China’s global rise in terms of economic engagements with the world are not only due to its financial lending’s but has gone on to incorporate a many other critical factors within the framework of developmental finance as well.
With its population of 1.42 billion people and a gross domestic product (GDP) of US$18.73 trillion, China has the world’s second largest economy after the United States.
Aspects such as the Currency Swap agreements which are bilateral agreements between two countries that facilitate the exchange of one currency for another at an already decided exchange rate, is proving to be a significant part of Chinese economic coercive strategy.
In 2021, a report sourced by the People’s Bank of China (PBOC) claimed that China has swap facilities with more than 40 countries around the world, including Indonesia, and had agreed to over 4 trillion-yuan ($570 billion) worth of deals with its partners.
The PBOC and the Bank Indonesia (BI), the central Bank of Indonesia, have renewed the bilateral Currency Swap Arrangement (CSA) on Jan.21, 2022. The arrangement is up to Rp 550 trillion ($38.8 billion) and valid for three years. It was established in 2009 and it was amended several times.
“The Agreement will further promote the bilateral trade and direct investment in local currencies for economic development of the two countries as well as indicate the commitment of both central banks to strengthen financial market stability”. The Bank Indonesia said in a press release on Jan. 27, 2022.
More so, these currency Swap agreements are also an attempt by Chinese authorities to internationalize the Chinese currency in order to destabilize the stronghold of the dollar in the international market. However, in such attempts Beijing’s methods have so far been understood to be problematic for various reasons.
China in the last 10 years has widely gained significant leverage against independent countries and their autonomous decision-making processes. Through such currency swap agreements, Beijing has provided liquidity and financial support to indebted countries, especially those facing currency or balance of payment crises.
This kind of support has been understood to be in the form of economic assistance and has majorly create dependencies and influenced the recipient countries economic policies that favor the lender.
Above and over such attempts, by engaging in currency swap deals Beijing has also deepened its economic ties with developing countries to extend its political influence in domestic policy-oriented decision making.
These agreements, which often require close coordination and cooperation between central banks, has led to increased communication and alignment of economic policies that otherwise would not have been enacted in lieu of no currency swap arrangements.
Major concerns have also been raised upon the fact that China has attached a set of stringent conditionalities to currency swap deals that benefit its own interests and promote its preferred policies.
These conditions have been understood to range from economic reforms to political alignment and support for China’s positions on complex issues. This has not only undermined the sovereignty and independence of the recipient country, but has also led to widespread concerns about long-term economic and political repercussions for the international market as a whole.
Beijing’s broader economic engagement have also solidified concerns about debt sustainability in recipient countries. Such concerns are also about debt trap diplomacy and unsustainable debt burdens that have so often extended to financial arrangements such as currency swaps agreements.
However, the larger aim of such strategies by China still remains to internationalize its domestic currency, the Chinese Yuan.
Experts have argued that the Chinese Communist Party’s efforts to internationalize the yuan are meant to be used as a method to manipulate the value of the yuan for international economic and political gains.
By doing so, Beijing would withhold the leverage of its competitive advantage which could also lead it to dictate over other countries economic decisions and force the recipients’ nations into agreeing on stringent conditions for repayments.
Such Chinese subversive practices combined with its ill-intentioned developmental finances to middle and low-income countries have caused significant concerns to countries and their economic feasibilities in repaying high interest loans.
As part of safeguarding its international lending’s Chinese lenders have rallied around strict contractual agreements that incorporated hidden debts mechanisms and stricter repayments with higher interest rates that the global market.
With the promise of faster access to capital Chinese developmental banks have been duping weaker economies with enticeful incentives for infrastructural development in lieu of guarantees that its business will be permitted to function as per its convenience. These methods have also led to Chinese MNC’s at times being allowed to override local laws as per its needs.
In the given scenario, countries struggling to cope with Chinese debt and obligated to sign currency swap agreements must rally together to prevent Chinese hawkish behavior upon its sovereign decision-making processes. Countries especially from the developing world must prevent Beijing’s authoritative intentions through economic coercive means from taking shape by calling out its double-faced tactics aimed to expand its influence through internationalizing its currency.
These counter-measures will not only go on to restrict the Party’s hegemonic aspirations but will also motivate other economically distressed countries from falling into Chinese dictates in terms of policy decisions that Beijing is attempting to achieve.