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THE DRAGON'S TRAP

The myths—and realities—behind China’s lending practices in Africa

REUTERS/Jason Lee
A short distance.
By Abdi Latif Dahir
Published Last updated This article is more than 2 years old.

On Dec. 13, 2018, US national security advisor John Bolton got on a podium at the conservative think tank Heritage Foundation in Washington DC to outline the Trump administration’s new engagement policy in Africa.

It was a strategy pronged on praising American generosity, criticizing the performance of United Nations peacekeeping missions, and at its crux, aimed at countering China’s expanding financial and political influence in Africa.

Bolton said Beijing used “predatory” and “corrupt” lending and investment practices to hold African states captive to its wishes and demands. To illustrate this “disturbing” effect, he singled out Zambia, saying it owed China between $6 billion and $10 billion, and added, “China is now poised to take over Zambia’s national power and utility company in order to collect on Zambia’s financial obligations.”

Instantly, Zambia became a flashpoint between China and the United States’ entanglement in Africa. More importantly, the southern African state was thrust into the raging debate about the unbridled borrowing and lending between China and African countries. Across the continent, China has funded highways, airports, railways, dams, and power plants as part of an infrastructural boom aimed at fueling economic growth. But as these projects have proliferated, particularly under the Belt and Road Initiative, concerns have been raised about the economic consequences of Beijing’s investment push and the negative impact on nations when governments incur too much debt.

From Nigeria in the West to Kenya and Djibouti in the East, Beijing has faced increasing criticism around project sustainability, with a number of countries even delaying, suspending, or renegotiating deals. Some of these schemes have been dogged by corruption, budget inflations, and poor planning—hindering the ability of countries to earn enough revenue to pay off their dues, heightening the likelihood of falling into a “debt trap.”

The narrative around “debt-trap diplomacy” appeared in January 2017 after Indian intellectual Brahma Chellaney argued that Beijing was funding questionable projects in a bid to gain access to resources or geo-strategic locations. In December of the same year, when Sri Lanka gave a Chinese state enterprise 70% equity and a 99-year lease for its Beijing-financed Hambantota port, the argument around predatory lending became ominously prognostic.

The disquiet around Chinese debt has intensified as Beijing now accounts for the largest amount of bilateral lending to some of the continent’s biggest economies including Nigeria and Kenya. African nations continue to run large trade deficits with China too, with many exporting minerals and buying manufactured goods.

The situation in Angola is particularly dire, where China has disbursed over $42 billion in the past 17 years. The oil-rich state’s reliance on Beijing grew exponentially following the end of its civil war in 2002, with Luanda financing reconstruction projects mainly through crude oil exports to China. That strategy has proven risky with Angola experiencing severe liquidity crisis given the effects of both lower production levels and oil prices in recent years.

 

Zambia, of course, refuted Bolton’s claims saying they were “regrettable.” China also hit back, saying the US could learn to “reflect” and “not blurt things out.”

But if there was a grain of truth to Bolton’s assertions it was that Zambia’s borrowing spree was making its debt load harder to sustain. As commodity prices slumped worldwide, the copper-producing nation looked everywhere to stimulate economic growth. As a result, public sector indebtedness grew “tremendously,” says Zambian economist Grieve Chelwa.

At the end of 2018, the stock of public and publicly guaranteed debt reached 78% of the gross domestic product from over 65% in 2017, according to the International Monetary Fund. As Lusaka’s cumulative debt grew, the China Africa Research Initiative at John Hopkins University last year listed it as one of three African states where Chinese loans were the most significant contributor to a high risk of debt distress.

One lender. Many myths.

 

There are valid reasons for the heightened concern about Chinese lending practices in Africa and elsewhere. China, for one, isn’t a full member of the Paris Club global creditor nations, and rarely publishes data about its financing arrangements. Beijing doesn’t have any public rules around negotiating bad debt too, and its sovereign banks and state firms’ eagerness to gain business advantage can lead to cronyism and rent-seeking.

Despite that, it’s unwarranted to say Chinese aid is inherently malevolent and aims to overload poor African countries with debt. Here’s at look at some of the realities beyond the myths and allegations:

Aid composition and goal: While there is admittedly little transparency as to how Beijing delineates development finance versus aid, the government encourages its firms and agencies to maximize viability and flexibility when doling out billions of dollars.

