7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 1/6

RAND > The RAND Blog >

COMMENTARY (The Weekly Standard) June 29, 2015

Photo by Gang Liu/Fotolia

China's Foreign Aid Offensive

Cby Charles Wolf, Jr.

hina's foreign aid programs are distinguished bysize (much larger than those of other countries),breadth (encompassing 92 emerging-marketcountries in six geographic regions), and

composition (focused on mining and exports of naturalresources and supporting infrastructure). They are alsounique in their accompanying quid pro quo conditions: Forexample, increased production and exports of mineralresources are explicitly consigned for delivery to China—payback conditions characteristic of commercialinvestments rather than bilateral foreign assistance.

China's pledged assistance in the past six years varied from alow of $91 billion (2012) to a high of $317 billion (2013), with anannual average of $174 billion. By way of comparison, U.S.foreign economic assistance in 2012 amounted to $37 billion,including aid for economic development, internationalnarcotics control, international refugees, and children'ssurvival programs. Notably, U.S. aid represents appropriated

Charles WolfDistinguished

Chair inInternational

Economics;Senior Economic

Adviser;Professor,

Pardee RANDGraduate School

TopicsChinaDevelopingCountriesEconomicDevelopment

OBJECTIVE ANALYSIS.EFFECTIVE SOLUTIONS.

7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 2/6

funds provided as grants, while Chinese aid mainlyrepresents pledges to lend. Security assistance is notincluded in either country's figures.

How the pledges are divided—by type and among regionsand countries—provides a crude indication of China'spurposes and priorities. Seventy-five percent are devoted tonatural resource (mainly oil, gas, and coal) andinfrastructure projects. Some infrastructure (such as roads,rail, warehousing) directly supports the resource projects,while other infrastructure (schools, office buildings, housing,stadiums) is separate. The remaining 25 percent includemedical supplies and services, humanitarian aid, technicalassistance, and training.

China's ministry of commerce—ostensibly the lead agencyamong the several that oversee these programs, includingthe foreign ministry, state-owned enterprises, and perhapsthe People's Liberation Army—divides recipient countriesinto six regions. The regional shares of total pledgedassistance from 2001 through 2014 (in billions): Africa ($330),Latin America ($298), East Asia ($192, excluding the bulk ofChina's aid to North Korea), the Middle East ($165), SouthAsia ($157), and Central Asia ($69).

The following table shows the top six country recipients ofChina's assistance, in total and per capita, in the last 14 years.Singapore's outsize per capita figure reflects the city-state'simportance as the entrepôt trade link between the IndianOcean and South China Sea, its role as a key member of theAssociation of Southeast Asian Nations (ASEAN), and itssmall population (under five million).

Table 1. Top Recipients of China's Assistance, in Total and PerCapita, 2001 to 2014 (U.S. Dollars)

Total Per Capita

Iran $143 billion Singapore $8,954

Pakistan $135 billion Venezuela $4,372

Venezuela $126 billion Iran $1,774

Nigeria $110 billion Malaysia $920

Brazil $80 billion Argentina $840

Indonesia $61 billion Pakistan $687

Source: Charles Wolf, Jr.

7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 3/6

Funding is principally provided by China's Export-ImportBank and the China Development Bank, an elite policyinstitution responsible to China's State Council. The termsof these loans include annual interest rates between 2 and 3percent and repayment spread over 15 to 20 years.Estimating the implicit subsidies in these terms is difficultbecause most of the 92 recipients would not qualify for long-term loans from international capital markets irrespectiveof interest rates. On the other hand, the few recipientswhose credit ratings are relatively favorable (e.g., Indonesia,Brazil, India) might qualify to borrow at rates only 3 or 4percent above the London Interbank Offered Rate. For thesecountries, the implicit subsidy is between 3 and 5 percent.

China's delivery of equipment and services has markedlybut unsurprisingly lagged far behind its pledged assistance.The lag is unsurprising because project implementationinvolves geological surveys, civil engineering, miningoperations, construction, and logistic arrangementsstretching over several years. And the projects typicallyimport thousands of Chinese workers (a unique requirementof China's assistance programs, often not welcomed byrecipient countries), necessitating additional housingconstruction and logistic support. Deliveries usually lagapproximately six years behind pledges; pledges made in theyears from 2001-2008 correlate with deliveries made in 2007-2014. (The payout period associated with U.S. grantassistance is typically much shorter.) By 2014, China'scumulative delivered aid accounted for more than 95percent of total pledges from 2001 through 2008. We canproject that pledges made between 2009 and 2014 will resultin deliveries of $500 billion between 2015 and 2020.

