The Hidden Risks In China’s Secret Lending To Africa

ONE-HALF OF CHINA’S nearly $150 billion of loans to Sub-Saharan African countries since 2000 are hidden, according to a recently published AidData working paper written by Kathleen Brown of Leiden University.

Africa is heavily indebted to China. One of every five dollars borrowed by African governments is owed to a Chinese lender. Hidden debt potentially puts the region more in hock — and thus obligated to Beijing — than realised, as well as posing a threat to global financial stability.

The AidData research lab at William and Mary university in the United States maintains a comprehensive database on China’s global financing activity through government institutions and state-owned entities.

Middle- and low-income economies are notorious for keeping debt off the books and out of sight so that international lenders do not penalise them for being over-indebted or breaking loan conditionalities. Mozambique, for example, concealed $2.2 billion in private bank loans to avoid hitting its internal public debt limits, although it is the World Bank’s debt-to-GDP thresholds that are most relevant.

Beijing is far from forthcoming about the credit it extends internationally. It considers external finance information state secrets and does not report its credit activity to the World Bank’s Debtor Reporting System (DRS), which acts as the global clearing house for such information.

Thus, recipient governments can hide their Chinese borrowings from international view by simply omitting them from their reporting to the DRS. Brown concludes that while some of this is accidental, most is intentional.

She suggests that publically undisclosed Chinese lending in Sub-Saharan Africa is intended to enable recipient governments to keep up payments on foreign debt, continue to buy Chinese imports and keep any threat of a balance of payments crisis at bay.

A separate report in the Financial Times, which reports similar undeclared lending to Asian and Latin American countries, suggests the hidden loans are also intended to prevent defaults on other Chinese Belt and Road infrastructure lending. (This Bystander has previously noted AidData’s analysis of Beijing’s BRI lending.)

China has had plenty of scope to extend its sway in Africa through hidden lending. So far this century, every country on the continent has experienced IMF and World Bank debt stability programs limiting external borrowing and sovereign debt levels.

Brown finds that governments hide an additional 2 percentage points of their Chinese loans as external debt to GDP moves 3.25 percentage points closer to Word Bank thresholds. The exception is when a country is under an IMF programme. Governments then hide less debt because they are more likely to be caught out by the Fund’s rigorous auditing of national accounts.

One implication is that Beijing’s loan recipients see China as a means to keep the IMF at arm’s length. However, that does nothing to reduce a country’s debt-crisis risk. Sri Lanka offers an extreme example of the consequences of the political and economic meltdown that a debt crisis can unleash.

For China, supplying unreported credit provides a way to undermine the influence and reach of the IMF and World Bank as Beijing develops an alternative international financial architecture. Other research has shown that it is common for Chinese lenders to put ‘no reporting’ clauses into loan agreements with middle- and low-income countries,

That the Global South is an active manager of international credit markets by strategically hiding its debt from international financial institutions suggests Beijing is achieving some modest success in that goal.

However, increased exposure to countries borrowing too far beyond their capacity to repay is the price that Chinese financial institutions and state-owned entities are paying. Given the headwinds buffeting the Chinese economy, that looks like an unsustainably high price, as Beijing is starting to acknowledge.

Beijing Remains Cautious Over Debt Relief For Africa

THE EIGHTH TRIENNIAL Forum on China and Africa Cooperation (FOCAC) was held today and yesterday in Dakar, Senegal.

President Xi Jinping kicked it off on Monday via video backing up the obligatory mention of a ‘shared future in the new era’ by announcing a donation of 600 million vaccine doses to the continent and promised to make 400 million more available for purchase. 

The less-feel-good items on the agenda include better balancing the continent’s trade with its largest trade partner by increasing the share of African manufactured goods bought by China. 

African manufacturing capacity is a significant constraint. Although Africa accounts for only 4% of China’s imports of manufactures, that is 70% of African manufactured products (2019 data). 

Thus, Beijing promises to increase its investment, particularly in manufacturing, to facilitate the continent’s industrialisation. It also will increase tariff exemptions for some $300 million worth of imported African goods, extend $10 billion in credit facilities to African financial institutions, and promote RMB-denominated trade. 

