#03 development cooperation
Margot Schüller / Jari John

China’s Foreign Aid – Interests, Strategies and Instruments

The emergence of new donors in international development cooperation is a rather recent phenomenon and directly related to the surge of economic globalization. Developing countries such as Brazil, China or India have benefited from a new international division of labour and the liberalization of global trade and financial markets. They have become powerful international actors and donors in South-South development cooperation. Currently over 30 donor countries have already emerged outside the realm of the OECD’s Development Assistant Committee (DAC). China is one the most important of these countries. Although China’s foreign aid diverges from OECD standards, recipient countries in Africa and Asia welcome China as a new source of finance and model of successful economic transition. There are, however, a number of challenges associated with Chinese foreign aid for both recipient countries and international aid architecture in general.

South-South cooperation versus North-South cooperation

The nature of China’s relations with other developing countries was defined as far back as 1955 at the Asian African Conference of the Non-Aligned Movement in Bandung, Indonesia. Since then, China’s relationship with developing countries has been guided by the ‘principles of mutual coexistence’. These include respect for territorial integrity, the rejection of aggression, non-interference into the internal affairs of other countries, equality, mutual benefits and peaceful coexistence. The principles that guide South-South cooperation (SSC) are very similar and stress the importance of equality, mutual benefits, and reciprocity. In this respect, SSC differs fundamentally from traditional North-South development cooperation (NSDC). The primary tools for realising mutual benefits and reciprocity are the parallel expansion of trade and investment relations and financial support for development projects. Though officially non-hierarchic in nature, SSC usually occurs between countries at considerably different stages of development. This maintains an asymmetric bargaining relationship. SSC also differs from traditional NSDC by taking a non-interventionist approach regarding local political practices. Consequently, SSC is not guided by a specific value set that legitimizes the application of conditionality and requests for political reforms. In this context SSC attracts criticism as it might stabilize or promote semi-democratic or authoritarian regimes. As will be seen later, another feature of SSC is the rather blurred division between private commercial projects and traditional development cooperation based on standards of Official Development Assistance (ODA).

China’s interests in international development cooperation

China is not really a new donor. It has, in fact, been active in international development cooperation since the 1960s. Initially, ideological and political interests dominated China’s cooperation with other developing countries. Over the last two decades though, strategic economic interests have become more important. Until the end of the 1980s, relations with, African countries, for example, were influenced by China’s ideological competition with the former Soviet Union and desire to be recognised as a global political power. Through cooperation with 53 African governments, China tried to win the support of this important voting block to enforce its own national interests (such as the 'One-China Policy') inside international organizations such as the United Nations. During this period, development cooperation focused on agriculture and health and was driven in large through the deployment of Chinese experts in Africa, though only to a limited extent on large-scale infrastructure projects.

Since China began its export-oriented economic reforms, the pursuit of strategic interests has been broadened and now includes the exploration of foreign markets, access to natural resources and foreign technology. Due to China’s strong economic growth, the need for natural resources, especially energy, became a pressing issue in the 1990s. Chinese state-owned companies were asked to diversify their markets and invest in Africa, Latin America and Asia.

In contrast to China’s relations with Africa, its relations with Asia are more complex due to the country’s historical experience with the Japanese occupation, the communist revolution, border disputes, the war with Vietnam and the potential conflict associated with the exploration of natural resources in the South China Sea. Geographical proximity, traditional cultural and historical ties and the advancement of Asian regionalism are also shaping relations with Asian countries. Today, China is strongly interested in improving its prestige in Asia and being recognized as the leading regional power. Most of all, China wants to persuade its neighbours that its rise is not a threat but an opportunity.

Strategies and instruments of China’s development cooperation

China’s development cooperation is based on the principles of South-South Cooperation and represents a mixture of traditional ODA finance (which requires a grant element of at least 25 percent), commercial loans, export credits and foreign direct investment. Compared to traditional donors, Chinese development assistance is focused on tied aid, but does not include debt relief. Confusion about the volume of Chinese foreign aid is widespread as media reports have often added up all these different activities. Since China is not a member of the DAC, it does not need to supply any statistics regarding its own activities as a donor. Data on its so-called “external assistance” are reported as part of the budgetary expenditure of central and local governments and published by the National Bureau of Statistics (NBS) on an annual basis. Country- and sector-related aid flows are not reported by the NBS and have to be extrapolated from other sources such as government and media reports from China and recipient countries.

