Using data on aid flows from 2010 to 2012, with a particular focus on the trade- aid linkages, the study found a strong correlation between Chinese aid flowing to infrastructure sectors
INTRODUCTION
The notion of “emerging donors” has been an important one in the recent literature on foreign aid With the rise of China as an emerging donor and Sub-Saharan Africa (SSA) as the main recipient of its growing aid, much attention has been focused on the nature of China’s aid relationship with developing countries, particularly in the SSA region For its part Beijing has been stressing the reciprocal nature of its interactions with SSA and promising a new aid relationship; one of a partnership based on traditional friendship However, academics express doubts about the latter and China’s real motives behind its aid to the SSA region The general agreement appears to be that although Chinese aid differs from that of traditional donors (OECD members), it still adheres to the basic principle of aid, which is to primarily serve the interests of the donor In theory, the so called self-interest can extend from economic benefits to political interests of the donor For China, it seems that economic interests are the main motives behind its aid program in Africa Many African countries express gratitude for Beijing’s generous offers of aid, cancellations of debt and promises of trade and investment in exchange for energy and minerals The Chinese government also states its allocation of aid to Africa is for mutual benefit However, China has been at the centre of criticism for its rapidly expanding role in the continent as an energy and resource extractor Critics charge that China’s extractive behaviour in Africa is no less than neo-colonialism, as it attempts to secure oil and other resources It is no secret that China’s interest in SSA is for the raw materials it requires to feed its industrial machine Indeed, China’s imports from the region are heavily concentrated in petroleum and mineral Data also shows that China is one of the biggest importers of fuels in the world Figure 1.1 below shows the share of fuels imported by China There is a constant increase up to 2012, after which it falls reflecting a slowdown of the Chinese economy
Figure 1.1: Shares of China’s imports of oil to the world, 2010-2012
Source: World Integrated Trade Solution (WITS)
There is also a feeling that China’s aid policy also serves its export strategy, by making aid receivers more prone to importing from China
In the context of the above, the paper attempts to investigate the motivations of Chinese foreign aid to SSA, with the emphasis being on the economic motivations and in particular the trade-aid linkages The trade benefits refer to the imports of strategic raw materials to serve the production needs of the economy and exports of Chinese goods to the region The research objective is to see the nature and extent of the aid trade relationship and in particular a) aid facilitates flows of raw materials from Africa to China and b) aid allows greater Chinese exports to countries in this continent
It needs stressing that the study does not look at the potential benefits of the recipients of Chinese aid, or compare Chinese aid to those of the OECD countries in this regard Rather, the sole focus is on whether Chinese aid as served the interests of China, particularly its economic interests Also of note is the relative dearth of official data on Chinese aid, since this is often to be found under the guise of foreign investment
The study is organized as follows: Chapter 2 introduces some theories and empirical studies of motivation of aid with a focus on the trade gains from aid Attention is also paid to China’s aid economic motives and the trade-aid link with Africa Chapter 3 provides background information about China’s economy and discussion the reasons behind China’s aid activities More specifically, it explains the importance of raw material and markets for China’s growth dynamism Background on China’s aid is also included together with Chinese policy toward aid Chapter 4 presents an analysis of the aid-trade link, distinguishing between exports and imports The last chapter will then attempt to draw conclusions from the preceding study.
LITERATURE REVIEW
Aid in general
In this chapter, the paper considers arguments for and against economic motives of foreign aid Based on a humanitarian concern about worldwide development, aid is claimed to contribute to the process of alleviating absolute poverty and global economic inequality and distress The role of aid in promoting economic growth and human development in recipient countries has been the main focus in the literature recently Recent articles covering the literature on aid and growth include McGillivray et al
(2006) and Arndt, Jones, and Tarp (2010) The effectiveness of aid in raising real GDP growth can be found in studies of Morrissey (2001), Hansen and Tarp (2001), Easterly
(2003), Easterly et al (2004), and Patella et al (2007) The overall conclusion is that
Evidence suggests that recipient-country growth would be lower in a counterfactual scenario with no aid, indicating that aid contributes to development outcomes Some related literature argues for short-term win-win effects of bilateral aid, where progress in recipient countries can, in turn, benefit donor countries through expanded trade opportunities and greater global economic and social stability in the long run However, there is broad agreement that donor self-interest shapes aid flows, with political and economic benefits guiding donor strategies Foundational analyses by Alesina and Dollar (2000), Maizels and Nissanke (1984), and McKinlay and Little (1977) emphasize that foreign aid decisions are often driven by the donor's strategic interests rather than purely altruistic motives.
