Where is China Targeting its Development Finance?

Where is China Targeting its Development Finance?
Where is China Targeting its Development Finance?
Where is China Targeting its Development Finance? Top

    China has emerged as one of the world’s largest providers of development finance. Between 2000 and 2014, China extended a total of $354 billion in loans, grants, and other resources to countries across the globe. As China continues to establish itself as a major source of development finance, it is important to consider how this spending intersects with Beijing’s growing political and economic interests.

    China’s development finance differs from that of other countries. Over 75 percent of China’s worldwide financing between 2000 and 2014 did not meet the strict Official Development Assistance (ODA) standards set by the Organization for Economic Co-operation and Development (OECD). Rather, China’s development finance is often categorized as Other Official Flows (OOF), which represent funding that is typically less concessional than ODA and is not necessarily designed to promote the economic development and welfare of recipient countries. Development finance from other major economies, such as the US, the European Union (EU), and Japan, typically conforms to OECD standards.[/vc_column_text]

    Data regarding China’s financing in subsequent sections is drawn from AidData’s Global Chinese Official Finance Dataset, which contains project-level information on China’s development finance from 2000 to 2014.1

    Development Finance in Africa

    Between 2000 and 2014, China funded 2,390 projects across Africa totaling $121.6 billion and constituting 34.3 percent of China’s global development finance over that period. Most of this financing was concentrated in Eastern Africa (38.2 percent), Middle Africa (25.1 percent), and Western Africa (20.4 percent). This regional distribution is roughly similar to that of other leading providers of development finance. Over the same period, just over 40 percent of the aid provided to Africa by the US flowed into East African states.

    China has a history of bolstering economic ties with African states through multilateral initiatives, such as the Forum on China-Africa Cooperation (FOCAC), which was established in 2000 to enhance Beijing’s partnerships across the continent. These partnerships are spread over several sectors that have benefited from easy financing from Beijing. Particularly noteworthy are the transportation (32 percent) and energy generation (28.5 percent) sectors, which amounted to 60.5 percent of China’s total development finance in Africa.

    This composition reveals Beijing’s twin goals of connecting African markets with the Chinese economy and enhancing its access to natural resources. Projects in Ethiopia, the second largest African recipient of Chinese developmental financing, illuminate this effort to boost connectivity. Fifty percent of the $14.8 billion China poured into Ethiopia was spent on transportation projects, as exemplified by the $4 billion Addis Ababa–Djibouti Railway that connects the landlocked East African state with ports in Djibouti. Official flows into resource-rich Angola reflect Beijing’s thirst for natural resources, as close to 40 percent of China’s development finance went to Sonangol, Angola’s national oil company.

    When narrowing in on ODA-like development financing, the transportation and energy generation sectors still drew the most attention from Beijing, with the two sectors constituting nearly half of aid given by China. This distribution differs significantly from that of other countries. The US, for instance, provided roughly $100 billion worth of aid to Africa from 2000 to 2014, with 80 percent of this assistance going toward health and humanitarian initiatives.2 It is also important to note, however, that the ODA that China does provide is effective in stimulating economic growth in recipient countries.

    Top Recipients of Chinese ODA
    Country ODA Amount ($bln)
    Cuba 6.7
    Cote D’Ivoire 4.0
    Ethiopia 3.7
    Zimbabwe 3.6
    Cameroon 3.4
    AidData, Chinese Global Official Finance Dataset

    Chinese aid appears to be given on a basis of converging political interests. While China proportionally gives more money to poorer countries, many of which are in Africa, countries that vote in line with Beijing in the UN General Assembly often receive additional funding. According to a report by AidData, a rise in voting similarity by 10 percent “increases ODA by more than 86 percent, and grant funding by 159 percent.” The report found no such correlation with OOF-like flows or loans. Chinese financial support is also tied to the recognition of its “one-China principle.”  African countries that maintain formal diplomatic ties with Taiwan are not only excluded from the FOCAC, but also do not receive any development financing from China. Upon severing official ties with Taipei, however, states such as Liberia (2003), Chad (2006), and Gambia (2016) witnessed an influx of financing from Beijing.

    Development Finance in Latin America

    The abundant natural resources and market size of Latin America and the Caribbean (LAC) present an enticing opportunity for China. Between 2000 and 2014, China’s development finance in LAC was spread across 320 projects, which totaled $53.4 billion. Of this total, $18 billion (34.1 percent) flowed into the energy generation sector and $9 billion (17.6 percent) was spent on transportation.

    Most of China’s regional development finance took the form of OOF-like financing (75.9 percent), which surged from $28 million in 2000 to $4.8 billion in 2014. This trend diverges significantly from that of other major economies. Since the turn of the century, only $9.9 billion in Chinese ODA has flowed into LAC, which pales in comparison to the $30.5 billion in aid given by the US and $53.5 billion extended by the EU.3 Cuba received the lion’s share of the ODA given by China across the region, where Beijing has an established history of supporting humanitarian and economic development efforts in a manner similar to initiatives sponsored by Western actors elsewhere in LAC.

    While China’s footprint in LAC is growing, its development finance is localized. Four countries – Venezuela, Brazil, Ecuador, and Argentina – collectively amounted for 64.3 percent of China’s regional financing and 82.9 percent of China’s OOF since 2000. China’s financing in LAC is marked by a willingness to provide loans to riskier countries, such as Venezuela and Ecuador. According World Bank’s Worldwide Governance Indicator, both countries suffer from weak rule of law and prevalent corruption, which increases lending risks. Nonetheless, Venezuela and Ecuador remain the two largest recipients of China’s development finance LAC, with Chinese loans constituting roughly 60 percent of both states’ total external debt in 2015.

