Chinese Development Finance In Africa: A Blessing Or A Curse?

In recent years there has been a sharp uptick in capital inflows to Africa from China in the form of development finance. As a result, China is now the continent’s largest single creditor nation. According to analysts from the Export-Import Bank of China, China will have provided African nations with $1 trillion in financing, including direct investment and commercial loans, by 2025. With this, questions of whether Chinese development finance in Africa is something to be celebrated, or something to be wary of are increasing in prominence.

Benefits for Africa

Development finance refers to the lending of money to fund ventures or projects aimed at reducing the infrastructure financing gap in the developing world, promoting sustainable economic growth and alleviating poverty. 

Between 2000 and 2018, China loaned an eye-watering $148 billion to African countries. These loans cover a wide range of fields but are primarily focused on four main sectors: agriculture, natural resources, infrastructure, and energy. China’s development finance can be witnessed at almost every corner of the continent. However, it is particularly concentrated in Nigeria and Angola, the former being Africa’s biggest market and the latter, China’s fourth largest source of oil. Further, researchers at the China Africa Research Initiative found that around 40% of these loans went towards power projects, and 30% towards modernising transport links to address Africa’s infrastructure gap. 

Ethiopia’s electric railway was funded and built by China

So much of the continent’s infrastructure initiatives are being backed by Chinese funding that, in the words of Daan Roggeveen, the founder of MORE Architecture and author of many works on urbanisation in China and Africa, “Right now, you could say that any big project in African cities that is higher than three floors or roads that are longer than three kilometres are most likely being built and engineered by the Chinese.” Regardless, according to the African Development Bank, the countries of Africa collectively in annual spending are still coming up $68-$108 billion short

Specific examples of projects Chinese money has helped to facilitate include: the £2.5 billion, 470-mile electric railway from the Ethiopian capital of Addis Ababa, to neighbouring Djibouti, and to the south, the development of the Husab Uranium Mine in Namibia for $4.6 billion. China has also helped in the building of new international terminals in Nigeria’s four largest airports, investing $600m to do so, and notably, put $4.5 billion towards building a hydroelectric power station in Angola. All these projects, and the countless more China has helped to facilitate, will no doubt help to improve interconnectivity across Africa, increase the extraction of resources and output of energy, and encourage economic growth. 

Benefits for China

Altruism aside, it is easy to understand why China might want to invest in Africa – it affords better access to the continent’s vast natural resources which are used in the production of goods on its home soil. After all, about 20% of China’s oil comes from Africa, as does 20% of the country’s cotton. Half of the world’s stock of manganese, an essential ingredient for steel production is found in Africa, and the Democratic Republic of Congo alone possesses 50% of all cobalt, which is used in batteries. Congo also possesses roughly 80% of the world’s coltan, an ore that is required in the production of electronics such as phones and laptops. Considering that over a billion phones were produced in China in 2019, it is clear that African resources are of key importance.

A cobalt mine in the Democratic Republic of Congo

In fact, much of the copious amounts China commits to Africa are ‘resource-backed’, long-term “concessional loans”. Concessional loans have terms substantially more generous than those loans offered by global financial markets and the likes of the World Bank and International Monetary Fund (IMF). Hence, they are attractive for African nations, which largely suffer from low credit ratings and, as such, if funding is obtained the interest rates on loans are often high. By contrast, Chinese loans to Africa, under what is sometimes referred to as the “Angola Model”, comparatively have low interest rates and offer longer repayment periods, with supplies of resources such as oil and minerals acting as collateral. This means loan repayment is either made directly in natural resources or from a resource-related income stream, present or future. In this way, China is able to secure valuable resources.

China’s financing also creates business opportunities for their companies and employment for Chinese laborers. In exchange for its development finance, Beijing generally requires that the related infrastructure construction and other contracts favour Chinese service providers. To put this in perspective, Africa is China’s second-largest supplier of service contracts, and according to Chinese analysts, when the country provides RMB 1 billion to Africa, it receives service contracts worth USD 1 billion (RMB 6 billion).