As China-Africa scholar Deborah Brautigam has written in her book The Dragon’s Gift, Beijing’s mode of assistance “repeats patterns established by the West” with development assistance benefitting both the donors’ national interest and the recipients’ economic and social needs.

Aid conditionality: Even though African leaders have praised Beijing’s assistance as “condition-free,” economic engagement between the two sides has usually come with requirements. Key among them is the recognition of the One China policy, which casts Taiwan as an inalienable part of China’s territory. There is also the unstated agreement that China will not interfere in Africa’s political affairs so long as African governments do not speak critically about Chinese internal affairs such as the mass detention of Muslims in Xinjiang region or the territorial disputes in the South China Sea.

There is economic conditionality too, “as most Chinese loans are contractually tied to implementation by Chinese companies; there is almost never open bidding,” says David Shinn, who lectures at George Washington University.

China and Africa’s ballooning debt: Even though China has risen as a key lender to Africa, it still isn’t the biggest contributor to the continent’s debt burden. Over the past few years, African debt has continued to rise because of the after-effects of the global financial crisis, the slow-down in commodity pricing besides low domestic savings rates. But African countries have also borrowed heavily from global institutions like the World Bank, the Gulf states, and have issued over $100 billion in Eurobonds.

Mozambique, for instance, has received $2 billion in loans from Credit Suisse and Russian lender VTB, while the top creditor in Chad is British-Swiss mining company Glencore. While Ghana’s total debt stood at $29 billion, China accounted for less than $4 billion in loans. Of the 17 African countries identified by the IMF as being in or exposed to “debt distress,” CARI found only three—Djibouti, Zambia, and Congo Brazzaville—where Chinese loans were the most significant contributors to debt risk.

Lending and asset seizure: The chorus around the “debt-trap” narrative has been fueled by worries that Beijing’s policy banks and companies are not doing their due diligence before pouring money into large infrastructural schemes. The state-funded insurance firm Sinosure, for instance, has said it lost up to $1 billion on the Addis-Djibouti line.

Yet scholars and research bodies have found no evidence that Beijing aims to act as a loan shark in a bid to take over key geostrategic assets. Even in the case of Sri Lanka, which has been widely touted as evidence for the “debt-trap” narrative, scholars like Brautigam have found no proof to support such a claim. The Hambantota port was troubled from the beginning, and Sri Lanka privatized it to both stave off a debt crisis and bring foreign exchange into the country.

After reviewing 40 China-backed projects, the New York-based Rhodium Group also found debt renegotiations common and assets seizures a rare occurrence. In many of the cases they assessed, the outcome actually favored the borrowers especially when they had alternative financing baskets or there was a regime change.

Asides from expeditiously funding large infrastructure projects, China has by and large been adopting a “policy of patience” with African countries when it comes to payment, argues CARI researcher Yunnan Chen. Ethiopia, for instance, was able to persuade Beijing to restructure the terms of the $4.5 billion Addis Ababa-Djibouti standard-gauge railway.

No funding rivals

Increasingly, however, Chinese financial institutions are recognizing they have to exercise restraint, especially as China’s own economy slows down. African civil society watchdogs are also being more critical and pushing their governments to be choosier when presented with options for engagement says Olusegun Sotola, a senior researcher with Nigerian think tank Initiative for Public Policy Analysis.

The question of accountability will especially be crucial as China emerges as an investor instead of just a primary lender in Africa. Many Chinese state-owned enterprises are trying to transition from short-term engineering, procurement, and construction contracts and into long-term investments including real estate and hospitality.

But while we might see the flow of Chinese financing slowing, Chen says Beijing will continue to remain a key source of funding for infrastructure on the continent. “Frankly, there are few alternatives.”

Zambia’s president Edgar Lungu seems to thinks so too. In a speech coinciding with Bolton’s, he told his countrymen to stop lamenting the Chinese presence and work with them to achieve the vision of becoming a middle-income, industrial state by 2030. “They are very resilient and they can survive in any condition and Zambians need to learn that kind of resilience.”