Sunday, January 22, 2012

China's Foreign Aid: The Economist still doesn't get it

credit: Derek Bacon for The Economist
The Economist still doesn't get it on China's foreign aid. They merrily mix apples and lychees in a new special report on state capitalism, writing:

"And government bodies such as Eximbank, China’s foreign-aid bank, have made no bones about their enthusiasm for tying foreign aid to commercial advantage. One of China’s favourite tools is oil for infrastructure. China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material. Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola."

What's wrong with this? Nearly all of it.

(1) "...Eximbank, China's foreign-aid bank..."

Eximbank is China's export credit agency, i.e. it finances trade deals like the 2009 deal where my old friend Mort Arntzen's American shipping company OSG bought a handful of Chinese tankers. Yes, China Eximbank also manages China's foreign aid concessional loan program, but this is a small part of Eximbank's total portfolio. Standard & Poor's credit rating review of China Eximbank in 2005 found that the concessional loan portfolio made up only 3% (three percent) of Eximbank's assets. 

(2) "...their enthusiasm for tying foreign aid to commercial advantage..."

Yes, China does tie its official foreign aid, while other countries have moved away from this (the UK led this move, but the US is a laggard here). However, tying export credits to your own country's exports is still the norm. Why else would countries have a government instrument to intervene in trade?

(3) "One of China's favorite tools is oil for infrastructure".

Not really. This kind of tool is relatively rare. If you consider all the transactions financed by Chinese banks in Africa, for example, oil-secured infrastructure loans that are unrelated to developing an oil asset (including refinery/pipeline) seem to be limited to Angola, the Congo-Brazzaville, and (in the works) Ghana.* Latin America has seen more deals like this: at very high interest rates. And coming right after a sentence about foreign aid implies that China's oil-secured infrastructure loans are "foreign aid" -- when they're not, by anyone's official definition.

(4) "China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material." 

This isn't quite how it works. This makes it sound as though the Chinese dangle a few hospitals in front of an African president and then say: you can have this if you guarantee us a supply of your oil!

Here's how it really works. The Chinese bank will offer to provide export-secured finance (these exports can be anything -- as I wrote recently in The Guardian, in Ethiopia, all of the country's exports to China were used to secure a loan). I'm not sure what a "soft loan" is technically, but all of these loans have been at market rates. The "guaranteed supply" of whatever export is already going to China is simply the mechanism for ensuring repayment of the loan (the proceeds are deposited into an escrow account). China doesn't dangle promises of schools, hospitals, etc. -- the proposals about what infrastructure to finance with the loan are made by the borrower. They might include schools, but they usually focus on productive infrastructure: roads, rail, electricity production.

(5) "Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola." 

No.  First, China's oil companies were not building infrastructure in Angola. The Chinese have world-class construction companies, and that's who got the business. Second, the loan was not "low-interest" but was made at LIBOR (London Interbank Offered Rate) plus a margin of 1.5% (this changed in later tranches). LIBOR is a market rate, and LIBOR plus 1.5% is actually a higher rate than some western commercial bank oil-secured loans given to Angola, as an excellent study by Global Witness makes clear.

For more detail than you probably want on how China's foreign aid really works, see some of my published papers here.
* Nigerians proposed using this model, but it apparently never happened. Although there is some evidenced that an early suppliers credit to finance two power plants was secured by oil exports, the loans were never repaid. If this system was used, it broke down. In Sudan, this model was apparently used very early on in the mid-1990s, but I believe it was limited to the construction of a joint-venture oil refinery. In Niger and Chad oil-related construction (refinery /pipeline) is also being financed this way.


gregory said...

so who to believe?

the economist article seemed to have a consistent pov (if not a fear-mongering agenda)

what i find curious is that most writing on china in africa is all about plotting, scheming, strategizing, they are smart, west is dumb .. whereas to me it is simply the continuation of the natural spread of ideas and influence through the world, similar to the one called westernization ..

nature is globalized, after all

Vasu said...

This is something that I feel will change for certain in the coming decades - this flow of culture and ideas, and more importantly business, will stop being a one way street.

The Chinese seem to be in a hurry to win this world, but can they succeed when they don't believe in the very tenets that make a modern society - freedom of the individual, freedom of the press and freedom of speech?

Anonymous said...