McKinlay and Little (1977) study the allocation of U.S aid over the years 1960-1970 They note that humanitarian model which considers economic assistant is the main rationale behind aid allocation has received criticisms from the literature Meanwhile there is considerable evidence has supported the view that aid is strongly linked to donor’s foreign policy interest They explicitly test the former model and question the validation of it in explaining U.S aid allocation They later is motivated to build a systematic model so called “foreign policy model” Guided by the wide range of literature, the model then is developed in to five substantial models that capture various interests of the U.S: “development interests”, “overseas economic interests”, “security interests”, “power political interests”, and “interest in political stability and democracy”
By doing so, the authors can isolate the effect of different types of interest of U.S’s aid The results of the study support the foreign policy model There is also evidence indicates that “power political and security concerns are the central interests supported by and controlled through the U.S aid program” (McKinlay & Little, 1977, p 80) One important emphasis the authors made in their research is that “the best single indicators of relative need are population and per capita GDP” in the context of aid They argue that as population grows and GDP per capita declines, the relative need for aid rises If two countries receive identical amounts of aid (that is, identical absolute commitment), but one has a larger population and lower per capita GDP, then some preference is being shown toward the smaller, wealthier country in the sense that its relative needs for aid are lower
Follow McKinley (1977), Maize’s and Naissance (1984) examine the balance of motivations between “recipient need’ and ‘donor interest’ They use two alternative models reflecting the need for aid of recipient countries and the donors’ gain from giving aid, respectively The data covers bilateral and multilateral aid flows to 80 countries in 1969-1971 and 1978-1980 The first model is found to be inapplicable as an explanation of allocation of aid The second model of donor interest provides a good explanation of bilateral aid but poor explanation of multilateral aid More specifically, political and security interests are found dominantly affect the results and its coefficients increase sharply from 1969-1971 period to 1978-1980 period Aid for investment shows positive effect, but not significant Trade interest represented by a dummy variable, which equal
1 if the recipient country exports more than 1% of world exports of any strategic materials such as bauxite cobalt, copper, nickel, etc shows positive coefficient in both periods, but again insignificant And by comparing results from two periods, the analysis show that there is a shift from the domination of recipient need aid in the first period to the domination of donor interest aid in the second period Maize’s and Nissanke (1984, p 891) concludes “bilateral aid allocations are made largely or solely in support of donors’ perceived foreign economic, political and security interests” With regard to econometric technique, Maizels and Nissanke (1984) use cross-country linear multiple regressions for analysis The choice of cross-country regressions is not new in empirical literature of aid Early analysis using this kind of regression includes Davenport (1970), Henderson (197l), Wittkopf (1972) Cross-country regression is often used to compare the differences amongst the subjects in a specific point in time, it is not meant to capture changes through time Therefore, weakness of the model that it might not help explain cause and effect in this study of trade and aid A problem often arises from the use of linear regressions is that the results may be affected by extreme values (or ‘outliers’) of the variables included In attempt to mitigate these problems, Maizels and Nissanke
(1984) take average of variables used in regressions for each three year period 1969-
1971 and 1978-1980 Outliers are also eliminated from regressions There is report that estimate results change from significant to insignificant in one of the estimations in this study after the exclusion of outliers
Alesina and Dollar (2000, p.55) suggests that donor’s interest explains more of
“distribution of aid than the political institutions or economic policy of recipients” They use the data on bilateral aid flows reported by the Development Assistance Committee of the OECD for every five-year period between 1970 and 1994 to study the behavior of bilateral donors aggregately and individually Aid flows from U.S., Japan, France, and Germany account for the majority of the total aid The authors consider variables such as trade openness (a zero-one index), colonial history, democracy (an index from on a scale of 1–70 and foreign direct investment (FDI relative to GNP), etc A new variable using records on UN voting patterns is constructed based on the correlation of voting between each donor-recipients pair This index is claimed to measure the friendship between a donor and a recipient The study finds that aid tends to flow to recipients with colonial past and favor voting patterns in the United Nations In particular, France has given overwhelmingly to its former colonies; and Japan’s aid is highly correlated with
UN voting patterns (countries that vote in tandem with Japan receive more assistance) They finds no evidence suggesting a link between FDI and bilateral aid flows
Most scholars agree that aid is driven more by self-interest than pure altruism, though the specific interests identified vary across studies Consequently, the literature remains fragmented, with different studies emphasizing different variables and rarely attempting to assess their interactions or compare their relative importance There is virtually no solid evidence on which determinants matter most, and most analyses suggest that the drivers of bilateral and multilateral aid are quite different, making it difficult to explain both forms within a single framework.
