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China, Africa cooperation: Analysis

African states that have continued to
rely on China’s lifeline should adjust in preparation to savour another
Beijing’s $60 billon investment pledge.
 
China, like previous Summits of the Forum on China-Africa Cooperation, made the pledge which appears attracting African nations.
 
W. Gyude Moore, examines Africa’s commitment to after China’s financial assistance
 
At this month’s 2018 Summit of the Forum
on China Africa Cooperation, the cornerstone of China’s investment and
lending on the continent, Beijing made a pledge of $60 billion in
investment, just like the previous edition.
 
It appears, however, that we are in a new
phase of Chinese financing. A combination of domestic and international
pressures is altering China’s extensive lending program—and African
states that have relied on this lifeline must
adjust. The new reality could benefit African countries by compelling
improved project preparation and implementation, reducing price
inflation, and decreasing the role of political over economic
considerations in project selection.
 
At the last summit, in 2015, China also
announced a $60 billion package for Africa comprised of $35 billion in
preferential loans and export credit lines, $5 billion in grants, $15
billion of capital for the China-Africa Development
Fund, and $5 billion in loans for the development of African
small-and-medium enterprises. While the announced $60 billion package
seems to be same as the last, there are noticeable differences.
 
It looks like China is responding to the
debt situation in Africa by increasing the portion of the package
covering no-interest loans, grants and concessional loans to $15
billion. 
The government portion of the packages is also smaller. As Lina
Benabdallah, assistant professor of politics and international affairs
at Wake Forest University, explains, “Of the $60 billion pledged, $10
billion is labelled ‘investments in the next
three years,’ which means that Chinese companies—not the Chinese
government—are likely to fulfill those investments.”
 
Debt Trap or Much-Needed Investment?
 
Between the 1970s and into the 1990s,
developing countries’ debt compounded at an annual average of roughly 20
percent, rising from $300 billion to $1.5 trillion. Some of the poorest
countries, many in Africa, saw external public
debt increased from slightly above 20 percent of GDP in 1970 to almost
140 percent of GDP by 1994. For some, interest payments rose from $230
million to $1.3 billion. In response to campaigners and activists, 41
countries, including 33 in Africa, had their
debt waived or restructured.
 
The current fear is that a significant
number of those countries are now at moderate or high debt distress,
which may trigger another debt crisis. Africa is at the center of this
anxiety, and China’s role in Africa’s emerging
debt crisis is attracting significant attention. China is now routinely
accused of “debt-trap diplomacy,” (paywall) or intentionally “miring
supposed partners, particularly developing countries, in unsustainable
debt-based relations.” The assumption seems
to be that “China’s own economic and geostrategic interests are
maximized when its lending partners are in distress.”
 
The “debt-trap diplomacy” idea, however,
has never been convincingly argued and its application in Africa is, at
best, tenuous. The reality of Africa’s debt to China is not particularly
remarkable when taken against the aggregate
of sources of Africa’s external debt stock (see chart below). A few
African countries: Angola, DRC, Ethiopia, Kenya and Sudan 
account for over half of Chinese lending in Africa. A number of
African countries’ (Djibouti, Kenya, and Angola) debt obligations to
China are high and many are now alarming—as they would be regardless of
creditor. There is a high likelihood that some
of this debt will be restructured.
 
As evidence of China’s putative “debt
trap,” the Sri Lankan port at Hambantota where failure to service the
loan resulted in a 99-year lease and China’s control of the asset. This
evidence, however, conveniently ignores 84 instances
(pdf, p. 29-32) over the last 15 years, of China restructuring/waiving
loans without taking possession of assets, including Ethiopia’s third
such restructuring. The argument for bad-faith Chinese lending also
ignores Venezuela—the single largest Chinese debtor
country where there still isn’t Chinese takeover of flagship state
assets.
 
The language of “debt-trap diplomacy”
resonates more in Western countries, especially the United States, and
is rooted in anxiety about China’s rise as a global power rather than in
the reality of Africa. As Evan Feigenbaum of
the Paulson Institute think tank writes, treasury secretary Steven
Mnuchin has counseled countries against taking Chinese money, warning it
will lead countries into a debilitating cycle of debt, and
asset-stripping. The US Department of Defense accuses the
Chinese of predatory economic practices.
 
For Africa, Chinese financing—and by
extension, FOCAC—remains an indispensable option. First there is the
history of the West dismissing African infrastructure plans as
“uneconomical and unnecessary” and a long history (since
the ’60s) of the Chinese stepping in instead. The West has also almost
exclusively anchored its engagement with Africa in development—rather
than business. European Union President Jean-Claude Juncker himself
admitted as much in his State of the EU address
last week when he noted, that the EU will “have to stop seeing this
relationship through the sole prism of development aid.”
 
