The Political Economy of Japanese Foreign Aid: The Role of Yen Loans in China's Economic Growth and Openness

Abstract

Over the past quarter of a century, China's economic growth, its transition from a socialist to a market-based economy and the integration of the Chinese economy into the global economic system have all progressed significantly. On the other hand, during the same period Japan has been the single largest source of foreign aid to China of all donor nations and international aid organizations, by providing more than half of China's total bilateral aid receipt. This article looks at the role of Japanese foreign aid in China's economic growth and increasing openness, and explains Japan's grand strategy in implementing its aid policy to China. My analysis suggests that there is a positive, albeit indirect, link between Japanese development fund, which is widely known as yen loans, and the growth and increasing openness of the Chinese economy. The evidence also indicates that the link between Japan's provision of yen loans to China and Japan's immediate corporate gains is surprisingly weak. Indeed, Japan has benefited indirectly because yen loans have contributed to the economic growth and openness of China, which in turn make it a better economic partner and more responsible regional neighbour for Japan. In the end, China's economic development, the incorporation of the Chinese economy into the global economic framework and China's transition to a market economy are in Japan's national economic as well as political interests.