China’s infrastructural lending in Africa may slow in the future – Citi

China’s infrastructural lending to Africa may slow down in
the future as the Asian nation changes tact in its quest to be a global superpower.
In a report, China and Africa: Soft power
and hard lending Citi Research says that under President Xi Jinping, China
is establishing itself as a global power through military engagement and
diplomacy rather than financing economically unviable infrastructural projects.

Initially, infrastructural loans were part of the enticement for African governments to face East. However, the trend may be declining less than two decades as the sustainability of the debts takes centre stage.

Academic literature on African growth has shown that the continent’s development has been held back by a lack of infrastructure. Africa’s massive size and low population density in many areas support this argument.

First Infrastructure
push

Efforts to build new infrastructure in the Independence era came from European and US aid programs (traditional lenders) in conjunction with Bretton woods institutions – World Bank. Africa plunged into its first debt crisis following the heavy lending leading to HIPC and MDRIdebt relief initiatives. Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) wrote off significant portions of the debts and led to a reluctance to lend to African large infrastructure projects.

Second infrastructure
push – Chinese entry into lending

Africa faced a crisis due to the limited access to funding and low grants. New lenders willing to step in and provide finance for infrastructure programs emerged led by the Chinese government and other states such as India, Russia, and Turkey and private investors through the Eurobond Market.

China has been a dominant player with a formal expression of this financial support in recent years has been funding commitment outlined at the China-Africa Co-operation Forum (FOCAC) held every three years for the last 18 years.

FOCAC, committed $5bn in 2006 in support for Africa, $10bn
in 2009, $20bn in 2012, $60bn in 2015, and $60bn in 2018.

China-Africa Research Initiative (CARI) at John Hopkins University shows that from 2000-17, Chinese total disbursements to Africa from various sources totalled $143.4bn, with this figure dominated by $63.1bn from China Exim Bank.

However, the CARI data shows that four countries have received over 50% of the total lending that is Angola ($19.2bn), Ethiopia ($13.1bn), Kenya ($9.8bn), and Republic of Congo ($7.4bn). On top of that, Cameroon, Sudan, and Zambia have contracted over $5bn each in Chinese loans by 2018.

Moreover, the report notes that Chinese lending to Africa
has been slowing since 2013.

New tactics

Chinese government outlined the first debt sustainability
framework where it outlines the possibility of more lending on more
commercially viable projects to allow the borrower to service the debt. In addition,
a significant number of Chinese companies with projects in Africa and
traditional providers of Chinese finance for projects such as China Exim Bank,
China Development Bank, and Sinosure are now looking in much more detail at
projects and their potential to generate sufficient returns to service
associated debt.

Furthermore, these firms are employing consulting companies to look in more detail at the financial viability of projects or asking for the cost-benefit analysis of projects.  

The foreign policy targets at increasing China’s influence
on global thinking through a network of embassies and Confucius Institutes to
teach Chinese language and culture and to influence positive sentiments towards
China.

In addition, it wants to be seen as an upholder of global
institutions such as the United Nations with for instance being involved in UN
peacekeeping operations estimated 2400 Chinese peacekeepers in Africa in seven
UN missions. On top of that, the first military base was opened in Djibouti.

Citi argues that these trends may slow down infrastructural project financing from the Chinese government and lenders.