Friday, December 23, 2011

China's "Checkbook Diplomacy" and Overseas Investment Reconsidered

A reader recently sent me a link to a design website that profiled Chinese overseas FDI projects, collected by Derek Scissors at the Heritage Foundation. But the website host, Cliff Kuang, uses Derek's great infographics to makes his own, inexpert analysis that perpetuates some of the Cold War frames commonly used to discuss China's emerging global role: FDI as "checkbook diplomacy."

For example, Kuang writes "... you'll notice that [sic] majority of China's trading partners aren't in Europe or America: They're in Asia and Africa and South America. In other words, precisely those countries which have always spoken last on the world stage. China is using its economic relationships to create an alternative bloc of power, which can directly compete with the political might of the E.U. and America." and "China has neutralized our power to oppose it by holding so much of our debt. And it has simultaneously drawn other countries closer to its bloc of power by offering them a taste of its rocketing economy."

Here, obviously, Kuang is mixing up trade with FDI. The charts he is illustrating have no trade data (and if they did, they would show that China's major trading partners are precisely Europe and America, not Africa and Latin America). So if Kuang had used trade graphs, he would have to make a different kind of argument. And the idea that China has 'neutralized' our power by holding our debt? The fact that our defense budget accounts for 48 percent of total global military spending is, I suppose, of no account ...?! As for China's alternative bloc of power, just what is this supposed to mean? Australia, Chile, and Japan? Hello Cold War II?

On the other hand, I think that Derek Scissors at Heritage is doing a great service by collecting and publishing (and continually refining) this project-level data. However, users of this data need to be careful, because it is not truly comparable with other countries' FDI data published by the OECD or other sources.

Why not? Two major reasons.

First, Derek is only tracking investments of $100 million and higher. This is going to leave out literally thousands of smaller investments that might be going into manufacturing, services, or agriculture. The kind of small and medium sized factories that are the first to start up overseas simply won't be captured by this database, and that creates a distorted sense of the sectors to which Chinese investment is going. In 2010, for example, Chinese overseas FDI in mining was $5.7 billion, and manufacturing $4.7 billion. Most of the latter will be in other developing countries. (For the reason why, see World Bank chief economist Justin Yifu Lin's 2011 WIDER Lecture: "From Flying Geese to Leading Dragons" or my 2008 book chapter on "Flying Geese or 'Hidden Dragon'?")

Second, Derek is collecting and recording FDI commitments, not actual flows. So if a project is expected to cost $3 billion over a number of years, he is putting the entire $3 billion in as "Chinese FDI". However, this is only accurate in a merger or acquisition, when the entire amount is actually being paid up front. And it is not how FDI flows are recorded in the OECD countries -- they record actual flows in the year that they actually happen. Mining and other large-scale investments take place over a number of years. Sometimes they don't take place at all (although Derek is doing a good job of adjusting his database to account for this failed projects, from what I can see).

A hat tip to Lisa Guetzkow.

Thursday, December 15, 2011

China in Africa: Global Health and Foreign Aid

In print just in time for the holidays -- a new Center for Strategic International Studies book on China's Emerging Global Health and Foreign Aid Engagement in Africa, available for free downloading on the internet in English and Chinese versions. It includes a paper of mine commissioned for the volume: "U.S. and Chinese Efforts in Africa in Global Health and Foreign Aid: Objectives, Impact, and Potential Conflicts of Interest" (no, I didn't pick the title...) 

Here's the official description from CSIS:

This volume is a compilation of papers that were written for the Conference on China’s Emerging Global Health and Foreign Aid Engagement, sponsored by the Center for Strategic and International Studies (CSIS) and the China Institute of International Studies (CIIS), in Beijing on May 24, 2011, as part of a larger CSIS initiative to examine the global health engagement of the BRIC countries (Brazil, Russia, India, and China). Focusing specifically on China’s health and foreign aid engagement in Africa, the volume includes contributions by U.S. and Chinese experts.

Friday, December 9, 2011

London Debate on the Motion: "Beware the Dragon: Africa Should Not Look to China"

SOAS Dean Stephen Chan at the Intelligence Squared Debate
I spent my birthday (!) last week debating the motion: "Beware the Dragon: Africa Should Not Look to China" at an Intelligence Squared event at Cadogan Hall in London.

