The Contest of the Century (40 page)

Brazil is involved in another interesting example of this new Chinese strategy to move beyond America-led globalization, the plan to create a BRICS bank. “BRICS” was a concept first invented by Jim O’Neill, an economist at Goldman Sachs, who wanted a catchy title to capture the exciting investment opportunities in a diverse group of emerging countries—Brazil, Russia, India, and China (South Africa was added later). Since then, the idea has taken on a geopolitical life of its own. The leaders of the five countries now hold annual summits, and some have high hopes that the BRICS can become an important political voice. Vladimir Putin, the Russian president, believes the group can develop into “a full-scale strategic cooperation mechanism that will allow us to look for solutions to key issues of global politics together.” The leaders of the five countries are in detailed discussions to establish their own development bank, which would lend funds to other developing countries, providing a powerful alternative to the World Bank and International Monetary Fund. With China the driving force behind the project, the BRICS countries are discussing an initial capital injection of $50 billion.

It is one of the ironies of the international system the U.S. created after the end of the Second World War that so many of its institutions are deeply unpopular in the U.S. On the American right, the visceral dislike of the United Nations is so intense that the U.S. Senate cannot pass any UN agreement, even if it is something the U.S. initially proposed. In late 2012, the Senate refused to ratify a UN treaty to promote the rights of the disabled that was based on American legislation. The World Bank and the International Monetary Fund are sometimes the butt of the same disdain, criticized on the right for their cushy perks and on the left as bastions of neoliberalism. But the reality is that both the World Bank and the IMF, which are based a couple of blocks away from the White House, have been powerful instruments for pushing an American vision of politics and economics on the developing world. Especially since the end of the Cold War, the World Bank and the IMF have been important conduits for the promotion of privatization and
free trade, the policies that have been the international priorities of the U.S. Treasury Department.

Their impact goes well beyond economics. These Washington-based institutions have also used their influence to encourage ideas about governance which have a strongly American flavor: a push for greater transparency, accountability, and respect for the rule of law. That makes the World Bank and the IMF hugely important and often underestimated tools in the global battle for influence. If China’s banks really do start to undercut some of the authority of the World Bank, providing an alternative source of financing that comes with far fewer political and economic strings attached, that would have a significant impact on Washington’s ability to shape attitudes in the developing world. Beijing does not want to tear up the World Bank or the IMF; indeed, it is lobbying hard for a bigger say in how they are managed. But without any announcement or grand design, it is also quietly setting up an alternative system of global development financing that has the potential to make the Washington institutions less relevant. “I sometimes ask the Chinese why they are making such an effort to be more involved at the World Bank,” says a senior Brazilian official who used to work at the bank, “because they are at the same time effectively putting it out of business.”

At the heart of most of China’s new economic relationships is one institution: China Development Bank. In the space of just a few years, it has become one of the most influential banks in the world. The state owns almost all the main banks in China, but CDB is different. Like the China Export-Import Bank, it is defined as a “policy bank,” which means that its objective is to support the overall economic goals of the government. China Development Bank is the sort of hybrid institution that can only really exist in Beijing, a branch of the Chinese state but for a long period it was also the political fiefdom of a very ambitious official from the Communist Party’s aristocracy. In the late 1990s, the bank was effectively bankrupt when Chen Yuan, a former vice governor of the Chinese central bank, became its chairman. His father, Chen Yun, was one of the most influential of the first generation of Communist revolutionaries and one of the “Eight Immortals,” the group of Deng’s contemporaries who acted as a parallel power structure during the 1980s
and 1990s, and who pushed for the military to take control of Tiananmen Square in 1989. Under Chen Yuan’s leadership, CDB managed to follow a delicate path of supporting government goals while also being hugely profitable. Dragonomics, a Beijing consultancy, calls it “the bestrun bank in China.”

