Foreign aid has long been used by the Chinese government as a diplomatic tool to expand its influence in developing countries. Despite its impressive growth in the past two decades, Chinese aid faces challenges that limit its impact. China faces the dilemma of needing to consolidate its relations with developing countries by providing more aid while facing the challenge of a likely reduced aid budget due to financial constraints and the economic impacts of COVID-19.
Chinese aid at a glance
The tactics and priorities for Chinese foreign aid have evolved over time. Aid was used by the People’s Republic of China to obtain recognition and expand influence in socialist and developing countries from the 1950s through to the 1970s. The normalisation of bilateral relations between China and western countries in the 1970s reduced the need for China to court developing countries for diplomatic support. This new development, coupled with China’s adoption of the reform and open up policy in the late 1970s, resulted in China shifting its focus to domestic economic development, and reducing the foreign aid budget.
The economic success in the following three decades has fuelled China’s ambition to be a global power, or ‘the rejuvenation of the Chinese nation’. This explains the rapid growth of Chinese aid outlay in Africa, Asia, Latin America, the Caribbean and Pacific islands since the early 2000s. This trend is most evident in the period since Xi Jinping took office in late-2012. China’s largess in developing countries has largely been used to support Xi’s grand strategies typified by the Belt and Road Initiative and the building of a ‘community of common destiny’, and to showcase its fulfilment of moral duty as a great power.
China’s aid program has achieved some major strategic success. For example, it has placed Beijing in an absolutely advantageous position in the diplomatic tug-of-war with Taiwan, reducing the number of Taiwan’s diplomatic partners from 70 in 1969 to 15 in 2020, most recently in the prominent case of Solomon Islands. With China being Cambodia’s biggest aid donor, Cambodia has been a firm supporter of China’s stance on the South China Sea disputes despite the pressure from other claimant states.
A closer look at Chinese aid reveals challenges, however. First, Chinese aid lacks influence in ‘soft’ areas. This is caused by an over-concentration of Chinese aid on the infrastructure sector especially large-scale projects. To avoid ‘offending’ recipient governments, China deliberately circumvents ‘soft’ areas such as governance, human rights, gender issues and democracy.
Second, these infrastructure projects are mostly funded by the China Export-Import Bank with concessional loans which need to be repaid. Compared with grant aid and interest-free loans (which could be written off upon requests), providing aid in the form of concessional loans enables China to satisfy the rising demands from recipient countries for more aid while reducing the financial burden on China, but it can result in growing debt burden and risk, especially in fragile economies. Currently, China only approves repayment extensions for recipient countries on an ad hoc basis by taking into consideration the overall bilateral relations and China’s geostrategic and economic interest. In other words, the debt issue has been postponed but not solved. There is also no sign that China’s policy on debt will change anytime soon. Even in the current environment when China needs the diplomatic support of developing countries most amid mounting pressure from the US and its allies, the Chinese government has only agreed to suspend rather than forgive debt repayments from 77 developing countries.
Third, China’s delivery of aid, similar to many of its other diplomatic activities, has relied on a government-to-government approach. This practice is a two-edged sword. It is welcomed by some officials in recipient governments and also speeds up the negotiation and allocation of Chinese aid. However, the vast number of non-government groups are excluded from this process, which limits the effectiveness of Chinese aid and the scope of its beneficiaries.
China’s aid program could face tough times ahead and a vexing dilemma. Strategically, to strengthen relations with developing countries, China needs to increase its aid spending. Tensions in China-West relations have escalated. In July, US Secretary of State Mike Pompeo said, ‘securing our freedom from the Chinese Communist Party is the mission of our time’. In the same week, Xi Jinping urged the party and the Chinese people to ‘safeguard the great socialism established by the Chinese Communist Party and pass it on from generation to generation’. The deterioration of relations with the West will naturally lead China to forge closer ties by all possible means with the developing world, which has long been regarded as ‘the basis of China’s diplomacy’.
Financially, however, the Chinese aid program is likely to feel the chilling effects of economic slowdown. The impact of COVID-19 has already affected China’s economy, resulting in a 6.8 per cent contraction of GDP in the first quarter of 2020 compared with last year, according to China’s National Bureau of Statistics. Although the Bureau reported a GDP bounce back to 3.2 per cent in the second quarter, the ongoing trade war with the US, and deteriorating China-West relations more generally are likely to impinge on China’s growth performance in the future. Not surprisingly, in May 2020, Chinese Premier Li Keqiang urged government at all levels in China to ‘tighten their belts’, pledging that ‘the Central Government will lead by example by living on a tight budget’.
Under these circumstances, Chinese aid spending is unlikely to rise in the near future. Indeed, a reduction in the long run may be a real possibility with potential negative implications for China’s influence around the world.