ANALYSIS: A closer look at Chinese foreign aid and investment

Jose Galang

Posted at Mar 01 2017 02:46 PM | Updated as of Mar 02 2017 04:47 PM

For developing economies like the Philippines, development aid and investment flows from China are an attractive proposition that could energize a range of productive sectors.

Studies made in recent years on the experience of developing countries that have received Chinese official development assistance and capital investment showed gains made in such sectors as infrastructure, agriculture, energy and mining. Some of the aid money also goes to technical cooperation, human resource development, medical assistance, and debt relief.

China proclaims that the aid that it dispenses takes into account the beneficiary country’s economic growth and poverty alleviation goals. Over the years, Chinese aid projects in developing nations have also ushered in the flow of Chinese investors through commercial contracts tied to state-funded projects.

The economic sectors that get most attention in extending funding assistance and investment — particularly food production, mining and other resource extraction projects — which raises analysts’ questions whether the real beneficiaries are the poor countries receiving the Chinese funding or the Chinese economy itself.

Some observers have also noted that most of the infrastructure projects funded with Chinese official aid improve access to locations where Chinese companies can produce agricultural products as well as undertake mining activities. If the Philippines’ Department of Environment and Natural Resources sustains its clampdown on destructive mining operations, will China just discontinue aid for that sector or will it exert pressure to overturn the strict policy?

These concerns deserve to be studied by Philippine economic officials before they commit this nation’s resources in formal agreements that will be signed with visiting China Ministry of Commerce officials this month. There will be conditions attached to these China-funded undertakings—one of them requiring that up to 60 percent of the manpower for projects should come from China—and these conditions should be carefully scrutinized.

Boom in China aid

More than half of China’s concessional loans for large-scale infrastructure projects accounted for more than half (nearly 56 percent) of all foreign aid dispensed from 2010 to 2012, indicating the benefits that have gone to Chinese contractors. Even in China, this result has been criticized by analysts such as Xu Weizhong of the China Institute of Contemporary International Relations who has called for channeling more financing for other priority needs of developing economies.

“Despite Chinese leaders’ claim that China’s assistance to Africa is totally selfless and altruistic, the reality is far more complex,” said public-policy think tank Brookings Institution nonresident fellow Yun Sun in a 2014 analysis paper. Africa has been a big recipient of Chinese financing, with a sovereign risk officer at the Export-Import Bank of China projecting that by 2025 China will have provided Africa with US$1 trillion in direct investment, soft loans and commercial loans.

Africa enjoys rich natural resources and market potential, and urgently needs infrastructure and development finance to stimulate economic growth, Sun noted. Much of the Chinese financing that had gone to Africa, she said, is “associated with securing the continent’s natural resources.”

“China frequently provides low-interest loans to nations who rely on commodities such as oil or mineral resources, as collateral. In these cases, the recipient nations usually suffer from low credit ratings and have great difficulty obtaining funding from the international capital market; China makes financing relatively available — with certain conditions,” said Yun Sun, who is also now senior associate with the East Asia Program at the Washington DC-based public policy institute Stimson Center.

Influence on government policy

In Southeast Asia, the influence of China’s financial aid on the recipient country’s government policy stance is best reflected in the position taken by Cambodia when in July 2016 it blocked an ASEAN foreign ministers’ move to include in a joint statement a reference to the United Nations-backed ruling that rejected Beijing’s claim to the South China Sea.

A political analyst at the University of New South Wales in Canberra, Veasna Var, wrote in an article published by the East Asia Forum days before the ASEAN foreign ministers’ gathering that “excessive dependence on China [financial aid] has also placed Cambodian foreign policy firmly under China’s influence.”

“Chinese aid provides an opportunity for Cambodia to dodge the efforts of the international community, in particular the United States, to get Cambodia on the right track for democracy, good governance and human rights, since Cambodia can ultimately turn to China when it disagrees with these initiatives,” explained Var, a PhD student in the UNSW Program in Political and International Studies.

China on July 15, 2016 announced the grant of US$600 million in aid to support Cambodia infrastructure, education and health projects. “China, a key ally of Cambodia in the region and the Southeast Asian nation’s largest donor, in return expects support in international forums, including in discussions over the future of the South China Sea,” the US-funded Voice of America Khmer said in reporting the signing of the aid agreement.

Government-to-government deals

The largest deals involving infrastructure and natural resource development projects “tend to be government-to-government”, noted a public policy paper produced at the end of a Wharton Africa Business Forum in January 2016. The forum was staged just a month after China announced a $60 billion loan and aid package for Africa intended to develop infrastructure, improve agriculture and reduce poverty on the continent.

Some of the experts who spoke at the forum pointed to alleged misconceptions about China’s aid and investment flows to Africa. For instance, aid recipient countries were said to also include commodity-poor nations and not just nations with rich mineral and agricultural production.

One expert, Aubrey Hruby, a co-founder of the Africa Expert Network, noted that Chinese companies usually deploy representatives to a developing country and look for potential infrastructure projects. They arrange high-level meetings with government ministers or the president of the country to pitch the idea.

Once a government signs a memorandum of understanding, the Chinese firm proceeds to work on a feasibility study. The Chinese can be “on the ground in a week” doing the feasibility study, which is itself is “not comprehensive” but merely an analysis of the cost — a stark contrast with the long time Western companies or even the World Bank spend on feasibility studies, Hruby noted.

A partner in the international law firm Dentons, Thomas Laryea, confirmed that Chinese “facilitators” are constantly monitoring countries for potential projects that their companies can undertake. This activity, Laryea said, has given rise to “a cadre of professional facilitators” on such deals. 

During the negotiation and decision making on funded projects, Laryea said that deals that go through as government-to-government tend to be “very high-level negotiations, sometimes between presidents.” There can be “a gap between a leader’s political decision and how the deal can be structured in a way that makes financial, legal and economic sense,” he added.

As far as the Philippines is concerned, there is an overflow of exuberance in the government and certain sectors of the business community in anticipation of large aid and investment inflows from China. There must also be a close scrutiny of the terms that will govern these expected deals—those terms need not be skewed unfairly in favor of the financing sources.