Concerns

China claims its investment in the continent is ‘win-win’: it provides infrastructure and technology to the benefit of African states, and in exchange receives access to natural resources and business opportunities. However, the country’s investment in Africa is not without its controversy. Especially rife are accusations of it contributing to a “debt trap”, being a form of neo-colonialism, and helping to line the pockets of ineffective, corrupt governments. Such concern is also exacerbated by the fact that the full extent of debts owed by African nations is unknown owing to contracts lacking transparency and loans coming from divergent sources. These sources include both private and public bodies such as the China Export-Import Bank, China Development Bank and the Industrial and Commercial Bank of China.

 

The China Export-Import Bank

Grant Harris, a former top adviser on US policy in Africa, accused China of creating a “carefully laid debt trap”. He described Chinese debt as the “methamphetamines of infrastructure finance” being that it is highly addictive, readily available, and with “long-term negative effects that far outweigh any temporary high”. The risk of Chinese loans burdening the developing nations of Africa with unsustainable levels of debt relates to project profitability and whether they are able to generate enough economic activity to facilitate repayment. In November, Zambia became Africa’s first sovereign default in a decade, and it is likely more will follow. The full fallout is yet to be realised, but it is likely that the country’s future access to funds will be severely impacted as will its currency, hitting ordinary people and reducing stability. 

Since Chinese loans are often ‘resource-backed’, in the event of default, African nations in these “debt traps” may eventually have to forfeit their stakes in infrastructure or resources. For instance, it was reported in late 2018 that the Zambian Government was in talks with China to settle its default on a plethora of Chinese loans in a way that might result in the total surrender of the state electricity company, ZESCO, as a form of debt repayment. Similarly, there were murmurs starting in late 2019 that Kenya may soon be forced to relinquish control of its largest and most lucrative port, the Port of Mombasa, to China after it defaulted on its loan. Perhaps the most worrisome example is Sri Lanka handing over a 99-year-long lease of a key port to China after debt struggles in December 2017. 

Related to this are concerns about neo-colonialism which is defined as the use of economic, political, cultural, or other pressures to control or influence other countries, especially former dependencies. There is a perception that China is now doing to Africa what European colonists did for centuries: funding projects and building infrastructure that is purportedly for local economic development but in essence, is to be used for better extraction of natural resource extraction to the ‘home’ country – in this case China – the benefit of which the average African citizen will not enjoy. Naturally, stripping the countries of Africa of their resources is deeply unsettling. 

Similarly, many are suspicious that China’s motivations may be to leverage development finance to increase its influence over African governments. It is thought that China may look to African debtor nations for tacit allegiance and support of Beijing’s agenda on the international stage. In some ways, we have seen this already with African leaders being reluctant to call out China’s cover up of Covid-19 in its early stages and the ensuing despicable treatment of Africans in China.

Further, a key issue is that many of the resource-rich, cash-poor African countries China strikes deals with also suffer from serious political problems. This contributes to the perception that funding poured in by China also helps to prop up corrupt governments.

My View 

There is a strong tendency to view Chinese development finance to Africa as either a blessing and indicative of China’s generosity, or a curse, representative of selfish attempts to secure key natural resources. But perhaps the reality lies somewhere in the middle. 

China’s contributions in the form of building railroads, expanding airports and more sophisticated natural resource extraction lay the foundations for long-term economic growth and development in Africa. Realistically, these projects require funds that governments do not have, and traditional donors are often reluctant to provide loans on such concessional terms. However, at the moment, agreements look skewed to the benefit of China and lack scrutiny. Resources, influence, business opportunities as well as essential resources if default occurs, flow to it. Whilst yes, African countries get infrastructure, many are likely to be indebted to China for decades to come and it does not address deep seated issues to do with resource-dependence and mismanagement. 