Yet that is all small beer by the scale of these things, as is Xi’s offer on debt. He did not offer debt forgiveness, only to write off the interest due on some of the loans to Africa’s poorest countries which fall due at the end of this year. It was not clear if that was the African part of the $1.9 billion in payments due this year to China that it has agreed to suspend under the G20’s debt service suspension initiative for loans to the world’s 73 poorest countries, or the $11.5 billion due this year not covered by the G20 programme, of which Angola, Kenya and Ghana own almost half.

Africa is already heavily indebted to Chinese lenders due to Beijing’s drive to secure commodities, farmland and infrastructure construction contracts. China has become the largest bilateral lender to the continent over the past two decades, racking up a tab of some $150 billion to governments and state-owned companies. 

One of every five dollars borrowed by African governments is owed to a Chinese lender. The Covid-19 pandemic is raising questions in Beijing about Africa’s capacity to repay, and even stay current on the interest payments on that debt.

This debt dilemma is the flip side of the commercial diplomacy that has advanced China’s national interests in Africa. Beijing’s past willingness to lend without conditionality and stay out of domestic politics has let it charge high interest rates with low transparency. 

Getting its money back and the damaging reputational risks of high debt and incomplete infrastructure projects may lead Beijing to offer less onerous terms for its latest aid and investment. 

China’s Debt Diplomacy Dilemma Will Extend Beyond Africa

CHINA’S DRIVE TO secure from Africa commodities, farmland and infrastructure construction contracts has made it the largest bilateral lender to the continent over the past two decades, racking up a tab of some $150 billion to governments and state-owned companies. One of every five dollars borrowed by African governments is owed to a Chinese lender.

The Covid-19 pandemic is raising questions about African capacity to repay, or even to keep current on the interest payments on that debt.

The continent is facing its greatest contraction in GDP in the post-colonial era. That will increase debt service as a percentage of government spending when countries will need funds to stabilise their economies.

On November 13, Zambia, where Chinese firms have copper mining interests and some previous, is likely to become Africa’s first sovereign default in a decade. China has at least as much debt there as the $3 billion owed to the eurobond holders who saw a coupon repayment skipped earlier this month.

There are eight African countries that each owe Chinese lenders at least $5 billion, and barely one that does not owe something. Beijing’s deep pockets and willingness in contrast to multilateral lenders not to become involved in domestic politics, have won it ready borrowers across the continent. However, the price of non-conditionality has tended to be high interest rates and low transparency.

Debt-service relief and fiscal support from multilateral organisations and G20 donors will offer some limited breathing room to African debtors. It may not be sufficient to prevent a liquidity crisis from developing into a debt crisis. However, Beijing has proved reluctant to go along wholeheartedly with the debt relief plans of other international lenders.

The G20 has extended its debt service suspension initiative for loans by its members to the world’s 73 poorest countries to June 2021 with the repayments spread over six years. China is the biggest contributor to the initiative, suspending $1.9 billion in repayments due this year, according to an internal G20 document seen by the Financial Times. That accounts for more than one-third of the total suspended debt service.

However, China is due to receive a further $11.5 billion this year from loans to countries covered by the initiative, with more than $3 billion due from Angola and nearly $1 billion from each of Ghana and Kenya. It is unclear how Beijing will handle that.

The Angola number does not include a further $6.7 billion of debt service payments due this year to China Development Bank, China Export-Import Bank and ICBC that are reportedly being renegotiated directly with the lenders.

This points to a separate track that Beijing is pursing — a debt relief plan of its own. One aspect of that emerged in June when President Xi Jinping announced the cancellation of interest-free debt due to mature by the end of this year for some of the countries that participate in the Forum on China-Africa Co-operation.

A further risk for Beijing is that rising interest rates could make dollar- and euro-denominated debt prohibitively expensive for African countries, pushing them to turn even more to Beijing for help in refinancing their maturing debt. That could test both China’s capacity and, more so, willingness to lend when the quality of Chinese banks’ loan books is of growing concern to authorities at home.

This debt dilemma is the flip side of the commercial diplomacy that has advanced China’s national interests in Africa. However, for Beijing, the predicament is not limited to Africa, which contains only half of the world’s poorest countries. World Bank figures show China’s share of bilateral debt owed by the world’s poorest countries to G20 members rose to 63% last year, up from 45% in 2015.

