Commentary

Saite Lu University of Cambridge | Email: [email protected]

An Overview of ’s International Development Finance - Issues and the Way Forward

hundreds of millions of people out of po- its new international development coopera- verty. When one is amazed by the skylines Thetion Chineseagency (IDCA government hereafter) officially on 18th unveiled April. The agency is directly under the admini- to imagine, about 25 years ago, the GDP per stration of the State Council. It integrates of and today, it is difficult the role of aid policy formulation, manage- the level of Sub-Sarah Africa (SSA). capita of China was still significantly below ment, and coordination from the Ministry Between 1980 and 2000, China has recei- of Commerce and the Ministry of Foreign ved over US$38 billion of foreign aids from Affairs. Its establishment marks China’s the international community. Although Chi- ambition to further engage itself in the are- na is still a recipient country in practice, it gradually becomes one of the major donors. The economic development of China over Having an aid agency separated from the na of international development finance. the past few decades was staggering. It took title of ‘Commerce’ could be a good start. China less than half a century to transform Issue 1 - Data Discrepancy from one of the poorest nations to the se- cond largest economy in the world, lifting China’s overseas development finance can Figure 1: Chinese ODA by Categories

36%

40%

24%

Grants Interest-free Concessional Loans

Source: China’s Foreign Aid (2011, 2014) attributed to the Ministry of Commerce (other MDAs also play a role based on their be broadly classified into two categories: respective jurisdictions). The concessional grants,Official interest-freeDevelopment loans, Assistance and concessional (ODA) and loans are managed by the Export-Import Other Official Finance (OOF). ODA includes- (EXIM) of China. However, the AidData database shows that loans. OOF captures official financing sour the Development Assistance Committee the size of Chinese ODA is much larger than ces that are not qualified for ODA. Unlike (DAC) members, who typically keep regular stated. Between 2000 and 2012, the Chine- updates of their aid data, data from China se ODA reaches US$64.7 billion, which exce- are relatively less transparent. As a result, a lot of analyses on China’s ODA still rely - on the White Paper of China’s Foreign Aid nateeds the the official discrepancy, data by and US$10.5 the White billion. Papers Aid (2011, 2014). doflows not before offer project-level 2000 seems data unlikely or data to byelimi the According to the State Council of PRC, up recipient countries for crosscheck. until 2012, the total amount of foreign aid Also, up to 2014, AidData records US$216.3 reached US$53.2 billion (Using an exchan- billion of OOF and US$57 billion vague of- ge rate of 6.5RMB/US$). Of which, US$21.3 - billion are grants, which comprise technical mation to be grouped into either category. assistance, humanitarian responses, and Toficial be financefair, transparency sources that issue have is littlenot unique infor social welfare projects; interest-free loans to China. Even for DAC members, around amount to US$12.9 billion, which are mainly used for the construction of public facilities and projects that may improve people’s li- 17.3% of the ODA flows (2015-15 average) velihood; US$19 billion are in the form of billion,are unspecified which is for almost its use. on Thepar totalwith officialthe US concessional loans, supporting economical- (US$394.6finance from billion). China (see amounted Figure to2) US$354.3 ly and socially productive projects, medium to large scale infrastructure development, - and equipment procurements. cs has led to a lot of concern and confusion The lack of transparency in official statisti- The budget of foreign aid expenditure is cing. The potential impacts of the Chinese formulated by the Ministry of Finance ba- lendingabout the can motivation be misinterpreted. behind such finan sed on proposals received from various MDAs, while the administration is mainly One of the common claims is that Chinese

Figure 2: Comparing the official finance (2000-2014), US, UK, and China

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0 US UK China

ODA OOF Vague OF

Source: AidData and OECD investments and aids are heavily biased their development agenda. towards mining and resource-rich coun- Issue 2 - Is the Chinese model too Com- tries in Africa. However, the data shows mercial? than 140 countries, hence not particularly Another common belief is that Chinese aid biasedthat Chinese toward official resource-rich finance nations. covers Much more projects are too commercial. Figure 2 se- projects such as transport, energy, and com- munication,of the financing instead end of up mining in infrastructure and natural fromems toChina confirm is indeed such impression.lower than someThe ODA tra- resources (see Figure 3). Some may argue ditionalas a percentage donor countries. of total official financing that many of the loans are resource-backed, Although the debt positions in many reci- but that’s far from the complete picture. pient countries improved massively after Brautigam (2011) has described the diver- 2005, because of a series of debt relief pro- se nature of Chinese aids with numerous grammes implemented by the , case studies across Africa. IMF, and other bilateral creditors, the gross Therefore, it is critical for China to impro- debt to GDP ratio in these countries star- ve data transparency. Following the inter- - national standard guidelines for data and sis (See Figure 4). The debt to GDP ratio isted relatively to pile up low again by international after the financial standard, cri reduce misunderstandings from the inter- nationaloperational community. transparency Domestically will significantly spea- high-risk premium. Hence many worry that China’sbut costs relatively of finance commercial are also higherdriven duemodel to - will cause further debt distress to recipient fectiveking, the internal official evaluation finance is processalso part are of also the countries. importantfiscal expenditures. measures Transparency to improve govern and ef- To better understand the issue, one should ment’s accountability for taxpayers’ money. - More engagement in multilateral agencies (e.g., AIIB and NDB) might offer an alterna- developmentlook at the definition credit programmes of ODA carefully. from Firthe tive solution. The establishment of AIIB and EXIMstly, financially Bank: Concessional speaking, theLoan two (CL) flagship and NDB also enables developing nations to be- Preferential Buyer’s Credits (PBC) both sa- come the majority shareholders so that the tisfy the Grant Elements (GE) conditions for ODA, but the latter, as a type of export cre- financing strategies can beFigure more 3: aligned Chinese to Official Finance by Sector

