China-US relations

With US poised to slash foreign aid, China in pole position to become world’s biggest donor

Research highlights different approaches to spending as Beijing favours projects that support its commercial interests rather than development

PUBLISHED : Wednesday, 11 October, 2017, 2:28pm
UPDATED : Thursday, 12 October, 2017, 10:02am

China could soon surpass the United States to become the world’s biggest aid donor in the developing world, according to US-based researchers.

Between 2000 and 2014, China gave almost US$354.4 billion in aid and other forms of support to 140 countries, according to research published on Wednesday by AidData, a US-based project that tracks flows of development assistance.

The US spent a corresponding US$394.6 billion in the same period.

“A striking finding is that China and the US are effectively spending rivals in the broader definition of aid. However, the composition differences in their portfolios are big,” Bradley Parks, one of the five researchers on the project, said.

The report was produced by researchers from Heidelberg University in Germany, and Harvard University and the College of William and Mary in the United States.

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China has further opportunities to project soft power through aid spending following US President Donald Trump’s announcement in March that he wanted a 32 per cent cut – equivalent to about US$13.5 billion – in all non-military spending abroad.

“Western donors, by comparison [with China], have less scope to achieve large economic growth impacts – within existing budgetary constraints – because they already provide most of their support through highly concessional and developmentally oriented projects,” the research concluded.

Despite the report showing global aid funding from the US and China running closer than ever, only 23 per cent of the Chinese funding falls under the Organisation for Economic Cooperation and Development’s strictest definition of aid – official development assistance (ODA).

By contrast 93 per cent of US spending falls into the category, which is classified as funding that goes to projects intended to promote development and which have a grant element of at least 25 per cent.

The rest, is what Parks called the broader definition of aid, or other official flows (OOF) – loans that were given to projects without a development intent and which have a grant element of less than 25 per cent or charge market rates.

Examples include preferential export credits, and on some occasions, the lenders may write off the recipients’ debts if needed.

“This disproportionate funding in OOF as opposed to ODA reflects that China has a more aggressive programme to promote its commercial interests overseas … it is not primarily or solely about generosity,” Parks said.

“There is a large component of profitmaking and achieving a competitive edge in the overseas market.”

But the report said projects funded by Chinese aid proved to be as effective as those funded by the US and other leading donor countries.

Chinese-funded projects were found to result in an average increase of 0.7 per cent in the GDP growth of the recipient country two years after the deal was signed.

China has pledged billions in aid to various nations and has also promised to cancel some of the debts they have run up.

In 2000, China said it would reduce or forgive 10 billion yuan worth of debt from African countries (equivalent to US$1.2 billion at the time).

Last year, Beijing waived 30 million yuan of Mozambique’s debts from an interest-free loan.

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The AidData research looked at 4,368 projects financed by China over a 14-year period using information from Chinese government papers, non-governmental organisations and media reports.

Despite Parks noting that there was a general assumption that much Chinese aid goes to Africa, none of the five largest officially financed Chinese projects between 2000 to 2014 happened on the continent and only one of them was an ODA project.

According to the research, the two biggest Chinese-financed foreign projects involved nearly US$34 billion of OOF loans given by the China Development Bank to Russian state-owned oil company Rosneft in 2009. In total Russia received more than US$35.9 billion from China.

Within a few decades China has turned itself from an aid recipient to a donor following its emergence as the world’s second-largest economy.

Yet details of its foreign aid spending have been shrouded in mystery as the government does not disclose any comprehensive data about its overseas development projects or details of the deals it funds.

Following President Xi Jinping’s announcement of the “Belt and Road Initiative” in 2013 the West has been increasingly sceptical about the plans to create an infrastructure corridor to link Central Asia and Europe through new rail networks and shipping routes, with critics characterising them as a form of neocolonialism.

Parks said he did not think it likely that China would surpass the US in terms of ODA funding, but said it was highly likely to become the largest aid donor using the broader definition.

“We can see over time there is a steady increase in China’s overall spending in the provision of ODA and OOF. I don’t think there are any signs of slowing down,” he said.