Mapping The Belt And Road

 

THR USEFUL MAP above is produced by The Mercator Institute for China Studies, the German think tank that is the largest in Europe with an exclusive focus on China.

There has been a sharp uptick in recent weeks in expressions of concern by US politicians outside the traditional China-hawks about Beijing’s long-term plans to expand its global power through infrastructure development and finance and by building up its military.

In February, The Mercator Institute published a report suggesting that Europe should have similar concerns about how Beijing is expanding its influence in Europe in support of those aims through the use of ‘sharp power’ — the offensive use of soft power tools aimed at political and economic elites, media and public opinion, and civil society and academia.

 

China And Zimbabwe: No Great Change In The Weather

WHATEVER WORD IS is used to describe the process of separating Zimbabwe’s long-serving president, Robert Mugabe, from power, China will have lost a long-standing political friend on the continent.

True, it may not cry too many tears over that, though it does like to be loyal to old comrades. But even Beijing will recognise that the 93-year old corrupt autocrat trying to establish a dynastic succession to his 52-year-old wife Grace is not the same man as the Marxist anti-colonialist they befriend as a young man.

However, Mugabe was an important champion for China in Africa after the Sino-Soviet split in 1960 and China trained and funded his Zimbabwe African National Union (ZANU) fighters when they were still a liberation movement.

Mugabe had visited Beijing as recently as last January, returning a state visit to Zimbabwe by President Xi Jinping in December 2015, on which occasion Xi described the two nations were “real all-weather friends.”

A high-level visit to Beijing between November 8 and November 10 by Zimbabwe’s army chief, General Constantine Chiwenga, only shortly before he and fellow generals moved against Mugabe, is raising some speculative questions. This Bystander doubts if there was a Chinese hand behind ousting Mugabe. If anything, a western one seems more probable.

Nonetheless, Chiwenga  who met both the PLA’s head of the joint chiefs of staff, Li Zuocheng, and defence minister Chang Wanquan, may have felt it important to inform Beijing of his intentions, given the close relations between the countries. Or it may have been a long-planned visit that would have looked suspicious to cancel at the last minute.

China has taken a neutral stance on events since, saying:

As a friendly country to Zimbabwe, we are closely following the situation unfolding in Zimbabwe. Zimbabwe’s peace, stability, and development serve the fundamental interests of the country itself and other regional countries. It is also the common wish of the international community. We hope that Zimbabwe could properly handle its internal affairs.

State media has given prominence to voices calling for a stable transition of power.

If you follow the money, as this Bystander likes to do, you will see that Zimbabwe has as not been a recipient of Chinese foreign direct investment (FDI) on anything like scale the friendship between the two countries would suggest. Xi during his 2015 visit pledged $4 billion of grants and loans over three years, part of a $60 billion package for the whole of Africa. That year, the figure had been $600m out of a total $929 million of FDI that Zimbabwe attracted.

That should be contrasted to the $2 billion that China invested in neighbouring Zambia . The Chinese investment in the struggling Zimbabwean economy has been going into power-generation infrastructure and agriculture, notably tobacco growing.

Total trade between the two countries is tiny: less than $400 million of Chinese exports to Zimbabwe, mostly machinery and equipment, some $720 million of imports, mostly tobacco, in 2016.  Zimbabwe barely makes the top 30 of China’s trading partners in Africa.

Mugabe may have been an old friend, but China has not been throwing much good money after bad in that particular direction for some time.

China’s Djibouti Base Raises The Flag

THE PLA-NAVY formally opened its base in Djibouti this week, China’s first military base overseas — though Beijing prefers to call it support facilities. Symbolically, it raised the flag in Djibouti on the same day as the PLA’s 90th anniversary.

The base is next to the Doraleh Multi-purpose Port to the west of Djibouti City on the southern side of the Gulf of Tadjoura which opens out into the Gulf of Aden. The $420 million port was only formally opened in May and is still half-finished. The biggest Chinese port construction project in the region, it was built by China State Construction and Engineering Corp. (CSCEC). China Merchants Holdings International is a stakeholder in the port’s operations.

A base comprising an encampment adjacent to a Chinese-built commercial port is a model seen in the making in Gwadar in Pakistan and likely to be repeated in Sri Lanka, and perhaps elsewhere.