Some particular studies focus on trade targeting resource- rich recipients (Brautigam
2007, 2010; Jiang, 2009; Downs, 2007; Fuchs, 2011) They argue that donors giving aid to promote energy relation with developing countries with natural resources endowment Aid is argued as a mean to secure exports of oil, raw material from recipient countries to donor countries It is often given under the form of investment in extraction projects or building infrastructure that support the exploitation process However, there is no clear empirical evidence supporting these above points Dreher and Fuchs (2015) empirically test if self-interest dominates China’s aid allocation; they finds that China’s aid allocation seems to be unaffected by characteristics of the institution and the endowment of natural resources in recipient countries
Dominant aid theory suggests that trade, FDI, and political alliance represent donors’ interest The main focus of this part is to address the link between foreign aid and trade
Researchers have long analyzed the correlation between aid and trade flows from donors to specific recipients, asking whether aid is used to promote trade or whether trade conditions drive aid allocation Two opposing views dominate: (a) aid leads to trade, with donor–recipient exports indicating an economic link and helping explain aid allocation, and (b) trade leads to aid, so trade patterns determine where aid goes Proponents of the first view emphasize exports from both donor and recipient as signals of the underlying relationship, while proponents of the second view argue that aid can come first—directly, if tied to imports from the donor, or indirectly, if aid spurs growth and increases demand for donor imports In practice, either dynamic may operate, and the dominant effect depends on the donor–recipient pairing.
There is broad agreement in the standard aid-trade literature that aid supports the donor’s trade policy, with donors typically transferring resources and conditioning recipient governments to spend more on donor trade goods; Kemp and Kojima (1985) and Wagner (2003) uphold this view, arguing that exports rise due to direct and indirect gains from aid, including the most obvious direct link in explicitly-tied aid that obliges recipients to use funds to buy the donor’s goods or services, while indirect effects can persist and boost exports not directly tied to aid, potentially exceeding the amount directly tied (Wagner, 2003); Morrissey (1993) adds that tied aid does not necessarily increase exports to donors since export competition among donors is the dominant objective, citing Jepma (1989) that 30–50 percent of tied aid from major donors is not trade-creating and that aid is used as an export subsidy or to support exports in general as donors seek frontier markets or to maintain market shares; Lahiri and Raimondos (1995) view aid as a means to reduce trade restrictions, presenting a two-country model where tied aid is used to promote exports by linking aid to the relaxation of barriers such as tariffs and quotas (Lahiri & Raimondos, 1995, p 313).
From a development perspective, foreign aid contributes to economic growth in recipient countries and, through development channels, tends to raise overall exports, including those to donor countries Pettersson (2013) argues that aid can accelerate the learning-by-doing process in trade, helping to build customer relations, reputation, and distribution channels, and enabling better adaptation to both formal and informal market environments, all of which facilitate future export growth Aid is also said to boost the export potential of recipient countries, with exports increasing even beyond bilateral trade Thus, aid forges links between donors and recipients that may produce long-run trade benefits.
