Let's separate the facts from the fiction on China and economic power.
Historically, empires or powerful nations that sustain their preeminence over large periods and have the ability to project power are built on a strong economy that supports a powerful military. In ancient times, the Roman Empire had a strong economy. For several hundred years, the British Empire had a strong economy based on its colonies around the world.
A strong economy provides funds to purchase a strong military as well as invest in advancements in technology. Also, a strong economy allows for the financial control of economies of less powerful nations beyond its borders. These less powerful nations become economically intertwined and dependent on the more powerful economic nation.
Both the Roman Empire and British Empire had strong armies and preeminent navies of their times, which provided them with the ability to project power. In contrast to the British Empire, the Russian Empire under the Czars covering much of the same period, had a poor economy, was technologically stunted, with a less powerful navy and could not project economic or military power much beyond its borders.
Over the last 100 or more years, the U.S. has been the most powerful nation in the world, built on a strong economy, leading technology and preeminent military, with the world’s leading navy, air force and nuclear capability. China is now using this model in its hope to displace the U.S. as the world’s most powerful nation. China has built the world’s second-largest economy and is using that economy to gain access and financial control over less powerful nations as well as building its military, especially its navy.
In line with its Belts and Roads Initiative, a means to use economics to gain access and control of countries around the world, China has lent extensively. China has surpassed the World Bank, a major lender whose goal is to reduce poverty and promote prosperity in poorer nations, as the largest lender to emerging market countries as well as establish itself as the largest government lender to the developing world. When countries need funding in times of crisis, they often look to the International Monetary Fund (IMF), whose mission is to further international monetary cooperation, increase trade and economic growth, and build prosperity. IMF funding usually involves painful austerity measures for the borrowing country, which can lead to political issues.
Another option involves China. China will provide debt financing to countries throughout the world for infrastructure projects or to pay off older debt. If the borrowing country cannot pay off the Chinese debt, they become financially dependent on China.
This leads to China having leverage to exercise remedies, which give it access and control over the borrowing country. This is often referred to as “debt-trap diplomacy.” Typically in distressed situations, lenders agree to take a haircut and accept a lesser amount of repayment, but China has often taken a different approach, insisting on repayment in full over an extended length of time.
In addition, China structures its assistance largely as debt, whereas the U.S. structures its funding mostly as aid. This provides China with greater leverage to foreclose on an asset should a default occur. In some instances, China has used its position to take control over a strategic infrastructure asset, such as the 99-year lease it secured on the Hambantota Port in Sri Lanka.
Further, unlike many lenders to emerging countries, China generally loans at adjustable interest rates. With interest rates rising significantly over the past year, the payments on China’s loans have risen significantly, creating additional payment issues and greater influence for China.
China has taken advantage of a difficult world economy by utilizing its Belts and Roads Initiative to provide a new avenue for international rescue funding in a challenge to the IMF and other institutions. China has rolled over old loans, extended payment periods, revised payment terms, extended additional credit/new loans, provided swap agreements and undertaken other tactics similar to what historically has been referred to in Western legal and banking circles a “extend, amend and pretend.”
China’s swap lines exchange domestic currencies for China's currency, the yuan. The swap lines help faltering countries to build up reserves to make payments on Chinese debt as well as enhance the adoption of the yuan in a world dominated by the U.S. dollar. The swaps carry high interest rates and are often rolled over, which essentially kicks the debt problem down the road. All of China’s responses further ingrain China in countries around the world.
I believe that China will use an economic downturn to exert greater control, claim additional assets and for its strategic and military benefit.
China has used its newfound power to gain a strategic and military foothold, as well as access to critical natural resources in Africa, South America and elsewhere. Also, lending provides China with influence over countries to side with it on international events as seen recently when several Muslim creditor countries voted with China at the United Nations against a resolution to debate China’s abuses with respect to the Uyghurs in Xinjiang province. I could see China using this same diplomatic influence with respect to its designs on Taiwan.
China has used its increasing economic ties with countries to gain recognition on the world stage as a broker of peace, as evidenced by its mediation between Saudi Arabia and Iran resulting in the reestablishing of diplomatic relations between the two countries.
China is using its Belts and Roads Initiative to challenge and eventually displace the U.S. dollar as the world’s reserve currency. In December of 2022 in Saudi Arabia, President Xi of China called for increasing the number of oil and gas transactions to be settled in yuan. In March of 2023, China completed its first LNG deal in yuan in a transaction with the United Arab Emirates.
One possible U.S. response to the China lending threat is to cancel foreign aid to countries that accept China’s loans. Also, the U.S. could offer loans of its own on better terms than China. Further, the U.S. could consider offering partially forgivable loans contingent on completion of a specific project to countries and require the leader of such country to be a co-borrower or guarantor. This would allow the U.S. to more easily monitor the use of funds for the designated project, make any leader responsible for the loan and be sure that the funds are not going to the leader and others. In addition, it would act as a less expensive substitute for foreign aid and provide a means for the U.S. to have influence in a country while depriving China of a foothold.
In summation, we must consider the facts and not be fooled by the fiction.
And that’s my take.
Perry V. Kalajian is an attorney, consultant, and analyst with extensive experience in the areas of banking, finance, and restructuring. He possesses multiple degrees in each of the areas of business and law. Mr. Kalajian has had numerous appearances on Newsmax TV.
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