What does this portend for the future? An earlier RANDstudy considered a range of factors that might affect thescale of China's foreign aid. For example, China mightincrease its assistance in an effort to stimulate its owneconomic growth by increased exports to recipient countriesand subsequent increased energy supplies consigned toChina. On the other hand, China might be inclined todecrease its foreign aid to ease resource constraints andreduce income disparities at home. Our conjecturedconclusion was that China's assistance would continue to belarge, perhaps with some reductions in the coming years.

More recently, China has launched a new institution, the

7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 4/6

Asian Infrastructure Investment Bank, to enhanceconnectivity and trade in the region (e.g., to revive andmodernize China's storied Silk Road and perhaps providebullet trains for the Trans-Siberian Railway), as well asaccelerate broader economic development throughout Asia.AIIB will cover three of the six regions cited by China'sministry of commerce: Central Asia (comprising formerrepublics of the Soviet Union), South Asia (the Indian sub-continent), and East Asia (including Korea and the ASEANcountries). China has set AIIB's initial capitalization at $100billion, of which its share is slightly under one-third; thesecond-largest shareholder is India ($8.4 billion), and theremaining shares are subscribed by the AIIB's 55 othermembers, principally those in Asia and, to a lesser extent,Europe. The United States is not a member. Whether AIIBwill seek to raise funds in commercial credit marketspresumably will be determined by AIIB's 57 members.

Whether and to what extent the China Development Bank—whose role in China's foreign assistance has been crucial—will be active in AIIB is unclear. It's worth noting the CDBalready has a separately managed China-AfricaDevelopment Fund. Adding the AIIB to CDB'sresponsibilities is unlikely, but not inconceivable. What isclear is that China will have decisive leverage in the newbank's major decisions.

How the AIIB may affect and be affected by internationalcapital markets remains to be seen. The bank's prospects donot appear especially bright. AIIB is one big addition to theplethora of multilateral and bilateral sources of subsidizedassistance to emerging-market countries, a list that includesthe World Bank Group, Asian Development Bank, AfricanDevelopment Bank, BRICS (Brazil, Russia, India, China, andSouth Africa), as well as the numerous bilateral assistanceagencies and government-supported banking institutions inthe United States, U.K., EU, Japan, and elsewhere. The supplyside is so abundant that virtually any well-conceived andsensibly configured development project can already qualifyfor support from one or more of these sources. Hence, it islikely that the AIIB and other sources of financing willcompete with each other in offering attractive terms to theirprospective borrowers. The result may well be invidiouscomparisons of the lenders by the borrowers: Which amongthe many options offers the best bargain? A walk—if notrace—to the bottom may ensue in terms of project quality

7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 5/6

and financial terms. The result may be borrowers burdenedwith debt they can't pay, while lenders hold accounts-receivable they can't or don't want to collect. It would not besurprising if 5 to 10 years down the road China views theAIIB as an albatross it regrets launching.

Contemporaneously, the United States is actively engaged inefforts to create a multilateral Trans-Pacific Partnership.TPP is an agreement with 11 other Pacific-trading countriesto expand free trade and boost investment in the region.Although TPP will entail losers as well as beneficiaries—acircumstance reflected by the current controversysurrounding it—its implementation is likely to generate netgains for the United States and its partners. AIIB's prospectsfor success are far dimmer—a welcome and timely plus forthe United States.

Charles Wolf Jr. holds the distinguished chair ininternational economics at the RAND Corporation. He is theauthor of Puzzles, Paradoxes, Controversies, and the GlobalEconomy.

This commentary originally appeared on The WeeklyStandard on June 29, 2015.

RELATED RESOURCES

7/1/2015 China's Foreign Aid Offensive | RAND

http://www.rand.org/blog/2015/06/chinas-foreign-aid-offensive.html 6/6

ABOUTThe RAND Corporation is a research organization that develops solutions to public policy challenges to help makecommunities throughout the world safer and more secure, healthier and more prosperous. RAND is nonprofit, nonpartisan,and committed to the public interest.

1776 Main StreetSanta Monica, California 90401-3208

RAND® is a registered trademark. Copyright © 1994-2015 RAND Corporation.