China’s ‘innovative and pragmatic’ foreign aid

How China’s aid program is shaped by and shaping globalisation

Lauren Johnston
Marina Rudyak

Development, Economics and finance, International relations | Asia, East Asia, The World

5 September 2017

China’s foreign aid is fundamental to its globalisation agenda, Lauren Johnston and Marina Rudyak write.

Speaking at the Davos World Economic Forum, Xi Jinping acknowledged that globalisation had brought new challenges, but urged that it not be written off entirely. Instead, he said, “we should adapt to and guide economic globalisation, cushion its negative impact, and deliver its benefits to all countries and all nations.”

Xi’s defence of globalisation pointed to selective policy priorities of a more China-led world economy. Highlighting China’s goal of delivering “mutual benefits” via its foreign aid program, Xi said that one of the leading drivers of a more China-led globalisation will be China’s partnerships with developing countries.

The most recent estimates suggest that China’s foreign aid increased over the period 2009-13 by some 11 per cent annually. This ranks China ninth among aid providers and by monetary size of program. Around half of that aid goes to African countries.

During his inaugural presidential visit to Africa in 2013, Xi said that China-Africa relations had entered a “fast track of comprehensive development”. In April 2014, Premier Li shed light on the direction of that ‘track’ when he laid out four principles for deepening China-Africa cooperation. The first three, “sincerity and equality; solidarity and mutual trust; jointly pursuing inclusive development” reflect traditional official Chinese language. The fourth, “innovative and pragmatic cooperation”, was a novelty.

More on this: China’s disruptive entrance on the global aid stage

Words are never casually used in official Chinese politics. The meaning of “innovative and pragmatic” has been incrementally revealed since, with China establishing several new financing institutions to promote international development: the Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund and a South–South climate fund.

China has also made new substantial investments in the African Development Bank (AfDB) and a host of other existing development finance institutions. Most prominent of all is Xi’s launch of the umbrella Belt and Road Initiative.

Debate continues outside of China about the wider implication of the country’s increasingly ambitious aid and concessional financing program. That debate, however, pays relatively little attention to the fact that China’s aid is largely itself a product of global development.

For example, the fundamental principle of “mutual benefit” can be traced back to when, in the early years of the People’s Republic, China began to receive concessional loans from the Soviet Union that were ‘tied’ to China’s purchase of commodities and military materials.

From 1978, the Deng Xiaoping era opened up China to aid from OECD-countries. The incremental success of opening and reform changed what China needed from its policy of ‘mutually-beneficial’ assistance; economic factors began to surpass politics.

By 1993, China’s industrial success had turned the country into a net oil importer. Aid, in turn, was incrementally converted into a channel for promoting related foreign trade and investment.

More on this: Engaging with Africa in a ‘post-aid’ era

China’s aid program also responded to political and economic change in Africa. This included the end of apartheid in South Africa in 1994, which allowed Africa’s then largest economy to integrate into the region. From the mid-1990s, it also happened that most countries in sub-Saharan Africa were characterised by much greater macroeconomic stability.

That combination of a complementary shift in mutual needs combined to make the mid-1990s a turning point in China-Africa ties, with economics unseating politics as the driving force. By 2009, China was Africa’s largest trading partner, and has since also become a progressively more important investor in the continent’s economies.

The scale of that economic outreach and of China’s own growth saw another significant shift. In the first 60 years of its existence, China’s foreign aid was shaped by globalisation. Around 2011, however, it began a transition to more actively shaping globalisation.

Three important factors likely helped trigger this change: changes to the global economy following the 2008 Global Financial Crisis (GFC); the growing debate about Chinese aid outside China; and demographic change in China and Africa.

The GFC’s impact on the global economy has meant an era of tighter growth conditions and shifting economic priorities from around 2011 onwards. Coinciding with this change has been a tightening of demographic conditions: China has experienced growing labour scarcity and also higher labour costs since around 2005.

Alongside this, China’s leading export destinations across the OECD saw the first of the ‘Baby Boomers’ turn 60. Many of the countries receiving Chinese aid and concessional lending are, in contrast, not only poor but also home to very young populations. Co-capture of the prospective demographic dividend in selective African and South Asian countries is one part of China’s new strategy for growth and explains the rising importance of China’s foreign aid.

More on this: China's partnerships offer lessons for sustainable development

That complex global economic story is met, however, with increasing pressures on China’s aid program, both domestically and in recipient countries.

China’s aid is expected to deliver a growing number of tasks, including supporting the Belt and Road Initiative; promoting China’s international image; and, last but not least, helping China promote its own global governance reform agenda in order to play a greater role in shaping globalisation.

Those external pressures sit against a backdrop of an ever-more vocal Chinese public, who are asking why the Government is generously spending large and rising sums of money abroad while much of China remains entrenched in poverty. Even Xi Jinping has said that “China must act more wisely when giving money to foreign countries”.

China’s aid institutions and delivery mechanisms may be expected to not only become more ‘innovative and pragmatic’, but also more efficient and streamlined. The AIIB – and the active contributions of its member states – may serve as a useful learning mechanism for that process.

In the same vein, countries and communities benefiting (or otherwise) from China’s foreign aid are just as important to that emerging aid narrative – and thus also a China-led globalisation.

Deng Xiaoping famously described the process of domestic reform as “crossing the river by feeling the stones”. As China moves toward leadership of the world economy, it seems developing countries are to be the first stones in the river.

 

This piece is based on the authors’ contribution to the 2017 China Update book: China’s new sources of economic growth. The book is available for free download here.

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