Official Aid or Export Credit: China’s Policy Banks and the Reshaping of Development Finance

Santiago, Chile. Photo by Caio Silva via Unsplash.

In the past decades, China has massively financed infrastructure projects overseas, building railways, bridges, power plants and ports around the world. The enormous amount of capital outflow has drawn much attention from international investors, mass media, policymakers and academics, especially after the announcement of the Belt and Road Initiative and the establishment of the Asian Infrastructure Investment Bank in 2013. Though heatedly debated and discussed, the nature of these infrastructure loans remains controversial in academic writing and media reports, which have been unable to fully explain the non-concessionality of Chinese loans. Sometimes the loans are referred to as state-led aid, financing infrastructure works in less developed countries while at other times, they are seen as commercially-driven export credits, supporting the international venture of Chinese manufacturers. 

In a new working paper, Muyang Chen seeks to demystify China’s overseas development finance by examining the lending mechanism of two policy banks, the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM). Using quantitative data and interviews, Chen shows how and why China mixes the use of official aid and export credits. 

Main findings:
  • China’s “state-supported, market-based” practice of development finance challenges the postwar paradigm of development finance, established by industrial countries based on an idea of “donation” from the North to the South. 
  • Unlike conventional official assistance, which essentially transfers tax payers’ money from donor countries to recipient countries, the Chinese policy bank loans come with limited degrees of concessionality and downplay the role of “donation”.
    • These loans also differ from tied aid, which uses state subsidized low-cost capital to raise the international competitiveness of selected enterprises. 
  • Chinese contractors are targeting more of the developing market and frequently compete with their compatriots, instead of markets typically favored by investors from industrial countries. 
  • The policy bank loans demonstrate new means of state involvement in development finance. 
    • The state involves infrastructure finance not through direct allocation of fiscal revenue, but through enhancing the creditworthiness of projects and making them bankable to the market. 
  • Loans are appraised and dispersed in a market-driven manner, but the credibility of borrowers and projects are raised by various forms of government-coordinated guarantees and collateral. 
    • This allows many developing countries, which may lack the fiscal capacity to finance infrastructure or are not attractive to commercial capital and do not receive sufficient aid or concessional lending from traditional donors, to be able to finance infrastructure projects essential for development and growth. 

The non-concessionality of Chinese policy bank loans challenges the conventional wisdom that development finance should be conducted in a charitable manner. To Chen, such a “state supported, market based” means of development finance has challenged the existing development finance paradigm and provided an alternative option for developing countries in need of capital.

Read the Working Paper