A renminbi world

Passengers carrying their luggages prepare to get on the train in the railway station of Hangzhou, capital of east China's Zhejiang Province. Photo: Xinhua/Ju Huanzong

The finding that China has loaned more money to developing countries than the World Bank in the past two years is being widely reported worldwide. Using phrases like “the economic might of the world’s most populous country will only grow stronger in the years to come” the daily news media has reported on the new reach of the yuan in two distinct tones.

One, from China itself, by its news agencies and news media, is a pragmatic tone which discusses the use of loans and financial aid as a primary tool of international relations. Two, from the West, is a simultaneously fascinated and worried tone, which does not hide an alarm over the growing influence of China on the developing South, and which bemoans the helplessness of western governments and financial systems to counter Beijing’s effortless reach.

Hu Jintao: General Secretary of the CPC Central Committee, President of the People's Republic of China, Chairman of the CPC Central Military Commission and Chairman of the Central Military Commission of PRC

The BBC The BBC has a news video on the subject, and news blogs such as 24/7 Wall St have discussed it in as much detail as possible based on the data available.

What is the data? The China Development Bank and China Export-Import Bank agreed to lend at least US$110 billion to governments and companies in developing countries in 2009 and 2010, according to an AFP story citing research from the Financial Times. From 2008 to 2010, the World Bank handed out US$100.3 billiion in response  to the global economic crisis.

The brief FT report says: “The volume of overseas loans by the two banks indicates how Beijing is forging new patterns of China-led globalisation, as part of a broader push to scale back its economic dependency on western export markets. The financial crisis allowed Beijing to push the commercial interests of its energy companies by offering loans to producer countries at a time when financing was hard to come by. The agreements include large loan-for-oil deals with Russia, Venezuela and Brazil, as well as loans for an Indian company to buy power equipment and for infrastructure projects in Ghana and railways in Argentina.”

“The statistics were collected by examining public announcements by the banks, the borrowers or the Chinese government. An adviser to CDB said the volume of lending suggested by public statements understated the real level of the bank’s new loan commitments to developing countries. CDB and EximBank provide more preferential terms than the World Bank and other lenders for certain deals that are strongly supported by Beijing, but offer terms that are closer to international standards for less politically sensitive deals. They also tend to impose less onerous transparency conditions.”

A passenger walks in front of the Harbin Railway Station in Harbin, capital of northeast China's Heilongjiang Province. Photo: Xinhua/Wang Jianwei

There has been evidence enough over the last five years that Chinese investors turn into bargains everything from distressed US real estate to African and Brazilian oil fields to European debt. China’s foreign exchange reserves stand at US$2.85 trillion (more than double that of the country with the second largest reserves, which is Japan).

The bottom-line is that China has lent more money to other developing countries over the past two years than the World Bank, as the FT is reporting, a fact that underlines the scale of Beijing’s economic reach and how it is forging new patterns of global trade and development. China Development Bank and China Export-Import Bank gave loans of at least US$110bn to other developing countries in 2009 and 2010. The equivalent arms of the World Bank made loan commitments of US$100bn from mid-2008 to mid-2010.

How does this activity fit in with the news, usually filtered and sometimes misunderstood, that China will progressively make its currency convertible on the capital account in the next five years amid its push for the deeper internationalization of the yuan? “The overall strategy for the reform of China’s foreign exchange management system is to achieve the convertibility of the yuan on the capital account progressively, as this will make trade and investment more convenient and boost the development of the foreign exchange market,” said Yi Gang, head of the State Administration of Foreign Exchanges (SAFE), in a signed article published on the SAFE website.

An example of China’s yuan reach is the reporting, from Angola in November 2010, of vice-president Xi Jinping’s visit there. The China Development Bank is to follow the official visit and “further strengthen cooperation” with Angola in mineral prospecting, staff training and municipal planning. “In addition, CDB will unleash its leading role in developmental finance to step up fostering and development of Angolan markets and finance for the country’s post-war rehabilitation, rendering substantial financing support in the process”, as Xinhua News Agency reported on 21 November 2010. During the Angola visit the CDB entered into a US$400 million loan agreement with the Ministry of Finance of Angola to address food security issues and promote urban infrastructure construction in the country. Moreover, the CDB and Angola’s African Investment Bank signed a US$100 million SME loan agreement.