There are numerous empirical studies attempting to test the trade-creating effect Wagner
(2003) uses gravity model of trade to statistically test the link between aid and export expansion The theoretical basis of the model used to address the effect of aid on trade is similar to that of Nilsson (1997), who employs a version of the gravity model to analyze the effects of bilateral and multilateral aid on EU exports to recipient countries The basic idea of the gravity model is that bilateral trade flows are explained by three sets of variables:
(a) variables indicating total potential supply of the exporting country;
(b) variables indicating total potential demand of the importing country; and
(c) variables that hinder or engender trade between importing and exporting countries
To simplify the analysis, three sets of variables can be reduced to two by recognizing that donors are usually large economies and recipients small, so donor export capacity generally exceeds recipient import capacity; consequently, the trade volume between donor–recipient pairs is determined by the recipient’s import demand While physical distance is often treated as a trade barrier, it can be omitted when relative distance does not meaningfully influence trade volumes between specific donors and countries, with accessibility sometimes being the real constraint (Osei, 2004) Wagner (2003) argues that this approach not only measures exports directly linked to aid-financed projects but also captures indirect effects of aid on exports; his findings show that 35 cents of every dollar of aid spent directly funds goods tied to aid, with another 98 cents generated indirectly by selling other goods.
Chinese aid
According to McCormick (2008, p 82), China appears to be motivated by a combination of altruism, mutual benefit, and strategic interests As in the case of western donors,
“China emphasizes motives like altruism and mutual benefit in public statements, but these can be difficult to disentangle from the more pragmatic strategic and economic interests”
On poverty and development, China's Ministry of Commerce (1985) asserts that its aid projects play a positive role in expanding recipient countries' national economies and in improving the material and cultural lives of their people It emphasizes a mutual-benefit approach, arguing that assisting these economies helps them grow while also driving economic progress for both China and the recipient countries (Ministry of Commerce 1985).
China’s aid policy professes to prioritize recipients’ living standards and economic development, aiming to benefit as many needy people as possible, yet these official claims can diverge from observed outcomes Some scholars argue that China’s infrastructure-focused aid addresses development needs that DAC donors have largely overlooked (Brautigam, 2009) This view challenges Naím’s (2007) assertion that China is a rogue donor unconcerned with the long-term welfare of populations in recipient countries Indeed, China is frequently depicted as a principal rogue donor among the new aid players, with Naím arguing that its assistance serves China’s national interests—securing access to resources and strengthening international alliances—more than aligning with recipient needs.
Discussion of benefits often centers on Chinese aid being tied to the export of Sub-Saharan Africa’s natural resources to China A World Bank study suggests that most Chinese government-funded projects in Sub-Saharan Africa are designed to secure a steady flow of the region’s natural resources for export to China, highlighting a resource-driven objective behind aid flows (Foster et al., 2008).
44) China’s need for resources (oil, minerals and timber in particular) is mentioned most frequently as commercial motives of its aid (Tull 2006; Davies 2007; Naım 2007; Halper
There is a widespread belief that a significant portion of Chinese aid is linked to securing natural resources as China’s development accelerates and internal demand for resources grows China's oil quest is well documented, and scholars such as Brautigam describe 'natural resource‑backed loans and lines of credit' that use resource access or security to obtain better terms for infrastructure finance, sometimes tying loans to preferential access for Chinese companies or using existing resource exports as repayment guarantees Zafar notes a form of tied aid termed 'China’s aid for oil strategy' in which financial assistance and project funding are exchanged for oil supplies The Chinese White Paper argues that concessional loans mainly fund infrastructure (about 61%), with 8.9% directed to energy and resources development such as oil and minerals In Africa, however, the World Bank’s database and subsequent research show that only seven countries have actually used large natural resource‑backed Eximbank lines of credit for infrastructure projects not directly connected to resource exploitation, suggesting the pattern may be more limited than some claims indicate.
There is ongoing debate about whether China’s aid serves to secure access to other countries’ natural resources, a claim vehemently rejected by the Chinese government Brautigam (2010) argues that China’s aid projects are often misunderstood and finds no evidence that most China-funded projects are tied to resource extraction While China’s aid program is sizable, only a small minority involve complex loan-infrastructure-resource packages; most projects are straightforward turnkey efforts such as a building, a bridge, or a health clinic The relatively rare but larger and more complex infrastructure-resource loans illustrate what is meant by “win-win” cooperation: a country leverages its natural resources to attract and secure an infrastructure loan from China on terms that are more favorable than those from commercial banks Dreher and Fuchs (2015) empirically test whether self-interested motives drive China’s aid allocation and find that aid cannot be explained by recipients’ natural-resource endowments or institutional factors; their model includes China’s total exports to each recipient country, in constant US dollars, to capture commercial interests that China might pursue by using aid to promote exports.
