The study looked at the two main Chinese development finance institutions, the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM). Scouring data from the university’s database of China’s Overseas Development Finance, it identified 28 new Chinese loan commitments in 2020-2021 worth a total of $10.5bn, the lowest in recent years.
In the early days of the Belt and Road Initiative, launched in 2013, “we see gargantuan projects being supported, often general purpose, often with less regard towards … environmental and social risks,” says the study’s author, senior academic researcher Rebecca Ray.
“In the last five years, we’re not just seeing less lending, we’re seeing smaller projects, on average, with smaller geographic footprints, more targeting,” Ray tells The Africa Report. “That’s why we titled [the report] ‘Small is Beautiful’ because that’s a phrase you hear a lot in circles that think about Chinese lending overseas.”
Changing priorities
The years-long decline in Chinese lending coincided with a collapse in its current account surplus after 2015, Ray’s study found, as Beijing held fewer foreign currency reserves that it could leverage through sovereign finance. In recent years, however, Chinese development finance has continued to decline even as its current account surplus has rebounded.
Ray says that’s to be expected.
“There’s an unsurprising progression from development finance, which helps establish bilateral economic ties and set the stage for investment, […] towards direct investment as Chinese firms become more comfortable doing business in host country areas and have more experience with their regulatory and cultural environments,” she says.
“So it’s not surprising at all to see that pivot. It’ll be interesting to see, as China opens up again [post-covid], whether FDI (foreign direct investment) really does step up to fill that gap.”
China is also changing the types of projects it finances.
Between 2009 and 2014, the country extended some $33bn in overseas development finance to the Sonangol Group, Angola’s hydrocarbon parastatal. Since 2017, however, CHEXIM and the CDB have ended their support for the state-controlled hydrocarbon behemoths in Angola, Brazil, Ecuador, Russia and Venezuela.
No reversing course
Ray says she’s seen no evidence that China is reversing course, even as the Ukraine war’s impact on energy supplies has rekindled global interest in fossil fuels.
“China’s backing away from general purpose lending to state-owned oil and gas companies. That’s true globally, in Africa just as much as it is anywhere else,” Ray says. “When we think about potential projects like East Africa (Crude) Oil Pipeline (between Uganda and Tanzania), that raises some doubts about whether China would be interested in participating in a project like that.”
Instead, CHEXIM has turned its attention to the telecom, transport and power sectors in Africa, adds Ray’s colleague Oyintarelado Moses, the database manager at Boston University’s Global China Initiative. Between 2020 and 2021, Moses says, the bank committed financing to 10 African countries – Angola, Burkina Faso, the DRC, Ghana, Lesotho, Madagascar, Mozambique, Rwanda, Uganda and Zambia – while the CDB did not record any support to African governments.
“Telecom is an emerging top sector,” she says, “while mining has received no finance within the past few years and finance for the transport sector has decreased.”
She cites Uganda’s cancellation of the Standard Gauge Railway contract due to financing issues with CHEXIM and the bank’s reluctance to finance future railway projects in Nigeria as two recent examples of Chinese caution.
“This has forced some African borrowers to look elsewhere for finance,” Moses points out. “Uganda, for example, turned to Turkey’s contractors and export credit agency for its SGR.”
Working for Africa
The changing Chinese model can be beneficial for Africa, says Ray, if the right legal frameworks are in place. Foreign direct investment (FDI) by Chinese state-owned enterprises can help fuel economic stability, she says, offering different business cycles that can help offset western investors’ fluctuations.
“One thing that we have noticed […] is often Chinese investors stepping in when Western investors bail out of a region,” Ray says. Western investors “have a tendency to flee to safety when there are market fluctuations. State-owned enterprises with longer-term horizons for making decisions are willing to give on shorter-term costs and fluctuations in order to have a long-term presence.”
A successful shift to FDI will require strong safeguards, she says.
“When there’s finance, especially with lower-income countries who have ongoing IMF agreements, there is certain debt transparency and reporting standards that have to be met. And so there’s a certain guarantee of transparency that may not always be there in equity markets, for example, in commercial equity markets,” she says.
“And so it will be important to make sure transparency is protected. And that’s a host-country institutional capacity question that is not intrinsic to China. It’s intrinsic to developing countries managing changing investment and finance relationships.”
The evolution of Chinese lending will also be impacted by the outcome of the ongoing debt negotiations with key African borrowers of Chinese loans such as Zambia and Ethiopia.
“We are still in a ‘wait and see’ mode for understanding how debt discussions could impact future Chinese DFI lending to Africa,” says Moses. “However, it does appear that Chinese overseas development finance is increasingly taking on the ‘small is beautiful’ approach in Africa as well.”
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