The PRC’s Foreign Aid to Developing Countries as a Tool to Protect Chinese Companies’ Investments against Political Risks

Abstract

The article is exploring the PRC’s experience in using foreign aid tools to mitigate political risks for its companies’ foreign direct investments in the countries of Global South. The author compares Chinese approach with the Western one, and identifies key exclusive features of China’s efforts towards mitigating risks for its companies. In particular, it has been found that the Chinese state-owned companies (SOEs) are the main proponents of kickstarting foreign aid projects with the aim of mitigating risks. Such projects are often implemented by the contractors from China, and encompass constructing social infrastructure in the recipient country, as a “bonus” to the principal commercial activity. Political risks are mitigated via subsidized loan contract terms, containing serious consequences for the recipient in the event of broadly defined changes in the regulatory regime and force-majeure detrimental to Chinese entities. Chinese SOEs can also protect their investments against the recipient’s harmful actions by prompting the PRC government to stop the foreign aid transfers, or by simply abstaining from proposing new aid projects in the future. The emphasis of political risk mitigation through foreign aid is on the legal-governmental (regulatory) risks, while the extralegal risks, such as terrorist attacks, worker strikes and civil protests, are not directly addressed, which can be explained by the adherence of the PRC to the principle of non-interference in internal affairs.