emerging world starts to share in the benefits of the country’s spectacular economic rise.
Indeed, in a recent debate on the “Marshall Plan,” a number of Chinese academics argued that the draft plan focuses overly on selling more goods to emerging markets as a way to reduce China’s overcapacity problems. The same academics warned that unless more attention was paid to creating jobs for locals and raising living standards, the plan might yet fail.
The challenge for China is its policy of nonintervention. This prevents Beijing from taking positions on issues like the Israel-Palestine conflict. It is a strategy that has enabled China to avoid entanglement in complex political issues. But it also limits the country’s policy options in trying to exert its weight in the emerging world.
A case in point: Saudi Arabia provided $60 million in aid for reconstruction in Sichuan following the earthquake in 2008. But when China provided only $2 million in aid for reconstruction programs after the war in Gaza, Arab sentiment toward China reportedly weakened.
It thus makes sense that China follows the Japan model. Japan rarely intervenes in another country’s internal politics. But it is one of the world’s largest providers of development aid. For example, Tokyo provides over $1 billion in aid to the Middle East annually, a large share of it to the Palestinians. This helps to bolster Japan’s image in the region.
It is this convergence of opportunism and necessity that will shortly produce a change in China’s foreign policy and spur its development aid.
For all the talk of a supra-sovereign wealth fund, it is more likely that China will offer aid bilaterally, thus more directly benefiting Chinese companies and providing much-needed burnishing of China’s reputation abroad. This development aid likely will go to countries with large domestic markets or commodity resources. Africa, the Middle East and Latin America will rank high.
Take the acquisition of Afghanistan’s Aynak copper mine by the Mettallurgical Corporation of China. The company’s bid was successful largely because it was linked to development aid, specifically the construction of electricity generation, road and rail projects, as James Yeager, a former adviser to the Afghanistan Ministry of Mines, noted in a report published this month.
China’s rapid accumulation of foreign reserves is unsustainable. Its commercial push into the emerging world is untenable. The economic crisis has brought about big shifts in the global economy. But bigger shifts are yet to come. And it is within the emerging world itself that the bigger surprises from China will lie.
Ben Simpfendorfer, the chief China economist for the Royal Bank of Scotland and the author of The New Silk Road.