To test whether China’s aid is tied to its commercial interests, the analysis uses a proxy for resource endowments—the recipient country’s logged oil production (in millions of barrels per day) It draws on data from 1956–2006 on Chinese project aid, food aid, medical staff, and total aid flows to developing countries Contrary to widespread perceptions, the findings reveal no evidence that China’s aid is distorted toward countries with large natural resource endowments Overall, the results suggest it is unjustified to label Chinese aid as “rogue aid.”
A further motivation behind Chinese aid is to secure future access to export markets and expand business opportunities The Ministry of Commerce (1999) claimed that through aid activities, Chinese enterprises entered the markets of developing countries rapidly and were welcomed by both governments and local firms China also exports relatively inexpensive manufactured goods to African countries, helping people there by expanding access to affordable products Yet Lammers (2007) argues that by purchasing Africa’s raw materials and selling back value-added products, China may create an unfavorable trade balance for many African nations Tariff exemptions constitute another form of aid unique to China, and preliminary evidence suggests these exemptions can positively affect output and the trade balance, though much of the positive balance seems driven by Africa’s natural-resource exports to China In sum, Chinese aid is intertwined with trade in ways that make it difficult to separate the two.
BACKGROUND AND METHODOLOGY
China’s economy
Before the late 1970s, China operated a planned market economy and faced pervasive poverty, with per capita income at only US$154 in 1978 and a trade-to-GDP ratio of 9.7% After reform and opening up, China underwent a miraculous transformation, delivering average GDP growth of 9.7% annually over 36 years and average annual growth in international trade of 16.6% Today, China is an upper-middle-income country with a per capita GDP of US$8,070 in 2015, and more than 600 million people have escaped poverty, making it one of the most robust and stable economies globally.
Figure 3.1: China’s GDP per capita (current US$), 1978-2016
China has become both a driver of global development and a stabilising force for the world economy, driven by three decades of spectacular growth This extraordinary performance has surpassed the expectations of many observers Today, China is a key engine of global growth, as demonstrated in Figure 3.2.
Since joining the World Trade Organization, China has positioned itself as a leading guardian of the international trade framework, with a trade dependence ratio around 50%, the highest among the world’s major economies In 2009, China overtook Japan to become the world’s second-largest economy and displaced Germany as the top exporter of merchandise (World Bank, 2017) As a strong advocate of free trade, China supported the completion of the Doha Round to advance global liberalization, while its massive purchasing power continues to stimulate aggregate international demand.
Figure 3.2: Country contributors to real global growth, 1995 – 2015
Source: Figure 2.1 in IMF Regional Economic Outlook: Asia and Pacific April 2016
3.1.1 China’s dependency on raw material
The Chinese development model has sparked a growing hunger for energy and natural resources, fueling massive extractive activities both within China and around the world As a fast-growing economy, China’s energy demand has surged to support its expanding manufacturing base, which relies on high energy consumption and often operates with inefficient energy use This manufacturing structure concentrates economic output in energy-intensive industries, reinforcing a system where growth hinges on rising energy use Today, China is widely described as the “factory of the world,” reflecting its dominant role in global production and its impact on global energy and resource markets.
Jiang (2009) highlights that China’s energy-driven economy is characterized by outsized shares in key materials and electricity, reflecting a heavy industrial structure and large energy waste: although accounting for about 6% of global GDP, China consumes roughly 30% of iron, 27% of steel, 40% of cement, 20% of copper, 19% of aluminium, and 10% of electricity, with a substantial share of coal as well Zhang Guobao, deputy commissioner of the National Development and Reform Commission, notes that to generate every 10,000 yuan of GDP, China uses energy at about three times the global average—higher than most advanced economies; for US$1 of GDP, China uses ten times the energy of Japan, and to produce the same industrial goods, about 11.5 times Japan’s energy input.