Bases operated by the US Navy and the Japanese Maritime Self-Defense Force are only a few kilometers to the southeast. The United States runs some of its most secret drone operations in the Middle East from its Camp Lemonnier base next to Djibouti’s international airport.

China’s base has been under construction since early last year, at a reported cost of $590 million. It covers a little more than one-third of a square kilometer and can accommodate several thousand military personnel. Satellite imagery of a later date than Google’s seen above suggests hangar facilities for helicopters and a short runway have been built before berths.

However, there are no deepwater channels running to the base, so the neighboring port, which does have deepwater berths, one of which is reserved for the PLA-N, is going to have to be living up to its name.

China has taken a ten-year lease on the land for its naval base and is a major funder of the Djibouti government, footing the bill for at least $14 billion-worth of infrastructure from railways to ports, airports and water conduits.

The rent China is paying for its naval base is not publicly disclosed (our man with his nose in the sand reckons that it is $20 million a year), but the US pays $63 million a year under its 20-year lease on its base.

The debate over the extent to which the base represents power projection will only continue, though that power projection will likely be steady but incremental as Beijing practices at being a world power.

Djibouti Bound

CHINESE MILITARY PERSONNEL are now en route for Djibouti where they will garrison China’s first overseas military base, which it started building last year at a cost of $590 million.

The photo above shows the departure from Zhanjiang in Guangdong province of the South Sea Fleet’s Jinggang Shan, a Yuzhao class Type 071 amphibious transport dock that had previously been deployed in the search for the missing Malaysia Airlines Flight 370,  along with a second PLA-Navy ship, China’s sole semi-submersible Donghai Island class naval auxiliary ship.

The Horn of Africa country, only half as big again as municipal Beijing, is already home to US, French and Japanese military bases with a Saudi Arabian one, like China’s, under construction.

China’s base will be used for supporting peacekeeping (Beijing has deployed its first UN peacekeeping combat troops in South Sudan), international anti-piracy operations off the Somali coast and in the Gulf of Aden (in which China has taken part since 2008) and humanitarian aid.

It will also provide advanced support, should it be needed, for the more than 250,000 Chinese now working in Africa — and the Chinese investments where they work. Evacuations of nationals have already been needed in Libya and Yemen.

China stresses that Djibouti will be a logistics or support, not military base. The question is, however it is described, whether it is the first of one, several or many such overseas beachheads.

The US defence department’s recent annual report to the US Congress on China’s military prowess took this definitive view:

As China’s global footprint and international interests have gown, its military modernization program and become more focused on supporting missions beyond China’s periphery, including power projection, sea land security, counterpiracy, peacekeeping and humanitarian assistance/disaster relief (HA/DR). In February 2016, China began constitution of a military base in Djibouti that could be complete within the next year. China likely will seek to establish additional military based in countries with which it has long-standing, friendly relationships.

The US defence department pinpoints Pakistan as best fitting that bill. Given the growing economic interests at stake in the China-Pakistan Economic Corridor, which runs through both some insecure but strategically important territory, and China’s extensive role in building a deep-water port at Gwadar on the Arabian Sea coast, that seems a logical deduction.

However, many other countries will not be receptive to the notion of hosting PLA bases, and Chinese military doctrine sees prowess in cyber, space and information warfare as more potent than building a traditional network of military allies.

Indeed, current doctrine sees power projection assets as a vulnerability in modern warfare. That alone will be cause for China to move cautiously on establishing further bases.

At the same time, Beijing will use China’s economic linkages to cement support among those with similar security interests and to deter adversary power projection in third countries, particularly that by the United States.

For now, gaining access to foreign commercial ports for as a logistics base and for pre-positioning of support of “far seas” deployments by the PLA-Navy is likely to be the order of the day. That, anyway, is what would be needed for the HA/DR operations that Beijing is likely to concentrate on while its military learns to find its way around the world.

A Kenyan One-China Lesson

WORD REACHES US from Nairobi of two curious incidents involving Kenyan authorities deporting groups of Taiwanese to China.

Last Friday, eight Taiwanese were forcibly sent to China in what Taiwan’s foreign ministry called an ‘extrajudicial abduction’. Although the eight had been on trial in Nairobi on fraud charges, they had all been acquitted and told to leave the country under their own steam within 21 days. However, police handed them over to Chinese officials who put them on a flight to Guangzhou.