Chen used his close personal contacts within the Chinese system to create a central role for CDB in Chinese urban development. In the early part of the last decade, the bank used an innovative financing structure to help unleash a surge in infrastructure projects by Chinese local governments—all those new airports, highways, and high-speed trains that have attracted so much attention. Then, from the middle of the last decade, Chen decided to take his bank overseas. He bought a small stake in the U.K.’s Barclays Bank and flirted with a much bigger investment, before pulling out of the deal. Instead, when the financial crisis started, he realized there was
a huge opportunity for China in the energy sector. Given the sharp drop in prices, energy-producing countries were “now in a difficult situation because they can’t raise capital from the West,” he said in 2008. “So they are shifting their focus to China. Therefore, we should grasp this opportunity to do deals.” He decided to build up an informal branch network for the bank overseas. Each of the main offices in China was given responsibility for a different region of the world. The Henan branch, in northern China, was told to scout for business in southern Africa; the Chongqing office, from central China, was sent to develop contacts in the Balkans. By the end of 2009, the bank had teams in 141 countries, including almost all the fifty-four countries in Africa. In a book he wrote about his experiences working overseas for CDB, Shi Jiyang recalls sitting in his office in Shenzhen in 2006, looking at a map of the world, and wondering if he would ever get the chance to visit South America; a month later, he was sent there to find new business. “South America is going to be the hotspot for Chinese investment over the next ten years,” he writes. “Entrepreneurs who want to ‘challenge the blue ocean’ should be ready to go to South America.” In early 2013, Chen Yuan stepped down from CDB, after more than a decade in charge. His new job is to establish the BRICS development bank.

Ambitious companies, not the Foreign Ministry, are forging many of China’s new international relationships. In a short period of time,
CDB started to sign a rapid succession of eye-catching deals. It provided the financing for the $2-billion Burma pipeline, as well as a series of big deals in Russia, Kazakhstan, and Turkmenistan. The bank was also behind a $9-billion development-financing deal that China signed with the government of Ghana. Africa gets most of the attention in China’s overseas investments, but CDB has also made a big splash in Latin America. Kevin Gallagher, a development economist at Boston University, calculated the amount of loan commitments that China made to Latin America between 2005 and 2011. The figure he came up with, $75 billion, was more than the entire amount loaned to the region by the World Bank, the Inter-American Development Bank, and the U.S. government. Some of those funds went to countries such as Argentina and Bolivia, which had effectively been cut off from international financial markets. “The key thing is that the Chinese are financing the sorts of projects that Latin American governments actually want, rather than the projects that the Washington financial institutions think that they need for their development,” says Gallagher.

The World Bank insists that it does not really compete with CDB and China Eximbank. In the strict sense, that is often correct. The Chinese are not involved in anything similar to many of the projects that the World Bank supports, such as microcredit schemes or health-care initiatives. According to World Bank officials, the Chinese are mostly interested in using their loans to get access to energy and natural resources, which is a different sort of business. But this explanation leaves out a number of things. It ignores the way in which Chinese money can alter the development priorities of governments. Dams are one of the best examples. After the World Bank succumbed to pressure from NGOs and withdrew from backing large dams in the 1990s, their construction ground to a halt. But when Chinese banks entered the fray, developing countries’ governments could ignore Washington’s advice about the risks of dam building. Whatever China’s motives, the money it makes available gives governments new options and reduces the leverage of the Washington-based banks.

The World Bank’s argument also ignores the broader political implications of China’s overseas lending spurt. The China Development Bank’s biggest client is Venezuela, whose firebrand leader, Hugo Chávez,
liked nothing better than taking potshots at Washington until his death in 2013. From 2007 to 2012, the bank lent $42.5 billion to the government of Venezuela—roughly a quarter of its overseas loans during that period. Venezuela is one of the world’s largest oil producers, and the loans are backed by oil revenues, which gives China some comfort about repayment. As part of the deal, Chinese companies are also getting access to some oil exploration projects which have become available because U.S. oil companies have been expelled. Most of the loans have gone into a development fund run by the Venezuelan government. It is not too much of an exaggeration to say that the Chinese money went a long way to securing Chávez’s hold on power. “Venezuela’s oil is at the service of China,” Chávez once told Xi Jinping. Ecuador, another Latin American country with a left-populist government that enjoys snubbing its nose at Washington, has negotiated a similar oil-for-loans deal with China. The $7.3 billion in loans it has signed are equivalent to around one-third of its annual budget.

