Path to Influence

• Author: Eswar Prasad

Path to Influence Finance & Development, September 2017, Vol. 54, No. 3

Eswar Prasad

China employs a multipronged approach to enhance its role in setting the global economic and political agenda

China is an economic superpower. It is the second-largest economy in the world, with an annual GDP of $11.5 trillion. It has annual domestic savings of more than $5 trillion and a stash of foreign exchange reserves of about $3 trillion. It is a net creditor to the rest of the world to the tune of $1.8 trillion.

Yet for all its vast financial resources, China remains a middle-income economy, with a per capita GDP only one-fifth that of richer economies such as the United States. Moreover, the country’s global economic and geopolitical clout is only gradually beginning to catch up to its sheer economic size.

History is replete with examples of countries that have punched above or below their weight in global finance and geopolitics depending on how well they deploy those resources. Until fairly recently, for example, countries much smaller than China, such as the United Kingdom and Switzerland, were seen as far more influential in global finance and geopolitics. But that is changing fast. China is a case study in how to learn by doing and seize opportunities to gain greater influence.

In the 2000s, as China’s financial clout and foreign exchange reserves grew, it began using its resources to increase its spheres of economic and political influence—offering investments, aid, and various forms of financial support to other economies. The recipients of this largesse were its neighbors in Asia as well as some economies in Africa, Latin America, and the Caribbean with large stocks of natural resources that China craved for its manufacturing machine.

Over the past decade, China’s cumulative investment has been about $290 billion in sub-Saharan Africa and $160 billion in South America. China has given money to countries that have not been able to raise capital in international financial markets or are loath to turn to Western institutions and countries. When China’s President Xi Jinping visited Pakistan in 2015, he announced $46 billion worth of financial support for energy and infrastructure projects. His visit to Africa that year culminated in a new China-Africa strategic partnership featuring cooperation in areas such as industrialization, infrastructure, green development, and public health. China offered $60 billion in funding support in grants, loans, loan write-offs, and development funds.

China has maintained that it adheres strictly to a principle of noninterference in other countries’ internal affairs, especially when it comes to political matters, and that its aid and investment do not come with any conditions, such as economic reforms. As Xi put it at a summit in Johannesburg: “China supports the settlement of African issues by Africans in the African way.”

China’s economic activities abroad have stimulated vigorous debate about whether its money has been a net benefit for recipient countries—whether China was exploiting the countries to which...