Bartering Globalization: China’s Commodity-backed Finance in Africa and Latin America

In just over a decade, China has become a major source of finance for emerging markets and developing country governments. China and recipient governments have been less than transparent with respect to the scale, terms and composition of this finance, engendering a great deal of speculation about its nature. 

In a 2014 journal article published in Global Policy, Deborah Bräutigam and Kevin P. Gallagher provide preliminary estimates of Chinese finance to both Africa and Latin America since the turn of the century, focusing on ‘commodity-backed’ or ‘resource-secured’ loans. 

Main findings: 

• Chinese banks have provided approximately $132 billion in financing to African and Latin American governments and state-owned firms since 2003. 
• Just over half of this finance, or $75 billion, is in the form of resource-secured finance. 
• Chinese finance is generally not out of line with interest rates found in global capital markets, does not bring windfall commodity profits to China and does not mandate the use of Chinese workers.

Chinese banks have become major development financiers, but their lack of transparency has left many policymakers understandably uneasy about the size and nature of their loans. For Bräutigam and Gallagher, policymakers in the Organization for Economic Cooperation and Development (OECD) need to understand that they are not dealing with a fellow donor when engaging China on its overseas finance. The bulk of Chinese finance is not subsidized and should be seen as export credits rather than foreign assistance. Countries receiving these credits can be reassured that there is no evidence that they lock in low commodity prices, or mandate the use of Chinese workers. 

China’s package loans, while relatively rare, are attractive to recipients. The authors also suggest that policymakers in competing countries explore how to use this model of project finance to reduce payment risks for their own loans. Policymakers that negotiate these loans have some leeway to demand employment, training and local content conditions and should make the most of these opportunities.