White Cats, Black Cats and China's Foreign Aid

03/18/2010 05:12 am ET | Updated May 25, 2011

"I don't care if a cat is white or black so long as it catches mice," China's former leader Deng Xiaoping famously commented on the role of ideology in economic development. In line with this credo, China offers foreign aid with no political strings attached. The only exception is that recipient governments must accept the One-China policy, i.e. may not recognize Taiwan. "Business is business. We try to separate politics from business", China's Deputy Foreign Minister confirmed in 2004.

After the World Bank and the International Monetary Fund tied their loans to the privatization of public utilities, the liberalization of foreign trade and other political conditions, China's pragmatism came as a welcome reprieve for many borrowing governments. Yet a few days ago, Ecuador's President protested that negotiations with China were "worse than the IMF." What is happening?

In November, the governments of Ecuador and China signed cooperation agreements worth $4.7 billion. This included Chinese funding for the Coca Coda Sinclair Dam, a $2 billion hydropower project on a tributary of the Amazon. Eighty-five percent of the funding was supposed to be provided by China Exim Bank. China's export credit agency has rapidly become the most important funder of large infrastructure projects around the world.

In recent days, the negotiations between China Exim Bank and Ecuador's government turned sour. On December 5, President Rafael Correa publicly complained that the bank's loan conditions were "a threat against our sovereignty." China Exim requested that Ecuador's central bank offer its assets as a guarantee for the Chinese loan. President Correa called this request "an outrageous thing that is really humiliating for the country." "Sometimes we feel ill-treated by China; not even the International Monetary Fund treats us like this," Correa concluded.

I'm not surprised by Ecuador's experience. The Chinese government may be pragmatic when it comes to economic policy, but is a tough negotiator when it comes to business interests. In 2007, a Western diplomat reported from Beijing that China Exim Bank "does not hesitate to discuss changes in project-related governance to ensure loan repayment." For example, the diplomat explained, Exim Bank would apply "pressure to raise electricity tariffs to finance hydropower projects." Like Deng Xiaoping's proverbial cat, a recipient government can be red, black or white, but it does need to catch mice, i.e. repay China's loans.

I don't know the details of the negotiations between China and Ecuador. In the past, many large dams have turned into white elephants that did not make economic sense. By requesting a water-tight guarantee for Coca Coda Sinclair, China Exim Bank may indicate that it is not convinced that the dam will pay for itself. By trying to lay its hands on the reserves of Ecuador's central bank, the bank attempts to be in a safer position than other Ecuadorian debtors.

Whatever we think about China Exim Bank's move, it should lay to rest the argument that China cannot insist on strict environmental standards in its overseas projects because this would violate the host country's sovereignty. If China is involved in a project as a funder or investor, it should ensure its sustainability. This includes the protection of the environment as much as a project's financial viability.