    China hedges against these risks by either requiring the use of Chinese equipment on projects it sponsors or (where applicable) by asking for oil as collateral or as direct repayments, or both. The Sopladora hydroelectric plant in Ecuador was paid for by a $571 million loan from China’s Exim Bank, which required the use of Chinese equipment operated by Chinese personnel. Venezuela has long maintained an oil-for-loan relationship with China, with roughly half of the oil it shipped to China in 2015 being earmarked for debt repayment. These lending practices have drawn considerable criticism from observers. Ricardo Hausmann, an economist and former planning minister for Venezuela, remarked in 2015 that “the Chinese have not required that Venezuela do anything to increase the likelihood that it regains creditworthiness. They merely demand more oil as collateral.”

    Development Finance in Asia

    In addition to securing access to natural resources and new markets, China’s development finance in Asia is highlighted by strategic infrastructure projects designed to boost intraregional connectivity and bolster economic ties with Beijing. Much of this push falls under the umbrella of the Belt and Road Initiative (BRI), which was announced in 2013 and incorporates earlier efforts to strengthen regional linkages. Between 2000 and 2014, China provided a total of $119.6 billion in development finance across 1,225 projects to countries in Asia. This constituted 33.8 percent of China’s worldwide development finance over this period.

    Although China has focused on infrastructure development across the globe, this trend is more pronounced in Asia. Projects in energy generation (35 percent), transportation (30 percent) and industry, mining, and construction (18 percent) totaled 98.9 billion –  constituting 82.7 percent of Beijing’s regional financing. This focus on commercial gains differs from that of other major providers of development finance. Between 2002 and 2014, roughly 34 percent of Japanese and only 15.4 percent of US aid flowed into these sectors.

    Many of these projects are not only funded by Chinese banks, but also built by Chinese firms. Cambodia’s first large-scale hydropower project, which opened in January 2012, was paid for by a $300 million loan from China’s Exim Bank and built by the Sinohydro Corportaion. In Central Asia, China has focused primarily on promoting energy and natural resource development, as exemplified by the $1.13 billion in loans borrowed by Kazakhstan’s state oil and gas company to upgrade the Atyrau oil refinery.

    Projects of this nature serve the dual purpose of reaping financial rewards for China while redirecting its excess industrial capacity.  As noted by Joshua Eisenman, Assistant Professor of Public Affairs at The University of Texas at Austin: “lending to your neighbors to finance infrastructure projects that you build for them is a shrewd way to make friends while generating business for Chinese firms and earning better returns than US Treasury bills.”

    Top Recipients of Chinese OOF
    Country OOF Amount ($bln)
    Russia 36.6
    Pakistan 16.3
    Angola 13.4
    Laos 11.0
    Venezuela 10.8
    AidData, Chinese Global Official Finance Dataset

    South Asia, one of the primary regions targeted by the BRI, has received 42.6 percent of the development finance China has extended to Asia. Countries like Pakistan and Sri Lanka are pivotal BRI partners, and rank among the top beneficiaries of Chinese financing. It is hoped that the construction of Hambantota Port in Southern Sri Lanka, which first opened in 2010 and was funded with $361 million worth of Chinese loans, will help link China with trade flows in the Indian Ocean. Pakistan has likewise partnered with China to develop the China-Pakistan Economic Corridor, which is expected to boost China’s access to maritime trade with Africa and West Asia.

    Some have questioned the sustainability of China’s continued lending under its current model.  Moody noted in late 2017 that the BRI has “increased exposure of Chinese issuers to countries with comparatively poor credit profiles, including weak financial strength, high susceptibility to event risk, and an unfavorable business environment.” In July 2017, Sri Lanka’s government was forced to lease 70 percent of Hambantota Port’s equity for 99 years to a Chinese firm in exchange for $1.1 billion in debt relief. In an effort to limit China’s exposure, China’s Exim Bank imposed a ceiling on borrowing for each country. According to the bank’s vice president, Sun Ping, “[f]or some countries, if we give them too many loans, too much debt, then the sustainability of its debt is questionable.”

    The Russia Connection

    Russia is the largest recipient of China’s development assistance in the world. Between 2000 and 2014, Russia attracted $36.6 billion in Chinese loans, grants and export credit, which has vastly outpaced financing flows into other areas of Europe. Chinese backed spending in Russia is further distinguished by the fact that nearly 100 percent4 of it is designated as OOF.

    In 2016, China relied on foreign oil for 64 percent of its oil consumption.  Not surprisingly, the bulk of China’s financing into its northern neighbor have been directed at increasing access to Russian energy. Projects such as the Eastern Siberia Pacific Ocean Oil Pipeline, which was backed by $25 billion in Chinese loans, have helped paved the way for Russia to overtake Saudi Arabia as China’s top source of crude oil.

    Following the annexation of Crimea in 2014, China also became an important source of financing as Moscow looked to mitigate the effects of Western sanctions. In 2017, the China Development Bank provided an $850 million loan to help Vnesheconombank, a Russian state-owned development bank, bypass sanctions and establish a new innovation fund. ChinaPower