China's Official Finance in the Global South: What's the Literature Telling Us?

Abstract In the last two decades, there have been exponential increases in Chinese loans and grants, particularly flowing to the Global South. The subsequent growth effects in the South have led to speculation about China’s development models that govern its official finance and the overall macroeconomic effects. Consequently, a considerable body of research has investigated how different Chinese development policies affect the allocation patterns and outcomes in the Global South. This paper critically reviews related scholarly works, emphasising empirical literature. It identifies that the One China Policy is unanimously the most important strategy in explaining Chinese funding, although this policy tool may not be linked to trade with China and its humanitarian assistance. Chinese finance undermines efforts to promote good governance and contributes to political extortion and environmental degradation in recipient countries by not imposing governance reform conditionality on official financing. However, this argument must be carefully weighed against the positive impact of Chinese finance on health and economic growth, among other benefits. Despite intense research efforts, further research is still needed to understand vulnerabilities associated with China’s development models. The information conveyed by the review will be of interest to foreign aid spectators seeking to learn from China’s experience.