China faces an immense demand for energy and raw materials, driving two structural imperatives: accelerate domestic resource exploration and development, and propel a go-global strategy that sees Chinese enterprises actively pursuing energy and mineral assets overseas The government promotes expanding overseas investment to secure additional resources and energy supplies, strengthening national energy security Africa, with its rich endowments of energy, minerals and other strategic resources, is naturally emerging as a key frontier for Chinese investment and resource extraction.
To fuel its booming economy, China needs abundant resources, fuels, minerals, metals, and above all oil Figures 3.3 and 3.4 illustrate a persistent energy production–consumption gap that China has faced since the 1980s, with the gap widening over time.
1998 onward, it shows in the imported shares of fuel and minerals from less than 10 percent in 1999 to over 30 percent in 2012
A growing share of oil imported by global markets originates in Africa, and China has played a notable role in financing and shaping energy and infrastructure projects on the continent, including a 2012 oil-driven loan-exemption agreement with South Sudan, the controversial $5 billion oil-for-aid loan with Angola in 2007, and a $9 billion mining and infrastructure aid partnership with the Democratic Republic of Congo in 2008.
Figure 3.3: China energy consumption and production gap, 1980-2012
Source: US Energy Information Administration Figure 3 Tseng (2015)
Figure 3.4: Changing composition of China’s import, 1999-2012
Source: US Energy Information Administration Figure 3 Tseng (2015)
3.1.2 The importance of market for China’s growth dynamism
China's foreign aid serves its commercial interests by opening new export markets for Chinese products and helping Chinese companies invest in and establish manufacturing plants abroad, making aid a form of business activity Consequently, aid can improve trade with recipient countries According to McMillan and Naughton (1992), the efficiency of China's industry—particularly manufacturing—is demonstrated by its success in selling in competitive world markets As the economy evolves, production shifts from agriculture and raw materials to more sophisticated goods, reshaping the export structure so that manufactured products account for a growing share of volume and value Given the large scale of China's output, expanding markets are essential, and with low prices and reasonable quality, developing regions—especially Africa—are likely to become major importers.
Figure 3.5: Composition of Exports and Imports from China, 1992-2012
3.1.3 Trade between China and Africa
Africa’s fast-growing population creates a substantial market for China’s manufactured goods, driving demand across sectors from consumer electronics to infrastructure materials At the same time, Africa’s abundant natural resources can help fulfill China’s energy and raw-material needs, reinforcing a mutually beneficial economic relationship This dynamic is evident in the growing trade volume between China and Africa, where Chinese products flow into African markets and Africa’s resources support China’s energy security.
Table 3.1: China-Africa exports and imports, 1992 - 2012
Trade deficit (US$ Thousand) 486547.288 -134627.418 -39437836.1 Source: World Integrated Trade Solution (WITS)
Figure 3.6: China- Africa trade by sector, 2010
Chinese aid
Chinese foreign aid is delivered through three main channels: grants and interest-free loans funded by state finances, and concessional loans managed by China Eximbank According to the 2011 White Paper, by the end of 2009 China had provided a total of 256.29 billion yuan (US$39.3 billion) in aid, roughly 41% as grants, 30% as interest-free loans, and 29% as concessional loans A notable challenge in the literature is the tendency to lump the different forms of Chinese economic engagement under the single label “aid.” China classifies its aid activities into eight categories: complete projects; goods and materials; technical cooperation; human resource development cooperation; medical teams sent abroad; emergency humanitarian aid; volunteer programs in foreign countries; and debt relief.
