A Project of the American Enterprise Institute and the Federalist Society

China Competes With West in Aid to its Neighbors

The New York Times

September 18, 2006

STUNG TRENG, Cambodia-In the dense humidity of northern Cambodia, where canoes are the common mode of transportation, a foreman from a Chinese construction company directs local laborers to haul stones to the ramp of a nearly completed bridge.

Nearby, engineers from the China Shanghai Construction Group have sunk more than a dozen concrete pylons across a tributary of the mighty Mekong River, a technical feat that will help knit together a 1,200-mile route from the southern Chinese city of Kunming through Laos to the Cambodian port of Sihanoukville on the Gulf of Thailand.

This is the new face of China's foreign aid to poor Asian countries: difficult construction in remote places that benefits the recipient, and China, too.

"It is the favor of our government to the Cambodian people," said Ge Zhen, 26, one of the more than 50 engineers and 250 other Chinese workers on the four-year project.

Flush with nearly a trillion dollars in hard currency reserves and eager for stable friends in Southeast Asia, China is making big loans for big projects to countries that used to be the sole preserve of the World Bank, the Asian Development Bank, the United States and Japan.

With the Singapore meeting of the World Bank on Sept. 19 and 20, China, one of the bank's biggest customers, is quietly shaking up the aid business in Asia, competing with the bank at its own game.

For poor countries like Cambodia, Laos and Myanmar, and somewhat better-off countries like the Philippines, China's loans are often more attractive than the complicated loans from the West.

The Chinese money usually comes unencumbered with conditions for environmental standards or community resettlement that can hold up major projects. The aid does not carry penalties for corruption that are being increasingly used by the World Bank president, Paul D. Wolfowitz. And China's offers rarely include the extra freight of expensive consultants, provisions that are common to World Bank projects.

For its part, China benefits from the added infrastructure-roads, ports and bridges-in the underdeveloped but growing region around it, to help increase trade and to move natural resources from China's periphery to its heartland.

Liqun Jin, vice president of the Asian Development Bank and a former vice minister of finance in Beijing, said in an interview at the bank's headquarters in Manila that China had carefully considered how to use its increasing wealth.

"China is attracting external capital, and as a balance China wants to help developing countries in the region by financing infrastructure projects," Mr. Jin said. "Helping your neighbors to have a good life is no sin."

He added, "China makes no bones that we want a peaceful neighborhood to develop our own economy."

The effects are likely to be enormous. Tom Crouch, country director for the Philippines at the Asian Development Bank, said, "Here comes a very large new player on the block that has the potential of changing the landscape of overseas development assistance."

Already, in the past several years, China has given aid to African countries, where it is buying oil and gas. They include some with repressive governments like Nigeria, Sudan and Angola.

Even during the cold war, China spread aid around Africa, sometimes to counterbalance assistance from rival countries, which were being helped by Taiwan. In the 1960's and 70's, for example, China aided Angola while Taiwan helped neighboring South Africa.

In Cambodia, Prime Minister Hun Sen boasts of China's offer last spring of $600 million in "no strings attached" loans, made during a visit from the Chinese prime minister, Wen Jiabao. The money will help pay for two major bridges near the capital, Phnom Penh, that will link to a network of roads; a hydropower plant; and a fiber-optic network that will connect Cambodia?s telecommunications with that of Vietnam and Thailand.

In contrast, Mr. Hun Sen points out that the traditional lenders together pledged just $1 million more than China. And the money came laden with conditions, including World Bank anticorruption clauses.

Four World Bank programs in Cambodia worth about $70 million were recently suspended by the bank after its investigators found corruption among Cambodian officials in the procurement process.

China's generosity to Cambodia has caught Washington's attention. The United States Navy is planning a port visit to Sihanoukville early next year, a first since the Khmer Rouge seized power in 1975.

In the Philippines, China is also making a big splash, offering an extraordinary package of $2 billion in loans each year for the next three years from its Export-Import Bank.

That made the $200 million offered separately by the World Bank and the Asian Development Bank look puny, officials from those banks said, and easily outstripped a $1 billion loan under negotiation with Japan.

Officially, the World Bank says it is not concerned about competition from China's increasingly energetic aid program. "The more important impact of China on these countries' development is trade rather than aid," said Homi Kharas, the bank's chief economist for East Asia and the Pacific.

The aid, chiefly for infrastructure, was being focused by China on the integration of trade in the region, a useful result for poor countries, he said.

But Western aid donors complain that China is secretive about its aid projects, and that it declines to attend the traditional meetings presided over by the World Bank to coordinate aid activities in poor countries. They also say they doubt that China always delivers the full value of the projects that it announces.

And Western aid officials said they were taken aback when the news of the $2 billion Chinese aid package came out at a lunch meeting of more than 100 aid donors in Manila last month. The size of the Chinese loans came as a shock, in part because the Philippines serves as the headquarters of the Asian Development Bank, a lender dominated by Japan and the United States. China is also a shareholder.

The secretary general of the National Economic and Development Authority in the Philippines, Romulo Neri, compared the Chinese aid package to those from other sources, and noted the appealing absence of the expensive consultant fees common to Western projects.

After being a favorite of the Bush White House, the Philippine president, Gloria Macapagal Arroyo, fell out of favor when she pulled her country's troops out of Iraq in 2004.

The Chinese appeared to have quickly filled the economic breach for the Philippines and, according to a memorandum from Mr. Neri's office, a number of projects are expected to be completed when Mr. Wen visits Manila in December.

They include two toll roads and a water supply system for Manila, and further financing for a rail project already under way to connect northern Manila with four provinces.

In some countries, like Cambodia, China?s construction projects seem clearly aimed at helping to assure China?s access to natural resources.

Western diplomats and aid officials in Phnom Penh said they believed that Cambodia had recently granted China the rights to one of five offshore oil fields that could yield as much as $700 million to $1 billion a year. Chevron already has an agreement for exploratory drilling at one of the Cambodian fields.

Washington does not know yet, and would like to know, whether China plans to offer loans for an often-discussed deep-sea port at Sihanoukville that would allow China a convenient delivery point for its Middle East oil imports.

In resource-rich Myanmar, the former Burma, Beijing's only real competitor on the aid front is India. China has built dams and roads connecting the interior of the country to China?s southern flank, and is currently reported to be working on a deep-water port on Myanmar?s west coast.

Myanmar is in deep arrears to the World Bank, which said it had no loan program there. The United States offers no official aid, either, because of the repressive nature of the government.

In Laos, China has built a major road up the spine of the country, and has been influential as much by the prospect of what it might do, than by what it has actually accomplished.

After years of study on the impact on the environment, the World Bank broke ground on a environmentally controversial major dam, known as Nam Theun 2, in Laos last year, because it knew that China was ready to step in to build the dam, bank officials say.

Beyond its no-strings approach, China is often appreciated as a lender by poor countries because it is willing to take on complicated projects in distant areas that others are not.

The bridge that Mr. Ge, the engineer, and his colleagues have sweated over during the last four years-the temperature creeps up as high as 106 in April-is in one of the most underdeveloped corners of Southeast Asia, the area where the Khmer Rouge first took power.

Running from the bridge is a new, smooth 130-mile road built by Mr. Ge's team that connects Kratie, a village to the south of Stung Treng, to the Laotian border.

"When we came here four years ago, we would leave at breakfast time from Kratie and we would arrive here for dinner-eight hours," Mr. Ge said. "It now takes two hours."

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