Venezuela’s experience in recent years demonstrates the potential of Chinese financing to alter some of the dynamics of international politics. When its oil revenues plummeted during previous financial crises, Caracas was often obliged to look to the Washington institutions for support. The price of that help was to adopt some of their advice about how the economy should be run. During the 2009 crisis, Venezuela’s finances were under heavy pressure as oil prices fell. But, courtesy of the Chinese money, Chávez was able to carry on as if nothing had happened. Indeed, as a result of Beijing’s backing, Chávez went so far as to pull out of the World Bank and IMF formally in 2010. “We will no longer have to go to Washington,” Chávez boasted.

Lurking behind the surge in Chinese lending there is also an economic philosophy that puts China at odds with the Washington institutions. When Deng Xiaoping decided to start opening up the Chinese economy, one of the first things the government did was to take out a large loan from Japan in 1978, on terms quite similar to the sorts of deals China has struck over the last five years in Africa and Latin America. China pledged to import $10 billion of Japanese technology and capital equipment, which it repaid with exports of coal and oil. (This was an era when Japan, not China, was the country scouring the world for
natural resources to feed its rapid industrialization.) China used the funds to build new ports and roads, to construct power plants, and to build up its telecommunications network—the core industrial foundations it needed to help kick-start the economy. “China was getting a discount
on finance the country needed for its modernization,” according to Deborah Brautigam, an American academic who has done extensive research on China’s links with Africa. China sees its hands-off financing in Africa and Latin America in a similar vein. Little of this is aid: the borrowing countries have to repay the loans, which are at international interest rates. But Chinese officials argue that economic development can only take place if governments are given the freedom to experiment with the sorts of projects that might work in their countries and which are important for their economy. “We had to learn from our own mistakes,” as a senior Chinese official explained to me. “We are letting other countries do the same. We cannot tell them what they need or how to run their economy. All we can do is share some of our own recent experiences.”

HACKED OFF

In 2004, a security officer at Nortel, a leading maker of telecommunications equipment, noticed something peculiar on the group’s computer network. One of Nortel’s senior executives appeared to be downloading a large series of sensitive documents about the company’s technology and strategy. The executive claimed to know nothing about the downloads, so the company’s IT-security staff started to investigate. They eventually followed the intrusion in Nortel’s networks all the way back to Internet servers in China.

Over the next few years, Nortel continued to notice signals that hackers were still present in its system. Brian Shields, a longtime Nortel executive who led the company’s internal investigation, concluded that the passwords of seven senior company officials, including the chief executive, had been stolen. Every so often, one of the company’s computers
would send a large packet of electronic data that would end up at one of the Internet addresses in China. The hacking had probably started as far back as 2000, Nortel concluded. “They had plenty of time
to get pretty much anything they wanted,” says Shields. “This is not the kind of thing that ordinary hackers can do. It has to be something organized by a state.”

Nortel is already an also-ran of the fast-moving IT industry. One of the pioneers in making the electronic switches that power mobile-phone networks, the Canadian company filed for bankruptcy in 2009 and has since been sold off in different pieces. The company could never definitively prove that China was behind the hacking of its system, and Beijing has denied it. It is also not clear whether there was any link between the hacking and the company’s deteriorating results. But the accusations that Shields has aired have become part of a familiar refrain in recent years, as American companies and politicians have started to accuse China of a staggering campaign of stealing trade secrets. The most detailed case has been compiled by Mandiant, a U.S. Internet-security company, which claims to have traced hacking attacks on 141 companies in the U.S. and fifteen other countries to one particular Chinese military unit based in Shanghai. According to the Mandiant report, a well-known group of hackers named APT1 is actually part of a PLA group called Unit 61398. By tracing a large volume of hacking activity back to telecom networks near the unit’s base in a twelve-story building in central Shanghai, Mandiant concluded that the PLA had to be involved. Amid the increasing volume of evidence linking China to hacking, senior U.S. politicians and officials have taken to denouncing Beijing. In Congress, there is a strong move to try and find some sort of payback, to punish the companies that are benefiting from cybertheft.
“What has been happening over the course of the last five years is that China—let’s call it for what it is—has been hacking its way into every corporation it can find listed in Dun & Bradstreet,” says Richard Clarke, former White House counterterrorism officer under Bill Clinton and George W. Bush. “Every corporation in the U.S., every corporation in Asia, every corporation in Germany. And using a vacuum cleaner to suck data out in terabytes and petabytes.”