Source: AidData dits (the US and Germany also provide such local sovereign entities (e.g. Ministry of Fi- nance and ). However, if defau- risks associated with both programmes are lt happens, it is unlikely for Chinese govern- credits), is excluded by OECD definition. The ment to apply punitive actions, debt reliefs A typical concessional from EXIM bank will be the only way out (Hurley et al., 2018) low, due to the favourable financing terms. Such an awkward situation is unfavourable percent per annum, and maturity ranges on both ends. has a fixed interest rate no greater than 3 between 15 and 20 years. So, some of the Therefore, China should endeavour to draw - a clear distinction between ODA and OOF. Dreher et al. (2017) point out the positive official financings may not necessarily cau Furthermore, confusion may arise when de- impact from the Chinese ODA on the eco- se financial distress to the recipient. - nomic growth of recipient countries (an mercial in China. The OOF statistics average of 0.7% increase in GDP growth is inaling AidData with financing also include from several state-owned loans comfrom ) is no less than any other donor the and the Industrial and agencies, but no such impacts observed Commercial Bank of China. Although these identified - banks are state-owned, the loans are more tant implication for the BRI projects. More using the OOF data. The finding has impor- veloped to accommodate the diverse nature OOFlikely data to reflect could privatebe exaggerated. lending than official ofinnovative its projects. financial products should be de financing. Therefore, the level of Chinese Dollar (2017) maps out the top recipient The Way Forward - en 2012 and 2014. Many of them are also channel. A win-win situation for both donor countries of China’s official finance betwe strategic partners under China’s ambitious andDevelopment recipient countries finance iscan not be achieved. a one-way In One Belt One Road (OBOR) Initiative. Over the era of globalization, the political and half of the top recipients rank poorly in the economic instabilities of any nation could World Governance Indicator for the rule - ghbouring region but the entire world (e.g., to be ODA, then it is likely to burden these thehave refugee significant crisis impacts in Europe on not and only nuclear its nei of law. If the GE of the financing is too low countries with increasingly high levels of test in North Korea). The success of China’s debt and create default risks. Many of the

development finance strategy rests on the project financingFigure require 4: Gross guarantees Debt in Sub-Sahara from Africa (% of GDP), 2000-2016

HIPC and MDRI Debt Relief 80

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0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: IMF premise of shared prosperity between Chi- Also, comparing with traditional donors, na and its recipient countries. It is up to Chi- soft power development is by far the wea- na’s interests to come up with a new model kest link of all. Establishing Confucius Insti- of foreign assistance, to develop more inno- tutes overseas and inviting government of- to seek more international collaboration. It training will promote mutual understan- shouldvative development be welcomed financing an embraced products, by andthe dingficials and from cultural developing exchange countries in the tolong attend run. International community. In the short-run, however, China may need According to the UN resolution in 1970, DAC to learn from other countries’ experien- member countries should aim to raise ODA ce - collaborating closely with universities, to 0.7 percent of their Gross National Inco- NGOs, and think tanks to have more Chine- me (GNI). However, the target is often put se development professionals engaged in aside when these countries face domestic technical assistance and development rese- political and economic pressures. In 2016, arch. only the UK, Denmark, Norway, Luxem- bourg and Sweden met the target. The US is leading in the absolute amount, but the ODA to GNI ratio was only 0.18% in 2016. As the second largest economy in the wor- ld, the average ODA to GNI ratio for China is averaged at 0.1% between 2000 and 2014. If looking at the GDP per capita, China is still a middle-income country. The 0.7% target may seem a bit unreasonable considering its development stage. However, if taking the OOF into account, the OF to GNI ratio is up to 0.5%. With the ambitious OBOR ini- outward FDI are expected to expand much further.tiative, theIn theofficial meanwhile, finance Chinafrom Chinamay need and to focus on how to increase the GE of many OOF to make them ODA.

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