Financial resources provided by China for foreign aid mainly fall into three types: grants (aid gratis), interest-free loans and concessional loans The first two come from China’s state finances, while concessional loans are provided by the Export-Import Bank of China as designated by the Chinese government By the end of 2009, China had provided a total of 256.29 billion yuan in aid to foreign countries, including 106.2 billion yuan in grants, 76.54 billion yuan in interest-free loans and 73.55 billion yuan in concessional loans From 2010 to 2012, China appropriated in total 89.34 billion yuan (14.41 billion U.S dollars) for foreign assistance in three types: grant (aid gratis), interest-free loan and concessional loan Foreign aid expenditure is part of the state expenditure, under the unified management of the Ministry of Finance in its budgets and final accounts system The Ministry of Commerce and other departments under the State Council that are responsible for the management of foreign aid
Grant is mainly offered to help recipient countries build small or medium-sized social welfare projects, and to fund human resources development cooperation, technical cooperation, material assistance and emergency humanitarian aid In the three years 2010-2012, China provided 32.32 billion yuan of grants, accounting for 36.2 percent of the total assistance volume
Interest-free loan is mainly used to help recipient countries construct public facilities and launch projects to improve people’s livelihood In the three years, China offered 7.26 billion yuan of interest-free loans, taking up 8.1 percent of its foreign assistance volume Concessional loan is mainly used to help recipient countries undertake manufacturing projects and large and medium-sized infrastructure projects with economic and social benefits, or for the supply of complete plants, machinery and electronic products In the three years, the concessional loans China provided to other countries amounted to 49.76 billion yuan, or 55.7 percent of its total assistance volume in the same period
China's aid features two key characteristics that distinguish it from traditional donors' assistance First, while recipients receive pledged facilities and services, the contracting process often keeps funds within China because Chinese-aid programs typically require at least 50 percent of goods and services to be sourced domestically, and contracted firms frequently import Chinese workers for local construction projects Second, although China's aid contribution, assessed under OECD standards, is smaller than that of traditional DAC donors, when other state-sponsored or subsidized overseas investments are included, China appears to be a major source of Other Official Flows (OOF).
Eximbank offers a broad array of financing options for aid operations, ranging from ODA-like grants and debt relief to export-promotion tools such as export credits and lines of credit or commercial loans Yet its aid credits are not concessional, as they are generally fixed at market rates, with the Ministry of Finance subsidizing the actual cost of funds through the interest rate differential (Brautigam, 2011b) Most of Eximbank’s lending supports Chinese firms going global, a pattern corroborated by estimates from Moss and Rose.
(2006) and Davies (2010) suggest that China’s Eximbank has surpassed its Japanese and
UK export credit agencies have become among the largest in the world, with an asset base totaling US$445.1 billion when measured at the 2014 annual average exchange rate By comparison, the US Export-Import Bank holds about US$23.5 billion in assets, underscoring the UK's leading position in export credit financing (Tseng).
Figure 3.7: Sectoral distribution of China’s aid: 1949-2009 vs 2010-2012
Figure 3.7 compares the sectoral distribution of China’s aid across two periods—1949–2009 and 2010–2012—as reported in the 2011 and 2014 editions of the Foreign Aid White Paper The largest category, Economic infrastructure, declines from 61% in the earlier period to 44.8% in 2010–2012 The 2014 edition also introduces two new sectors, Social & public infrastructure and Goods & materials, which account for 27.8% and 15% of disbursed loans in 2010–2012, respectively.
Since 2012, preferential import/export credits and natural-resource-backed loans have helped drive Africa’s surge in crude materials exports to China, showing how China’s aid is often embedded in non-concessional financing tied to natural resource development in recipient countries Because recipient countries vary in development, funding public infrastructure can function as a down payment to anchor future large-scale resource extraction projects, while in more developed regions like Latin America, Chinese-backed extractive activities are more prominent The expansion is reinforced by China’s coastal Special Economic Zones, which support a trade-heavy aid portfolio, as many loan agreements require recipients to spend a portion of their export revenues on Chinese goods and services Tseng (2015) notes a pattern of growing Chinese imports of natural resources and exports of manufactured goods to regions with more favorable loan terms, signaling how preferential loan frameworks align with shifts in resource-focused trade.
On 10 July 2014, China’s Information Office of the State Council released its second White Paper on Foreign Aid China’s first white paper, released in April 2011, offers an overview of Chinese foreign aid from 1950 to 2009 The new white paper provides an update of Chinese aid for the period 2010–2012
China's cumulative foreign aid from 1950 to 2009 reached 256.29 billion yuan (US$41.7 billion), and aid disbursed from 2010 to 2012 totaled 89.34 billion yuan (US$14.53 billion), more than one-third of the sum for the previous six decades By the end of 2012, China had provided a total of 345.63 billion yuan (US$56.22 billion) in aid, with the 2010–2012 period accounting for 25.8 percent of that total.