Today, at least a further 15 and possibly as many as 37 Taiwanese, who appear to have been involved in the fraud case but details are confused, were also forcibly enplaned by police following a scuffle involving tear gas and flown to China. Kenya does not recognize Taiwan diplomatically so can argue that it was deporting Chinese nationals to China.

Beijing has, not surprisingly, praised Nairobi’s adherence to its ‘One China’ policy.

We have no idea of the details of the individual cases, said to involve a telemarketing scam of people in China perpetrated by a ring comprising nationals from both the mainland and Taiwan. (Update: The Ministry of Public Security said in a statement that China had legal rights of jurisdiction over 77 telecom fraud suspects being ‘repatriated’ from Kenya, including 45 Taiwanese.)

This may also be a case of Beijing throwing its weight about less than a month before a new, less-China-friendly government takes office in Taipei. The question is whether this is a warning shot at President Tsai Ing-wen and her pro-Taiwan independence party, or a harbinger of a more lasting chill in cross-strait relations.

Meanwhile, we understand that a further 31 people are awaiting verdicts in connection with the alleged telecoms scam that are not expected to be handed down until June. At least five are Taiwanese and the rest from the mainland.

One report says China has been talking to Kenya since the start of the year about extraditing all the suspects in the case to face charges in China. However, China and Taiwan have an agreement not to extradite each other’s citizens, so there may well be much more to come in this story.

China’s Cautious $60 Billion For Africa

The Africa growth story may be overhyped — rising worries about debt and public finances in many African countries in the face of low global prices for natural resources are making the continent’s growth prospects less rosy — but that is not stopping Beijing pledging billions more dollars in development aid.

President Xi Jinping announced at the triennial Forum on China-Africa Cooperation (Focac) in South Africa that a larger-than-expected $60 billion worth of assistance and loans would be made available to Sub-Saharan African nations over an unspecified period. We shall return later to whether that is a lot or a little.

The newly pledged money is a mix of:

• free aid and interest-free loans ($5 billion),
• preferential loans and export credits ($35 billion);
• additional capital for the China-Africa Development Fund ($5 billion);
• additional capital for the Special Loan for the Development of African Small- and Medium-sized Enterprises ($5 billion); and
• initial capital for a China-Africa production capacity cooperation fund ($10 billion).

The funding is probably a mix of old and new promises. Some will underwrite expanding trade. As of October, Africa’s exports to China, dominated by oil and minerals (85%), had slumped in value by 32% year-on-year, though they are virtually unchanged in volume.

Angola, South Africa, the Democratic Republic of Congo, Equatorial Guinea and Zambia — natural resources-rich all — are China’s main trading partners in Africa. Together, they account for more than 70% of all that China buys from Africa.

The slump in export values together with the steady rise in exports from China to Africa has turned Africa’s overall trade surplus with China into deficit for the first time since the early 2000s.

The inflow of Chinese direct foreign investment to Africa fell by 40% in the first half of the year from the same period a year earlier, after having shrunk 5% last year over 2013.  Nonetheless, much of the newly pledged money will end up funding much-needed infrastructure projects that will also provide lucrative contracts for China’s road, rail, port, power-station and dam builders.

China’s investment in Africa has hitherto focused on natural resources and to a lesser extent farmland. The global slump in commodity prices, driven in part by China’s own slumping demand as its  economy slows, means that Chinese investors are looking to put their money elsewhere, at least for as long as it takes for this turn of the commodity cycle to pass.

Contrary to popular perception, most of the more than 2,300 Chinese companies doing business in Africa are privately owned, though the big state-owned ones dominate the big-ticket investment flows. China is still the largest lending country to infrastructure projects in Africa but in 2014 it accounted for only 4% of total commitments, compared with about 50% the previous year, a reflection of both the slowing economy at home and a more realistic eye being taken to the potential return on investments being made, as Chinese investors are also doing in Latin America.

All of which provides some background to whether $60 billion is a lot or a little — to which the answer is it is difficult to say.