Chinese external assistance (which includes grants, interest-free and preferential loans, cooperative and joint venture funds for aid projects, science and technology cooperation, and medical assistance) as well as concessional loans supplied by the Export and Import Bank of China (Eximbank) have strongly increased over the last few years (see Figure 1).

Figure 1: China’s external assistance and concessional China Eximbank loans (million of US$)

Concessional loans are used to finance industrial and infrastructure projects. Their amount has increased compared to external assistance since 2008 and totalled around US$ 3 billion in 2009. The total volume of Chinese aid (external assistance and concessional Eximbank loans) amounted to US$ 4.906 billion. The extent to which concessional loans can be counted as part of ODA is disputable since information about concessionality is lacking. Non-concessional loans supplied by the China Eximbank and the China Development Bank have grown much quicker than external assistance and concessional loans and have thus become an important source of finance for developing countries, especially in the form of export credits.

This kind of development cooperation plays an important role in Africa-China relations. In 2009, total aid to Africa reached US$ 2.091 billion, including US$ 1.501 billion in concessional loans. Compared to aid from traditional donors, China provided less than France and only one third the amount of US aid to Africa. In contrast, the volume of Chinese non-concessional loans of around US$ 7 billion exceeded that of other countries’ export credit agencies by a large margin. This demonstrates the strong commercial engagement of Chinese companies in African countries (Christinsen 2010). Trade between China and Africa increased to US$ 50.8 billion in 2009 and China is now the largest trading partner. Chinese foreign direct investment grew to US$ 9.33 billion by the end of 2009 (White Paper).

Although China’s foreign direct investment has a strong focus on natural resources, development cooperation covers a broader field including educational cooperation, technical training programmes, agricultural cooperation and medical training. In general, China’s aid is adapted to the needs voiced by the beneficiary country, which often requests support for infrastructure projects as a precondition for its economic development and expansion of foreign trade. The construction of transportation infrastructure involves the building of highways, ports, airports, railway lines or trade cooperation zones. The infrastructure projects are partly financed through concessional loans which can be understood as foreign aid, and partly through export buyers’ credits supplied by the Chinese at commercial market rates. These credits are not development assistance but an instrument to promote business (Brautigam 2011).

Is Chinese development assistance a threat?

The discussion of the non-DAC donors’ impact on developing countries and the existing aid architecture centres mainly on the following questions: First, do non-DAC donors undermine the standards agreed upon by the DAC donors such as aid effectiveness, good governance and sustainable economic development? Second, is non-DAC donors’ provision of easily accessible loans with less conditionality leading to a new round of indebtedness for developing countries? Traditional donors are also concerned that non-DAC donors’ aid programmes are focused on technical or production-based projects instead of supporting the Millennium Development Goals (MDGs).

China has become the main focus of both the political discussion and the empirical research on the impact of non-DAC donors on the existing aid architecture. Supported by the government, Chinese state-owned companies have accelerated their ‘going-global’ activities, especially in the field of natural resources. The combination of development assistance with favourable conditions for finance projects and the expansion of trade and direct investment opportunities is commonly used by non-DAC donors, but China plays an outstanding role in this respect. Although many scholars take a critical stance when it comes to the violation of social or environmental standards by Chinese companies, some also point to the new opportunities China’s engagement brings for economic development in Africa. Here, the greatest challenge is a lack of long-term strategic thinking on the part of many African governments, which need to better shape relations with China to achieve the desired win-win situation. For many poor countries in Asia, particularly the continental Southeast Asian countries along China’s border, development cooperation with this strong neighbour offers new opportunities badly needed to catch-up with the emerging economies in Asia. Whether China’s engagement as a new donor contributes to sustainable development has to be evaluated on a case by case basis. While infrastructure projects tend to have a positive growth effect, negative environmental and social implications could lead to a more critical perception of Chinese development cooperation.

References

Brautigam, Deborah: The Dragon’s Gift. The Real Story of China in Africa, Oxford University Press, December 2009

Brautigam, Deborah: China, Africa and the International Aid Architecture, Working Paper March 2010

Brautigam, Deborah: China in Africa: Seven Myths, Real Instituto Elcano, ARI 23/20011, February 2011

China Statistical Yearbook, various Issues, Beijing Christensen, Benedicte Vibe: China in Africa. A Macroeconomic Perspective, Center for Global Development, Working Paper 230, November 2010

White Paper: China-Africa Economic and Trade Cooperation, Information Office of the State Council, The People's Republic of China, December 2010, Beijing