I believe there is the potential for more balanced gain for both parties involved were the continent not plagued with bad governance and kleptocratic, myopic leaders. For one, with there being an abundance of underutilised manpower across the continent, I consider it a great travesty that it be common practice for Chinese labourers to be brought in mass to work on projects as part of agreements. The labour generated from development finance could instead provide employment to African citizens, giving governments a potential source of tax revenue with which to pay off their debts. This could be instrumental in taking Africa forward and breaking the poverty gap for many by increasing the availability of skilled work. And I think African governments have the required bargaining power to at least attempt to negotiate for this. Without their country’s valuable resources, China could never hope to output as much as it does and to increase output further still. In this way, loans could more accurately be described as fostering partnerships between African nations and China.

The key problem with development finance in Africa is that, to a large extent, the continent does not have leaders which prioritise fighting for the betterment of their respective nations when reaching agreements on loans. They should be making thorough assessments of loan terms and understanding what it is exactly they are agreeing to. They should only be borrowing as much as their country can afford, acting responsibly especially when resources, which nations across the continent are so heavily dependent on, are on the line should they default. They should be pushing for native people to work on projects, with Chinese labourers primarily being brought in to train them. 

Objectively, it is not for China to push for any of this, though it would be welcomed and represent true altruism. Instead, African governments should take a leaf from their book and become more calculating and self-interested in order to promote economic prosperity for their people and their country. Sadly, African leaders are often blinded by selfishness, the short-term and personal gain. It may take more Sri Lankas and Zambias for lessons to be learnt and indebted governments to take more care when agreeing to loans.

This Post Has 25 Comments

  1. Beant

    Extremely well detailed article, Lisa. Fascinating!

    1. Lisa Onyeka

      Thank you Beant! So glad you thought so! 🙂

  2. Rebecca

    This is amazing Lisa! Really informative and interesting

    1. Lisa Onyeka

      Thank you Becca! Means a lot! 😄

  3. Fola Fapohunda

    Really informative & very well written Lisa!

    1. Lisa Onyeka

      Thank you Fola!!

  4. Hafsa

    Very insightful (albeit shocking) and very well written!

    1. Lisa Onyeka

      Thank you Hafsa! I definitely learnt a lot in the writing process!

  5. Arna

    Such an interesting read Lisa! Totally agree with you on the unfairness of importing labour, as opposed to making the most of employment opportunities for natives! Keep up the good work

    1. Lisa Onyeka

      Thank you so much Arna!!

  6. Oliver H

    Interesting read Lisa

    1. Lisa Onyeka

      Glad you thought so Oliver! Always lovely to hear from you!

  7. Jesse B

    Fantastic piece Lisa. Very readable and arguments are well considered!

    1. Lisa Onyeka

      Thanks Jesse!!

  8. Will Diaz

    This is brilliant Lisa good good good

    1. Lisa Onyeka

      Wow, thank you Will!

  9. Sonia

    What a fantastic and thorough analysis of this evolving problem. Very well written!

    1. Lisa Onyeka

      Thank you Sonia!!

  10. Ebere O

    “Sadly, African leaders are often blinded by selfishness, the short-term and personal gain” absolutely true, especially in Nigeria. Well written Lisa!

    1. Lisa Onyeka

      Hopefully we see some change soon. Thank you Ebere!

  11. Sharif

    Right On point
    Africa is blessed with resources and cursed with Leaders
    The future is bright but can we get there? Work has already started, the AU must do more to protect nations, strict policies regarding foreign investments. Africa needs to take a leap of faith just like Rwanda.

    1. Lisa Onyeka

      Thank you Sharif! And I totally agree!

  12. Stephen Bejide

    An amazing article Lisa, very well crafted!

    1. Lisa Onyeka

      Thank you for reading Stephen!!

  13. Clive D Fraser

    This is all eminently sensible. If a student can appreciate all of this, why cannot African leaders with their team of advisors?

Leave a Reply