The Population Reference Bureau projects
that Africa will be home to 58 percent of the projected 2.6 billion
increase in global population between now and 2050. Africa is not
creating jobs anywhere near the pace needed to accommodate
those numbers. It also lags behind all other regions of the world on
every measure of infrastructure coverage. This has led to tepid
industrial growth, with Africa’s share of global manufacturing falling
from about 3 percent in 1970 to less than 2 percent
in 2013.
 
Across Europe and the United States,
nativist political parties and racist politicians, some openly hostile
to Africans, are either winning elections or comprising significant
parliamentary blocs. Therefore, investment from China
is one of the few ways African countries can get financing for the
infrastructure it so desperately needs.
 
China has financed more than 3,000
strategic infrastructure projects in Africa and extended tens of
billions of dollars in commercial loans to African governments and
state-owned enterprises. China’s export of excess industrial
capacity and its model of special economic zones has benefited the
nascent manufacturing sector on the continent. An in-depth evaluation of
Africa’s economic partnerships with the rest of the world in trade,
investment stock, investment growth, infrastructure
financing, and aid concluded that no other country matches the depth
and breadth of Chinese engagement.
 
Will China be forced to curb its ambitions in Africa?
 
It appears, however, that a combination
of domestic and international pressures—both economic and political—will
limit Chinese ambitions, at least as expressed through extension of
credit.
 
China watchers have seen “obvious signs
of discontent” (pdf) with President Xi Jinping’s policy agenda,
including Chinese spending in Africa. Jamestown Foundation’s China Brief
editor-in-chief Matt Schrader notes that “BRI lending
has already begun to shrink, decreasing dramatically since 2015.”
Schrader suggests a link between emerging criticism of the expansive
BRI—the Belt and Road Initiative, an infrastructure plan announced in
2013 and spanning Asia, Europe, and Africa—which its
domestic Chinese critics have taken to calling “aid,” and the reduced
ambition of the program.
 
As China’s trade war with the United
States escalates, the People’s Bank of China is attempting a balancing
act between allowing the yuan to weaken against the dollar and
intervening to arrest the decline before it leads to a
devaluation that would affect the Chinese economy. And this trade war
is occurring as China attempts to manage its massive domestic debt
(paywall). Even if a crisis does not emerge, managing this debt will
remain a prominent focus of Chinese policymakers.
 
In terms of outside pressure, China is
also facing pressure to conform to international lending standards from
the International Monetary Fund.
 
Meanwhile, the narrative of weaponized
loans is beginning to spread. For example, 16 American senators wrote a
letter to Treasury Secretary Steven Mnuchin and Secretary of State Mike
Pompeo inquiring “how can the United States
use its influence to ensure that [IMF] bailout terms prevent the
continuation of ongoing BRI projects, or the start of new BRI projects?”
The incident with the Hambantota Port in Sri Lanka is paraded as
evidence of China’s bad intent in providing loans to
low-income countries. Domestic politics in partner countries is also
beginning to affect Chinese lending, with Malaysia canceling two large
Chinese projects after elections brought a new government to power.
 
The new realities of China’s investment in Africa
 
Under Xi, China has increased its focus
on making China’s voice heard on a global level. China is determined to
assure its African partners that it remains a stable and dependable
ally, particularly as Chinese leadership attempts
to contrast itself with its American counterpart.
 
But the pressures outlined above cannot be ignored. Coming out of FOCAC, Chinese officials 
“vowed to be more cautious to ensure projects are sustainable.”
Using sustainability as a criterion will increase the quality of Chinese
lending and limit the scope of projects eligible for lending. Kenya’s
inability to secure financing for phase two
of the Standard Gauge Railway project amid reports that China wants a
study on the commercial viability of the project could be the beginning.
While there is now research that concludes that, “Chinese loans are not
currently a major contributor to debt distress
in Africa,” Chinese lending cannot ignore the numerous African
countries facing moderate-to-high debt distress.
 
Reduced Chinese lending need not
necessarily be a bad thing. We now know that Kenyan officials siphoned
off billions in Kenyan shillings from Chinese loans for the SGR project.
There are still questions about the true cost of
the project and whether Kenya overpaid. A set of stricter project
eligibility criteria could lead to more competent project preparation
and implementation. It could also decrease the incidence of projects
selected for funding based on electioneering and politics
rather than on social and economic policy outcomes. This might even
prompt African states to increase submission of projects that enhance
regional integration, trade and commerce.
 
African states will continue to look
toward Chinese lending as a significant component of the suite of tools
available to deal with poverty and the gap in infrastructure financing.
But the new reality looks set to be one in which
the Chinese spigot, while not completely turned off, has slowed as
China adjusts to pressures at home and abroad.

 
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