Untangling the true level of Chinese investment in Africa is tricky. Official statistics put the stock of Chinese foreign direct investment in Africa at $32.4 billion as of last year (up from $1.6 billion in 2005). If all of the Xi’s pledged $60 billion went into FDI, it would triple the stock, which sounds impressive, but if that took, say, five years to happen, the rate of annual growth would decline by a quarter.

However, as noted above, not all the $60 billion will take the form of FDI — and FDI is a rough and ready reckoner of true investment levels anyway (for any country, not particularly China, which uses the standard OECD/IMF definitions of FDI). The numbers won’t include loan financing of capital investments, any investment that comes via third countries, usually tax havens and acquisitions of non-African companies that have assets in Africa. They will also undercount smaller investments, which tends to mean mom-and-pop scale retailing and manufacturing businesses (who also tend to get missed from the count of Chinese businesses in Africa).

Independent tracking under the aegis of the American Enterprise Institute and the Heritage Foundation that aims to get round this undercounting puts the flow of new Chinese FDI into Sub-Saharan Africa in 2013 at $15.25 billion against the official number of $3.37 billion, although we caution that that is commitments rather than actual flows. Between 2005 and now, the AEI estimates, Chinese firms have signed $197.2 billion in investments and contracts since 2005.

Sixty billion dollars would be a substantial but not transformative addition to that. We also note that Xi’s figure includes aid, about which China is far more secretive than FDI.

China is clearly not backing off its interest in Africa; a first military base on the continent, in Djibouti, is in prospect as sign of the magnitude of both of its national interests and assets in the content. But Xi’s latest assistance package indicates that Beijing is also maintaining a realistic view of what it can get for its money.

Update: According to a Foreign Ministry spokeswoman, China has helped Africa build 5,675 kilometers of railway, 4,507 kilometers of highway, 18 bridges, 12 ports, 14 airports and terminals, 64 power stations, 76 sports facilities, 68 hospitals, over 200 schools and 23 agricultural demonstration centers.

China Breaks New Ground By Putting Boots On The Ground In South Sudan

IT HAS LONG been expected that China would deploy troops in Africa, even though doing so would mark a shift away from Beijing’s long-held policy of keeping itself, in public at least, at arm’s length from involvement in African conflicts.

State media said last year that Beijing would send 700 infantrymen to take part in the UN peacekeeping mission in South Sudan, UNMISS. The first of those boots are now on the ground. The rest — including a small contingent of female soldiers — will be there by March, complete with other staples of ‘self-defense’ — armored personnel carriers, drones, anti-tank missiles and other weapons.

China already contributes more personnel to UN peacekeeping missions than any other permanent member of the Security Council. But most of its some 2,000 blue hats, mainly sent to Africa, are engineers, medical staff and other civilian workers, not, as in the case of South Sudan, a battalion of combat troops.

China has invested heavily in South Sudan’ oil, which accounted for 5% of China’s total crude oil imports as recently as December 2013. However, renewed civil war has since cut production by a third to some 160,000 barrels a day.

The troubled situation in the country, which separated from Sudan in 2011, has worsened since last December when the president accused his sacked deputy of attempting to orchestrate a coup. A potential humanitarian disaster threatens to make it worse still. Some 2.5 million people are facing famine; that is on top of 1.9 million already displaced by the conflict, in which at least 50,000 have been killed.

Oil-producing regions have seen some of the worst of the most recent violence, but Chinese oil workers in South Sudan and Sudan have been particular targets of kidnappings for several years. State-owned China National Petroleum Corp. (CNPC) owns 40% of the consortium that dominates South Sudan’s oil industry. Late last year, it signed a deal with Juba to stabilize then increase oil output.

Putting troops in the country will stiffen Beijing’s ability to push for a diplomatic end to the conflict, which, in a rare example of cooperation, it has agreed to work closely with the West towards resolving.  In this sense, the arrival of Chinese combat troops, even if they are wearing blue hats, underscores not just an international power willing to protect its overseas interests but also one willing to shoulder more international responsibility — for which, it should be said, the U.S. and others have been calling for some time.

This foreshadows, though, what will be a gradually increasing shift towards Beijing being far more of a global actor, albeit taking on a role it will want to play to its own script. As President Xi Jinping said in late November, “We should conduct diplomacy with a salient Chinese feature and a Chinese vision.”