Of course The Economist is in the fear mongering business. what they don't realize is how little Africans and China care about the opinions of increasingly irrelevant and completely biased outlets like The Economist. The west's obsession with China is quite creepy and there's nothing that scares it more than the relationship b/n China and Africa. in an increasingly complicated world where Africans and others no longer care for the west it's fascinating to see how the west is handling it within the context of its past history.

Anonymous said...

Reading your blog is always refreshing after reading so much misleading information from the western news agencies every day! --Jinghao Lu

Anonymous said...

Are we supposed to take a magazine once dubbed Africa as "The Hopeless Continent" seriously?

let me know when they write articles on The Economist, not from a race obsessed view but from a balanced and well researched angle.

Chimaoge1 said...

Great blog article ! The Economist is hopelessly biased so no surprises there.

Anonymous said...

from the Economist opening paragraph:

'The Chinese elite sees the world in terms of brutal competition for limited resources'.

You've got to ask 'as opposed to'...?

Anonymous said...

I appreciated reading your thoughtful comments and breakdowns. Perhaps this comment is marginal at best, but I was struck by your note that "The Chinese have world-class construction companies." Perhaps this is true, but it lacks support in your blog. How is this defined? Those of us who live in Beijing know all too well the questionable quality of existing as well as new construction--even among China's newest iconic buildings--not to mention deferred maintenance issue. One has to question what strategies are deployed internationally based on what is being done locally.

Deborah Brautigam said...

About construction companies and quality: I don't have a survey of the quality. But I know that Chinese firms have been winning a lot of repeat business overseas with non-Chinese clients (including American and European) for quite a few years. Even as long ago as 2008, they have quite a few companies in the ENR top 20: this source has some useful rankings

Anonymous said...

China has 20 of the top 100 biggest International construction contractors by revenue. You don't become this large internationally without good quality, reputation and repeat business. The ENR top international contractors list for 2011 can be found here...

Anonymous said...

Africa needs more infrastructure, no one denies that. I just have one question. Why is it that it is only foreigners who can build this infrastructure? Why can't we Africans rise to the challenge of learning how to construct the infrastructure we need? Is constructing infrastructure too hard for us Africans?

Margaret C. Lee said...

I agree with you. Africans have the capacity to build infrastructure. The problem is that the Chinese are sending many of their people out of China to get jobs because there are too many people in China. All over the continent you have well qualified African engineers who can design new infrastructure and people to actual do the construction. In addition, most African countries have the monetary resources to pay for the needed equipment and supplies. The real issue rest with African leaders who are not serious about African development and would rather allow foreigners, like the Chinese, to do the work. This has been the problem with Africa since independence. Noted brilliant African scholar, now deceased, Claude Ake in his book on Democracy in Africa says,"..the assumption so readily made that there has been a failure of development is misleading. The problem is not so much that development has failed as that it was never really on the agenda in the first place. By all indications, political conditions in Africa are the greatest impediment to development.."

Bradpitr said...

The Chinese have world-class construction companies, and that's who got the business.We will, continue to do our best to improve our efforts on all fronts to better our standards to serve our clients and the society. فك و تركيب الرافعات و المصاعد

Samsara said...

I don't think its about winning the world. China is in a hurry to build the world to sustain its economy. After all, you can't be the world's workshop when the market is not there. The idea is to develop the under-developed and developing world to expand the market. But I must say that capitalist development itself is not sustainable.

Anonymous said...

Reading this piece 7 years after it was written is illuminating. The Economist has been proven correct regarding China's objectives. The above response above completely misses the point regarding Chinese construction companies. Most (if not all?) are considered state-owned enterprises which means they are economic tools of the state, and therefore,hardly comparable to Western construction firms who must survive in market-competitive environments. And of course these SOEs can offer enticing deals! The state takes the risk to keep the domestic economic engine running. Size has nothing to do with quality, so careful with the rankings. Academics should know that indices can be deceiving. Firms that are capable of high quality construction can also cut corners when the margins are thin and fragile "host" governments have little incentive for oversight/recourse, particularly when they've been bought off. We've certainly seen some shoddy BRI construction in Africa. Repeat business? Sure, that's easy to achieve when the terms of deal are so enticing it's hard for non-subsidized firms (or even Western development banks) to compete. Speaking of which, where is the foreign construction competition in China? Oh wait, the Chinese haven't really opened their markets to foreign construction firms. Why would they?