China's aid composition changed markedly from 2010 to 2012, with concessional loans rising to more than half of total aid and interest-free loans shrinking to below ten percent (Figure 1) Unlike grants or interest-free loans, concessional loans mobilize market funds, expanding the reach of Chinese development assistance while reducing the Chinese government's direct financial burden, since it only covers the interest gap between concessional and commercial rates and the recipient remains obligated to repay the principal Although some concessional loans are converted into grants or forgiven, such write-offs are far less frequent than the forgiveness seen with interest-free loans (Davies et al 2008, p 13) The focus of concessional loans on productive projects and infrastructure is intended to strengthen the recipient's revenue-generating capacity and ability to service debt, but this approach adds pressure to poorer countries already burdened by debt—burdens that debt-cancellation policies have only begun to relieve for many.
Africa and Asia remain the main recipients From 2010 to 2012, China provided aid to
Chinese foreign aid expanded to 121 countries, including 51 in Africa, 30 in Asia, 19 in Latin America and the Caribbean, 12 in Europe, and 9 in Oceania Africa and Asia remained the largest recipients, with Africa receiving more than half of total aid and Asia about one-third, underscoring the regions' enduring political and economic significance to China.
Many researchers contend that China’s aid has become a point of concern for Western aid agencies Lancaster (2007) argues that Chinese assistance is typically extended with fewer of the conditions commonly attached to Western aid—such as commitments to human rights, sound economic governance, environmentally sustainable policies, and political openness by recipient governments By contrast, Chinese aid emphasizes infrastructure, addressing the urgent needs of many low‑income countries who often find Western donors reluctant to fund such projects In Africa, for instance, highways and railways constitute the main focus of Chinese activity.
Figure 3.8 Net ODA from leading donors and Estimated Foreign aid from China, 2001-2013
Source: OECD International statistics; Kitano Naoshiro and Harada Yukinori, “Estimate China’s foreign aid 2001-2013” (JICA Research Institute Working paper No.78, 2014)
Figure 3.8 shows that China’s aid volume is rising steadily, surpassing South Korea and nearing the level of assistance provided by other developed donors such as Japan, France, and Germany This upward trajectory positions China as a major global source of financial assistance, underscoring its growing role in international development and humanitarian aid.
Methodology
China’s aid to Africa is driven mainly by the aim of securing imports of strategic resources and expanding markets for its exports This chapter investigates the aid–trade interlink by breaking trade into imports and exports and analyzing the correlation between aid and Africa’s imports from China as well as between aid and China’s exports to Africa It tests the relationship between aggregate aid and aggregate imports/exports to reveal how aid translates into trade outcomes The approach aligns with existing literature showing that donors often view Africa as a developing continent with urgent needs for aid, while recognizing that many African countries share similar colonial histories, cultural ties, and levels of development.
Evidence on China indicates a positive link between aid inflows and imports of raw materials, with aid funneled into construction sectors to support extractive activities, effectively tying aid to China’s raw-material imports The relationship is bidirectional and identifying the causal driver is challenging, so measuring the correlation between the two variables is a sensible approach since either can be explanatory or dependent in a symmetric analysis Accordingly, one would expect that larger aid inflows (in absolute terms) correspond to higher imports (in value terms) and the import measure should reflect China’s need for raw materials This justifies using import value in extractive sectors and aid value in construction sectors as the two variables in the correlated relationship, while accounting for time effects in aid’s impact on imports from Africa Since infrastructure aid to support resource extraction takes time to influence import volumes, the aid volume variable is lagged by one to three years to capture the delayed impact on imports.
Following the literature on the allocation effect of trade, this study examines the relationship between China’s exports and aid to Africa If China wants to expand its existing exports to Africa, it should encourage African purchases by providing financial resources, but China’s aid to Africa is often accused of being tied to buying Chinese goods, making it difficult to separate the impact of the two factors Since aid is measured in monetary value, exports should be measured in value as well To study their correlation, I use two variables—the total aid value and the total imports value To capture potential time effects, I include lagged exports values at one-, two-, and three-year horizons in the analysis using aggregate data.
Percentage changes in aid and in imports/exports can reveal meaningful relationships When aid value grows, the growth of imports and exports is expected to rise as well However, correlation tests are often unreliable when applied to percentage figures, so I will not examine this factor in growth terms.