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Using official Chinese development aid to support investment

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In Brief

China does (and does not) use its official development assistance (ODA) to support investment. More specifically, the kinds of large-scale natural resource investments by Chinese firms that have made headlines in many regions are almost never supported by China’s relatively small budget for foreign aid.

At the same time, policymakers in Beijing use a number of other instruments to support the business activities of Chinese companies overseas.


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These other instruments are often regarded as ‘aid’ by casual observers who are either unfamiliar with the kinds of activities normally regarded as ODA, or who do not understand the nature of the activities undertaken by the Chinese.

In discussions of ODA, it is helpful to use standardised terminology developed by the OECD’s Development Assistance Committee. First, the purpose of ODA finance must be primarily to promote economic development and welfare in the recipient country. Second, ODA must be provided on a concessional basis. Export credits do not generally qualify as ODA, nor do grants and subsidies to support private investment. Chinese definitions of external assistance are not very different from this, and their foreign aid budget is generally used for roads, health stations, rural telecommunications projects and so on, although they will also finance ‘prestige projects’ and public works like stadiums and conference centres.

The overlap between Chinese official aid and the investment activities of Chinese companies is small, but it does exist. The first projects displaying this overlap date from the 1980s and involved debt equity swaps, where debts owed to the Chinese government (usually for productive, state-owned projects such as factories) were transformed into equity shares in the project, which would then be assigned to a Chinese firm.

In 1995, Beijing began to establish around a dozen centres for trade, investment and development. These public-private partnerships followed a standard build-operate-transfer model. In the Benin centre, for example, China’s aid budget provided 60 per cent of the construction cost. The Chinese company that was to operate the centre contributed 40 per cent and the host government provided the land.  The company would rent out space in the building, while also providing services to other businesses (predominately, but not solely, Chinese firms). After 50 years, the host government would receive the building. The entire package mixes aid and investment, and is clearly meant to boost the opportunities for Chinese firms, while also serving as a (long-term) real estate investment for the host government.

The Chinese government is also subsidising the cost of building 15 overseas industrial and trade zones. Initially, a minimum of 10 zones were to be established abroad, with the hope that 500 ‘mature’ Chinese companies, particularly small and medium enterprises, would use these to go offshore, investing a projected total of US$2 billion. More than half of the zones are located in Asia; six are being built in Africa. Again, although this might look like foreign aid, it is not. The subsidies are given directly to Chinese companies and they do not come out of the foreign aid budget.

Like other countries, China also has an export credit agency (China Export–Import Bank, or Eximbank) that supports Chinese exports to less-developed countries. China Eximbank and the state-owned China Development Bank also have loaned funds to support Chinese investors overseas, particularly to help them purchase equipment and machinery from China. Loans from Eximbank can be extended to host governments to help them purchase telecommunications equipment and installation services from Chinese firms, agricultural machinery or planes, or to build infrastructure. Although these loans can be provided to joint ventures between Chinese and foreign firms, they would not qualify as ODA if their primary purpose was to support private investment or exports.

In some countries, such as Brazil, Angola and Venezuela, the Chinese have provided large lines of credit that are backed by the country’s existing exports to China in long-term trade agreements. These ‘mutual benefit loans’ are provided at market rates (LIBOR plus a margin) and are not seen as concessional. Because they are secured by natural resource exports, which lower risks, these loans can be provided at competitive rates, much as Western bank consortia have done in places like Angola for several decades. Neither the Western bank resource-secured loans, nor the Chinese loans are viewed as ‘development aid’. It is not necessary for the resources that secure these loans to come from a Chinese investment, but the borrowing government must have control over the exports, in order to boost the credibility of its pledge to repay the money.

China has many instruments that can be used to promote what its government labels ‘mutually beneficial cooperation’. These instruments need to be disentangled from the official aid program, and viewed for what they are: part of the portfolio of tools used by an activist, developmental government with a clear vision of what it needs to do to promote its national goals overseas. And in viewing them for what they are, we have a chance to re-examine the conventional wisdom that excludes these kinds of activities from the portfolios of most traditional donors.

Deborah Bräutigam is Professor of International Development at the School of International Service, American University, Washington DC, Professor II at the University of Bergen, Norway, and a senior research fellow at the International Food Policy Research Institute.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘China’s Investment Abroad’.


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