For the motion: Ghanaian intellectual George Ayittey and Ana Maria Gomez, European Parliamentarian from Portugal. Against the motion: myself and Stephen Chan, Dean of Arts and Sciences at SOAS (School of Oriental and African Studies).

What struck me most was the large number of people who were undecided about this issue, and how hearing actual evidence and research -- instead of what passes for that in much of the media -- can swing public opinion. The audience vote before we started the debate was For the Motion: 154. Against 106, and Undecided 126. When the debate was over, the audience was polled again. For the Motion: 149. Against 212 and Undecided 25. Our side picked up 106 new votes. To understand why, you have to watch the debate. Don't miss Stephen Chan, he was superb!

The entire debate went from 6:45 until 8:30. It's all on Youtube. But you can also watch short pieces of it on Intelligence Squared's website, including each debater's starting presentations, about 10 minutes each. Here's the link to mine and the others are on the same page.

Wednesday, December 7, 2011

US Eximbank versus China Eximbank

photo credit: Agence France Press
The head of the U.S. Export-Import Bank, Fred Hochberg, has responded in an open letter (November 4, 2011) to suggestions made by Stephen Hayes, president of the Corporate Council on Africa in his November 1, 2011 testimony before the Senate Foreign Relations Committee that we could do better in supporting our companies' business efforts in Africa. I've just stumbled on this while looking (in vain) for data on the terms of loans for specific transactions that U.S. Ex-Im Bank has supported.

While I appreciate Hochberg's valient defense of his bank's performance in Africa, his characterization of Chinese large infrastructure transactions in Africa as "subsidized by the Chinese government ... at every level" is simply incorrect.

Hochberg mixes up apples and oranges. The large infrastructure transactions that are secured through commodity exports to China (not the same as "secured through resources for Chinese state owned companies") are not concessional. China Eximbank does have a small subset of concessional loans at fixed interest rates of 2 or 3 percent and repayment over 20 years. This interest rate is subsidized, but these are not the loans that finance the large, resource-secured transactions. Worldwide, between 1995 and 2009, China Eximbank committed $11 billion in concessional loans, total, whereas its commitments of non-concessional credits to Angola alone came to $10 billion during that period.

Hochberg states that his bank would need to provide "taxpayer subsidized loans if we were to compete toe to toe with the financing being provided by the Chinese." But this isn't exactly true, as we can see if we look at the rates for U.S. Ex-Im Bank's loans.

Forgive me if I get a bit technical now. U.S. Ex-Im Bank's fixed rates (CIRR) for loans in early November 2011 ranged from 1.47 percent to 3.35 percent depending on the term of the loan (repayment period). But the U.S. Ex-Im Bank's major business involves providing guarantees or "cover" for private bank loans. Quoting U.S. Ex-Im Bank:  "Generally, a floating rate pure cover interest rate will be based on LIBOR [London Interbank Offered Rate] and have a spread in the range of 0 to 100 basis points (for larger transactions) or 20 to 400 basis points (for smaller transactions)."

One hundred basis points = 1 percent. So our Ex-Im Bank will guarantee floating rate loans based on LIBOR plus a margin (spread) of 0 to 4 percent.  Similarly, China Eximbank's large infrastructure export credits are at floating rates based on LIBOR plus a margin of 100 to 300 basis points (1 to 3 percent) or even higher. They usually need to be repaid over a period of 13 to 17 years. There is no indication that these large Chinese infrastructure loans are subsidized. So the loans that we guarantee can be cheaper than China Eximbank's export credits, or they can be more expensive. Or so it looks to me. But I'd be interested in how it looks to readers of this post.

Finally, I was pleased to see data in Hochberg's letter to show that U.S. Export-Import Bank support to projects in sub-Saharan Africa has gone up from an average of $455 million annually (FY2006-FY2009) to $800 million (FY2010), and $1.4 billion (FY2011).  At this rate of growth, we may stand a chance of catching up to China Eximbank... which is probably putting in around $6 billion annually.

Addendum on December 8, 2011: Thanks to Dr. Helmut Reisen, head of research at the OECD's Development Centre, here are links to the approved current export credit rates for most OECD currencies:
More generally:,3381,en_2649_34169_1_119656_1_1_37431,00.html