Over the years, or possibly in the last two decades, China has invested heavily in the African continent. The level of Chinese investment in the continent has only been growing each year. China has undertaken huge developmental projects in Africa, from developing ports to logistics to infrastructure to hydropower stations among others.
However, things are likely to change in the post-pandemic era. This could be due to the fact that the coronavirus pandemic has pushed the global economy into recession and most African nations, which are either developing or are under-developed economies, are struggling to repay their loans. Data released by the China-Africa Research Initiative showed that China extended loans worth $148 billion between 2000 to 2018, towards infrastructure development in Africa.
US-based consultancy Rhodium Group said that around 12 African countries are currently renegotiating their debt repayment structure with China, estimated to be worth $28 billion. The pandemic has made investors cautious about their investment and they are expected to be more prudent when it comes to future investments. Even though Chinese investments will not completely dry up, there will be a decline in the amount of Chinese money coming into projects on the African continent.
Investors worry about Africa’s debt repaying ability
The coronavirus has forced almost all countries to announce lockdowns to contain the spread of the infection. The halt in economic activities across the globe has led to a global recession. This has also led to investors being cautious about their funds. The uncertain economic situation in Africa, mostly caused by the coronavirus pandemic, will lead to reduced lending from China. Over the years, China has acquired equity stakes in mines and oil fields across Africa, and has fully understood the continent’s potential at a very early stage. With that, it was quick to seize control over the region’s infrastructure, transport and raw materials. This has ultimately led to China becoming the most active non-traditional lender in Africa. However, investors’ sentiment appears to have changed significantly.
In this regard, Mark Bohlund, a senior credit research analyst at REDD Intelligence told the media, “I think it is clear that [Belt and Road] lending will be further curtailed due to the economic pressures brought on by the coronavirus but I think some projects in less-distressed countries will continue.” Many experts agree to the fact that the coronavirus is only partially responsible for the anticipated lending slowdown, because the trend had slowed down three years ago.
What are the reasons for investing then?
The reason for China investing heavily in the African continent over the last couple of years is due to various factors. Many argue that resources remain the primary focus of China’s investments in Africa. However, China’s investments in Africa are not just limited to procuring natural resources or minerals. Africa is rich in natural resources and China has a close eye on it. Africa is estimated to contain 90 percent of the entire world supply of platinum and cobalt, 50 percent of the world’s gold supply, two-thirds of world’s manganese, and 35 percent of the world’s uranium. In fact, China’s investment in Africa extends across every sector, from infrastructure to food processing.
Chinese investments are also visible in key areas such as utilities, telecommunications, port construction and transportation. Most of the funding made by China in Africa is through state-owned firms. This gives China an advantage when it comes to bidding procurement contracts in African countries since the state-owned agencies can procure substantial subsidies from the Chinese government. Over the last decade, China has also been expanding its military presence in the region and rivaling the US on investment and military activities on the African continent.
In fact, China imports a substantial amount of its resources and commodities from Africa. Many Chinese private companies are also operating in the agricultural and mining sectors in Africa, which imports products to the Chinese mainland. These Chinese businesses also acquire technical tools or machinery used in their day to day operations from China. The Asian superpower buys one-quarter of Africa’s trade, making it one of its biggest trading partners. China, which has a huge manufacturing sector, also sees Africa as a potential market for its products and it also imports non-oil products from various parts of the continent. It imports coal from South Africa, ore from Gabon, timber from Equatorial Guinea and copper from Zambia.
Africa is vital to China’s economic expansion. Its leaders recognise the increasing need for natural resources, food and product markets necessary for continued economic growth. Another factor here is that nearly one-third of China’s total foreign direct investment in African nations has gone to the mining sector. By working to secure a solid base of critical raw materials, China is strengthening its economy for decades to come.
China also sees Africa as a good destination to extend its geopolitical influence. While China has already established itself as a superpower in Asia, it soon wants to establish itself as a global superpower and counter the US. In an effort to fulfil its ambitions, China sees Africa play an important part in achieving that. China’s investments in African infrastructure has to do with its geopolitical ambitions. Major investments in African infrastructure have been made through the China-Africa Development Fund.
If China can rise to a position where it exerts major control over essential economic elements such as the utility sector and telecommunications in African countries, while also developing military influence, then it also holds considerable political alliance in those nations. The Asian superpower has also invested heavily in other Asian emerging markets, as well as in Latin America; however, African economies provide another sensible choice to take advantage of excellent growth opportunities both for political reasons and investment returns.
Establishing presence through economic engagements
China has several economic engagements with both developed and less developed economies. It has engagements in Africa too. Through the Forum on China-Africa Cooperation (FOCAC), China has established its presence on the continent. Since its inception in 2000, several economic packages and investment programmes have been structured to develop infrastructure and boost trade in the continent. However, prior to the Forum on China-Africa Cooperation, China continued to have economic cooperation with Africa as well. If we go back in time, China has been an ally of Africa for hundreds of years.
