Tuesday, March 19, 2013

China's Pledge of $20 Billion to Africa: Aid or Not?

At the fifth ministerial meeting of the Forum on China Africa Cooperation held in Beijing last summer, the Chinese announced a new pledge of a $20 billion line of credit "for Africa". Almost immediately, reporters began to call this pledge of credit "Chinese aid" to Africa. Jane Perlez at the New York Times probably influenced many when she called it "Chinese aid". Others confidently labeled the $20 billion in finance "concessional".

But was this aid? Was it concessional? I doubted it. But I was on vacation in the Olympic Penninsula National Park at the time, and kayaking in the San Juan Islands. I couldn't check it out, and then it receded as a hot issue.

Yesterday, for a paper I am writing, I went back to examine the Chinese discussion around this $20 billion. The very first source I found -- the Action Plan that summarizes the next steps for the FOCAC -- was very clear that this pledge is not about official assistance but business.  

Former President Hu Jintao made the pledge in his July 19, 2012 address to the Beijing meeting. The first of five priority areas was to "expand cooperation in investment and financing". Hu said "China will provide $20 billion dollars of credit" to African countries. This was followed by the second priority area, "to increase assistance to Africa." The new loans are clearly not being positioned as assistance. There is also no mention of their being concessional or preferential. 

Further evidence comes from the Action Plan issued by the FOCAC. Beijing's pledge comes under the heading 4.5 Cooperation in Banking and Finance. I quote it below:  
4.5.1 The two sides were delighted to see the steady progress in China-Africa financial and banking cooperation in recent years, which has played a positive role in supporting the growth of businesses from both sides and boosting China-Africa business cooperation.
4.5.2 China will expand its cooperation with Africa in investment and financing to help boost Africa's sustainable development. China will provide a credit line of US$20 billion to African countries to mainly support the development of infrastructure, agriculture, manufacturing, and development of small and medium-sized enterprises in Africa.
Later, under Section 5.1, the Action Plan focuses on "Development Assistance".  The Chinese pledge here is not specific and talks only of "scaling up" assistance and making "active use" of foreign aid instruments: grants, zero-interest loans, and concessional loans:
5.1.2 China pledged to scale up its assistance to Africa and to create new ways of assistance and make the assistance more effective.
5.1.3 China will make active use of the grants, interest-free loans and concessional loans to help the development of African countries.
So why did the pledge of $20 billion in investment and bank finance get interpreted as "concessional aid"? In the West, we are so used to seeing Africa as a place that needs our aid, rather than a place where our banks can do a rousing business. Africans are also used to big countries pledging big aid -- as urged by Bono and Jeffrey Sachs. The Chinese clearly see it differently. There are risks here -- a downturn in China, lower demand for African commodities, difficulties with repayment, a new debt crisis? So far, these remain hypothetical. Reporters and observers need to reboot their view of Chinese engagement in Africa. This is not about altruism. It's "mutual benefit" in intention: Chinese loans, Chinese companies doing the work, African infrastructure being built, and (probably) repaid by African exports.


Anonymous said...

Deb, the Africans can do business with China and get benefit in return, like most of China‘s neighbors - or go back to the good old days of western campanies build a fence around their business interest and keep the locals out with guns.

Nan said...

Great post, Deb. I must confess that I'm often guilty of conflating the loans, development assistance and aid terms. I would agree completely with your conclusion that this is about about "mutual benefit" and not altruism, although, curiously a few Chinese workers I've spoken to in Kenya do feel a sense of altruism in doing their work here (a technology transfer and training project).

So, in the end what terms would you use to describe the $20 billion? I've been using the term "concessional loan," because as I understand it, the loans are below market rates. Beyond the semantics of the term, I think it's more important to recognize how the money is being used, which you pointed out. The loans go to Africa to pay for Chinese goods and services.

Deborah Brautigam said...

According to the OECD's Development Assistance Committee, "concessional" requires a subsidy of some kind. China's Eximbank & CDB bank lines of credit are not subsidized. There is no clear market rate for this kind of loan, but we can look at Angola, a risky country where global banking consortia have made oil-backed loans to Sonangol at LIBOR plus 100 basis points, lower than any of the loans made by Chinese banks to Angola. So what is a market rate? By definition, LIBOR is a market rate. The margin above LIBOR depends on the risk, and that is something that can be tempered by guarantees. Finally, the IMF clearly does not regard these large loans as concessional. Recall the long stand-off in the DRC about the Sicomines deal, or the year long wait in Ghana for the IMF to agree to lift their ceiling on non-concessional borrowing so that they could go forward with the $3 billion package from China Development Bank.

Sean Mac said...

Keep the locals out with guns ... just like the Chinese mine owners in Zambia who shot the locals to death?

Deborah Brautigam said...

@Sean Mac, what happened in Zambia was reprehensible, but no Zambians were killed. Striking workers who attacked the mine managers' compound were sprayed with birdshot. This mine, now closed by Zambian authorities, was the scene of much violence from the Zambians toward the Chinese as well. Two Chinese managers were killed by Zambian workers on two different occasions. It's a good thing the mine is now closed.

sophia said...

I have a slightly off-topic question: would you say there is a point where Chinese aid in Africa sort of escalated and reached new (current) levels?

Im writing a bachelor thesis on the impact of Chinese aid on DAC aid and am looking for some sort of historical point of reference.

Thank you! :)