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V. C. China’s Approach to Financing: AID VS. COMMERCE: FACTORS INFLUENCING THE GROWING TIES

Guest post by: International Monetary Fund

Article Overview: A pattern emerging in China’s official financial support to Africa is that it differentiates between social services and business development projects.

V. C. China’s Approach to Financing: AID VS. COMMERCE: FACTORS INFLUENCING THE GROWING TIES

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

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Article Tags: capital expenditure, commercial loans, commercial projects, country china, debt financing, development projects, export earnings, export sectors, external consultants, financial institutions, free medicine, infrastructure project, interest rate loans, low interest rate loans, productive sectors, public buildings, public goods, recipient country, recurrent public expenditure, social services



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