A pattern emerging in China’s official financial support to Africa is that it differentiates between social services and business development projects. Implicitly, grants (including inkind)
and quasi-grants (interest-free or low-interest-rate loans, with a willingness to reschedule) are used for projects that are meant to provide public goods or social services, such as hospitals, schools, public buildings or facilities, and technical assistance. To finance projects that are expected to generate revenue or export earnings, through state financial institutions and enterprises China provides trade credit and commercial loans, often with repayment linked to the output of the projects (e.g., oil). This approach thus aligns debt financing with evolving repayment capacity.
Instead of delivering a whole infrastructure project as an in-kind grant, as in the 1960s– 1970s, China now uses aid to facilitate investment—only a small part of China’s infrastructure activity in Africa is outright aid. Concessional financing is often used as only part of a financing package for commercial projects.26 Because aid is used to finance infrastructure that complements investments in productive or export sectors, it helps leverage financing from nongovernmental sources and indirectly stimulates growth in the recipient country.
China’s official financing seldom directly supports a country’s recurrent public expenditure.
Any assistance to current spending is usually in kind (e.g., free medicine, medical services, training of professionals, and scholarships). China’s technical assistance also seems to relate mostly to sectoral development rather than government functioning or external consultants for public service. These aspects of China’s official assistance—aligning debt financing with commercial projects, using aid to leverage financing from nongovernment sources, and focusing on capital expenditure and development of the productive sectors—help explain the changing financing mix and growing Chinese financial flows to Africa.
IMF Working Paper African Department What Drives China’s Growing Role in Africa?
Prepared by Jian-Ye Wang October 2007
To learn more about this author, visit International Monetary Fund's Website.
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