Through the Forum on China-Africa Cooperation, China has carried out various growth initiatives in Africa, with the biggest being the China One Belt Road or Maritime Silk Road initiatives. Its opus magnum aims to connect Africa with railway and shipping links to major markets in the Middle East and Central Asia. While China’s investment in Africa is widespread, its investments in the continent can be traced to at least 46 countries under different investment portfolios. Around 2200 Chinese private and state-owned companies are currently operating in Africa. In the last decade, China has also developed hundreds of educational projects and healthcare centres on the continent.
Chinese banks such as the People’s Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of China) have financed large-scale investment projects on the African continent. Investments in China sharply increased after the 2015 Forum on China-Africa Cooperation Summit where China committed $60 billion towards various developmental works on the African continent. It is also important to note that investments in Africa have been geographically concentrated in oil rich countries, like Nigeria and Angola.
According to the China Africa Research Initiative, Beijing has handed out $152 billion as loans to 49 African nations during the period between 2000 and 2018. Data from the World Bank has revealed that the amount of Chinese loans to sub-Saharan African nations stood at $64 billion as of 2017. Similarly, Chinese foreign direct investment in Africa increased significantly from $7.8 billion in 2008 to $46 billion in 2018. Commodity trade between China and Africa almost doubled from $107 billion to $204 billion in 2018, according to data provided by Beijing.
If we look country wise, China has invested in upgrading Nigeria’s railway connectivity, which will lead to improved logistics. In Nigeria, China funded two major standard-gauge rail projects: One is a line from Lagos to Kano, the other is a coastal railway from Lagos to Calabar. Besides Nigeria, China is also involved in building railways in other African nations such as Kenya, Ethiopia, and Zambia. It is noteworthy that around 85 percent of the funding for the $475 million Addis Ababa Light Rail, which serves 4 million of the city’s residents, was provided by the Chinese Export-Import Bank. China has also made notable investments in the energy sector in Africa. African countries do not have the sole power to build the infrastructure they need to suit the growing population. In Africa, about 70 percent of the affected payments, which is equal to $8 billion, are owed China, and it accounts for 62 percent of Africa’s official bilateral debt. In October, Zambia defaulted on a $42.5 million interest payment on a dollar-denominated bond. It was also close to defaulting on its foreign debt worth $12 billion, equivalent to half its GDP. Then, it was the Chinese creditors who eased the pressure to a great extent.
For foreign direct investments, mining and construction still account for the bulk with a 54 percent share. It was reported that the stock of manufacturing foreign direct investment increased to 13 percent of China’s FDI stocks in Africa in 2015. It is also interesting that Chinese foreign direct investments increased more rapidly in Africa’s fastest-growing economies during the period between 2012 and 2015 compared to the rest of Africa.
The leading outcome of China’s efforts
Factors such as depleting oil prices and the coronavirus pandemic have battered the global economy since the beginning of last year. The coronavirus, which originated in Wuhan last year, has also taken its toll on the Chinese economy. All these factors also dealt a severe blow to Chinese economic, political and investment activities. China was the first country to enter a state of lockdown and as a result, its economic output fell by 6.8 percent in the first quarter of 2020. The poor economic conditions of many poor countries in Africa have led to tremendous pressure on China to pardon billions of dollars of loans that it had offered to Africa in the last two decades. This has led to many questioning the future of China’s trillion-dollar deal Belt and Road Initiative (BRI) infrastructure programme with Africa.
Despite the size of investments made in the region, many critics question whether China could have increased its trade to Africa differently: a system that did not involve $200 billion in bilateral loans and foreign direct investments. While the very purpose of the investment was to have direct control of the African resources, China’s critics argue that the mainland actually shelved more money than the open market rates.
China’s foreign direct investments into Africa are creating fewer jobs per unit of investment. To put things into perspective, what China needs to be is more successful in its investment strategy in Africa. In this regard, the superpower needs to move from focusing its investment in natural resources and infrastructure to manufacturing, which is more labour-intensive.
In the last couple of years, a substantial amount of funds were poured into mines or oil fields across Africa by China. Despite that, Beijing never actually had the power to call the shots. In fact, they were being called by the regional government. If in the future, any government decides to nationalise any of the assets China has heavily invested in, China would have no power to influence the decision or to reverse it. If supply interruption happens due to conflict in Africa or along China’s long sea lines of communication, the so-called benefit of direct control will be ineffective, because for now, Beijing lacks the military muscle to defend its mines and other investments in Africa. Many experts also argue that China has made wrong investment decisions at the wrong time. They believe that Chinese firms paid a higher price for assets that lost a massive value after the downfall in the commodity prices. Now. with the coronavirus pandemic already affecting the global economy, China might soon seek a realistic exit strategy.