Digging down into the balance sheets of China’s foreign aid to Africa may be near impossible, but experts say soft loans are on the rise

African countries may never feel a hard pull on “no strings attached” loans from China. That’s because for the past few decades, aid has been tethered to infrastructure projects, which experts say are only going to grow.

Since the first Forum on China–Africa Cooperation (FOCAC) was held in 2000, China has offered hundreds of billions of yuan to African countries in the form of interest-free and preferential loans.

On the fifth ministerial meeting of FOCAC on July 19 in Beijing, the Ministry of Commerce announced that China had written off 391 overdue loans owed by the most heavily indebted and least-developed nations globally by the end of 2011. Of these, 14 debts of nine African countries were included.

At the 2006 FOCAC, China announced that it would provide a total of US$ 5 billion to African nations in the subsequent three years. By 2009, the pledge was doubled to US$ 10 billion. China followed through on the guarantees and has now promised US$ 20 billion in soft loans between 2012 and 2015.

Yet at home, critics say spending abroad has neglected financing for far more pressing domestic needs.

In response to such observations, assistant Minister of Commerce Zhang Lijin said at this year’s forum that China’s aid to Africa is simply “doing the best it can,” and that in proportion to GDP, aid amounts are marginal.

Tough Financial Straits

China’s aid programs to Africa began in the 1950s through construction projects in the explicit promotion of an ideological program. Support from African countries in the United Nations General Assembly led to a crucial turning point in China’s standing on the global stage two decades later – a permanent seat on the UN Security Council.

“It is our African brothers that carried us into the United Nations,” Mao Zedong once remarked.

With the exception of recognizing the “one China” policy, the outcomes that Chinese foreign aid disbursements seek to realize remain unofficially acknowledged, given almost zero conditionalities for aid provision.

Unlike other countries that distribute foreign aid through foreign affairs ministries or relief agencies, the Ministry of Commerce is chiefly responsible for foreign aid funds.

But little is known about the total amount of foreign aid that China has spent in Africa.

In April 2011, China released its first white paper on foreign aid. The paper stated that in 2009, China provided a total of 256.3 billion yuan in aid globally.

The white paper described three principal forms of aid: non-reimbursable donations, interest-free loans and soft loans. The former two are provided by the Ministry of Finance, while the latter is issued by the policy bank, Export-Import Bank of China.

According to official data, by the end of 2009, approximately 40 percent of China’s foreign aid was in the form of non-reimbursable donations, the majority of which were used for small- and medium-scale social construction projects such as hospitals, schools, wells and affordable housing.

Interest free loans made up a further 30 percent of foreign aid by the end of 2009. The loans typically have a 20-year term and are targeted at the construction of public facilities. From 2000, China began to write off some of its interest-free loans, and at the end of 2009, a total of 25.6 billion yuan in debts were written off, accounting for 30 percent of the total interest-free loans.

According to the white paper, the interest rate on soft loans provided by China is usually in the range of 2 to 3 percent. By the end of 2009, China had provided soft loans for 325 projects in 76 foreign countries. Sixty percent of the loans were dedicated to infrastructure projects in developing nations while 8.9 percent were used to support the extraction of energy and natural resources.

At Home with More Aid

The amount of soft loans saw rapid growth in recent years, particularly toward African countries. According to research by former World Bank adviser Harry Broadman, the Export-Import Bank of China provided a total of US$ 800 million in soft loans for 55 projects by the end of 2005 to African countries. Another 32 projects valued at a total of US$ 1.5 billion were offered for the next two years.

But experts say loans for construction projects don’t go unmonitored, but are under the meticulous supervision of Chinese officials. Technical design and even project staff are mainly from China, which has led to some that characterize the aid as “binding.”

IMF economists Nkunde Mwase and Yang Yongzheng wrote in an essay that this form of “binding aid” is designed to prevent mismanagement and misappropriation of funds because the capital will be directly sent to the project operator’s account, which is usually a Chinese company. However, the lack of transparency still creates a risk of corruption.

Meanwhile, the domination of Chinese firms and goods in aid and investment projects have also been blamed for conflict with commercial and employment interests in the recipient country.

Chinese foreign policy observers say Chinese foreign aid resembles investment. As Africa’s largest trading partner, China’s foreign direct investment into Africa has increased from US$ 9.3 billion in 2009 to US$ 14.7 billion at the end of 2011, according to Chen Deming, minister of commerce.

Says Zhang Hanlin, chairman of China’s National Institute for WTO Studies: “Chinese firms have a long history of implementing Chinese and international aid projects, so Africa is already familiar with how they operate. On the other hand, Chinese firms also have an understanding of the cultural, political, economic and market circumstances of African nations. As a result of co-operating with African nations, Chinese firms have acquired a large body of foreign investment experience.”

In addition, official Chinese aid has helped to promote Africa as a growing export market, particularly for electronics and agricultural machinery sectors.

No verdict has been reached on whether China’s impact on the global development aid paradigm should be welcomed as a step in the right direction. Certainly, there is no doubt that the “Chinese model” of foreign aid has risks as well as benefits. For instance, Mwase and Yang wrote while China and other developing countries pay close attention to the sustainability of specific debt to Africa, they don’t focus enough on the macroeconomic stability of the recipient countries, which will create risks in long term.

Nevertheless, according to the World Bank, for Sub-Saharan African nations to catch up with Asian and Latin American infrastructure standards, the region will require US$ 93 billion in investment per year, roughly 15 percent of regional GDP. Aid from emerging markets, such as China, Brazil and India, is expected to take an increasing part.

By staff reporter Zhang Hong