An Empirical Analysis of the Effect of Chinese Capital Inflows on Economic Growth in Kenya

Emergence of China as a key partner in development in Africa in the 21st century is slowly taking the world by surprise, much more the traditional partners in Africa’s development – the countries of the ‘North’. More to this are large capital and trade inflows which can be a double-edged sword. They have a tendency to lower or replace domestic savings and investments, transfer inappropriate technology and even inhibit the expansion of indigeneous firms, thereby limiting growth. The study interrogates whether this involvement will help Kenya’s quest for double digit economic growth anticipated. Using monthly secondary time series data for Kenya over the sample period 2007-2015, a bounds testing and autoregressive distributed lag model (ARDL) was used to establish the presence of long run relationship between Chinese Capital Inflows and Economic growth in Kenya. Using Eviews 10.0, findings reveal that Chinese loans and industrial Inflows have a positive and significant long run effect on Economic growth in Kenya. The study recommends that the government should encourage Chinese industrial inflows especially capital and intermediate goods for growth in quantity and quality of domestic output, pursue appropriate policy actions to reduce Chinese debt inflows and assess the nature of Chinese FDIs to ensure economic growth in Kenyan that Kenya, market access in China for its manufactured products from Kenya. Finally, the government should exercise fiscal discipline in order to avoid swelling fiscal deficit