China's Changing Investment Strategy: Unveiling Africa's Infrastructure Future
China's investment in Africa's infrastructure has been substantial, but recent economic challenges raise concerns about its future commitment Additionally, a recent gathering in Beijing has further sparked speculation about China's plans in the region
Sign up for CNN's Meanwhile in China newsletter, examining the country's growth and global impact. Last month, the inauguration of two new electricity-generating units at Zimbabwe's Hwange power station followed a familiar pattern seen in major infrastructure projects across Africa.
In a rural corner of the southern African nation, government officials and the Chinese ambassador came together to inaugurate and praise the enlargement of a coal-fired plant. The purpose of this project is to alleviate power shortages in the country, highlighting Beijing's involvement in its financing.
This initiative, which received around $1 billion in Chinese loans several years ago before Beijing ceased funding new coal-powered ventures abroad, is among the numerous significant undertakings in the continent that Chinese lenders have supported as part of President Xi Jinping's prominent Belt and Road Initiative.
The funds have had a significant impact on various parts of Africa, particularly in major cities like Lagos, Nairobi, and Addis Ababa. These cities now have access to modern transportation systems, including railways, highways, and airports that have been constructed in the past few years with Chinese loans and often by Chinese construction companies. As the global infrastructure development continues into its second decade, there are concerns about Beijing's future direction for the initiative, including the potential downsizing of funding due to emerging challenges and indications of a readjustment.
Amid the Covid-19 pandemic and the war in Ukraine, along with Beijing's financial troubles and the need to address environmental concerns, China is facing additional challenges in its lending practices and countries' borrowing.
According to researchers from the Boston University Global Development Policy Center, there is evidence of a current shift in this landscape. They have observed a continuous decrease in new loan commitments from Chinese entities to African government borrowers, which has intensified over the past two years.
The Chinese-built Maputo-Katembe in Mozambique was inaugurated in 2018.
According to a recent report, the amount of new loans has significantly decreased over the past few years. In 2016, these loans reached a peak of $28.5 billion, but in the previous year, they dropped to just under $1 billion. This marks the second consecutive year that lending has fallen below $2 billion. The researchers suggest that this decline cannot solely be attributed to the pandemic, but may also indicate a broader trend towards a decrease in large-scale loans.
"The Belt and Road Initiative does appear to be in recalibration mode," report author Oyintarelado Moses told CNN.
And such a phenomenon may not just be limited to Chinese financing in Africa.
"Given the declining loan averages on a global scale, it is probable that this upcoming phase of Belt and Road lending will be distinguished by a reduction in overall financing," stated Moses, a data analyst at the centers Global China Initiative.
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However, accurately determining the amount of money exiting China and going towards global development is challenging due to China's reluctance to disclose this information and the involvement of numerous financial entities. The data provided by the Global Development Policy Center specifically looks at loans with sovereign guarantees or African government borrowers, thus excluding Chinese loans that may be directed towards private borrowers for projects in Africa.
The key motivations that have driven Beijing to become the largest bilateral lender in the world are believed to remain unchanged. This suggests that Beijing will continue to provide funding for both large and small-scale projects in the future, although it is uncertain to what extent. The outcome of all these developments could greatly affect the access of developing countries to crucial infrastructure funding.
Policymakers will be looking to a major international forum focused on the initiative next month in Beijing for signs of whats next.
Economic headwinds
During a trip to Kazakhstan in 2013, Xi introduced an initiative that would later form the foundation of his foreign policy. This involved proposing a revitalization of the historic Silk Road, aiming to strengthen economic ties, deepen mutual cooperation, and expand the scope of development between nations.
Following that, substantial loans have been pouring into infrastructure projects such as railroads, power plants, highways, ports, and telecoms across the developing world. These loans have not only come from development finance institutions but also from China's commercial banks.
This influx of funds has provided the Chinese economy with an avenue to utilize its surplus industrial capacity and financial resources. As a result, China has been able to expand its global presence and enhance its soft power, forging stronger ties with over 150 countries that have committed to cooperating in this initiative, as proclaimed by Beijing.
Many of its partners have reaped benefits from the new infrastructure.
The People's Bank of China (PBOC) injected a greater amount of cash into the banking system in December than originally anticipated. This action is projected to provide support to bonds that have been affected by the sudden change in China's Covid policy. The PBOC building in Beijing, China, is pictured in the image taken on Thursday, December 15, 2022.
China has provided substantial financial assistance to various countries, but is now investing billions of dollars to rescue them from financial difficulties. However, the projects initiated under the Belt and Road initiative have faced criticism for their insufficient attention to environmental and labor regulations, as well as for the potentially risky nature of the loans. Detractors argue that China has burdened low- and middle-income governments with excessively high levels of debt compared to their respective Gross Domestic Products (GDPs).
Beijing has rejected these claims and instead praised the initiative as a way to promote global inclusivity and economic growth. However, current economic conditions, including the impact of the pandemic and the escalation of interest rates and commodity prices due to the conflict in Ukraine, are affecting the situation.
"The significant shift that we must acknowledge is the conclusion of the era of low interest rates and abundant cheap money flowing from China into these nations. Currently, China holds the position of being the largest debt collector globally," explained Ammar A. Malik, a senior research scientist at AidData research lab at William & Mary's Global Research Institute in the United States, which also monitors Chinese overseas development finance.
"Now, the key challenge for China is to ensure that these nations possess enough liquidity and that these projects are adequately operational, allowing China to receive their repayments, along with interest, promptly," he added.
Recently, several recipient governments have sought debt deferment or relief assistance from creditors, including China. Beijing has provided bailout loans and partnered with other lenders to collectively negotiate debt relief for struggling borrowers like Zambia and Ghana. According to Malik, the presence of debt distress problems implies that many low and middle-income countries are currently unable to incur additional debt.
But there is still significant interest from developing economies in obtaining funds for crucial infrastructure projects that are essential for driving their economic growth. Furthermore, there are several factors that incentivize China and recipient countries to maintain their cooperation, indicating that there may not be a decline in financing in the near future.
A man cooks noodles on a street in Shanghai, China May 27, 2023. REUTERS/Aly Song
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China is also navigating the second decade of the Belt and Road amid stark economic challenges at home.
The anticipated economic recovery following the Covid-19 pandemic has not materialized as expected, resulting in local governments struggling with increasing debt associated with a housing crisis.
The long-term impact of Beijing's domestic economic struggles on its foreign lending remains uncertain; however, there are current indications of such effects, as stated by Moses of the Global Development Policy Center.
Beijing's decisions on how to utilize its foreign exchange reserves and calls for increased liquidity in order to tackle domestic challenges indicate a current trend towards emphasizing domestic financing needs, stated the speaker.
However, despite China's economic difficulties potentially leading financiers to take a more cautious approach, some of the economic priorities that originally spurred China's global infrastructure expansion, such as seeking new investment opportunities in a slowing economy, still persevere, as per Austin Strange, an assistant professor at the University of Hong Kong.
"This fundamental instinct remains debatably applicable amidst the persisting deceleration, notably due to intensified geopolitical tensions hindering Chinese enterprises in specific industries from further expanding their investments in developed economies," he expressed.
A railway track at the construction site of a Standard Gauge Railwayproject in Nairobi, Kenya.
Yasuyoshi Chiba/AFP/Getty Images
A Beijing gathering
With the upcoming Belt and Road forum in Beijing next month, where delegates from over 100 countries are set to convene, global policymakers are eagerly observing to discern the future trajectory of this initiative.
Analysts state that aside from monitoring the decrease in loan volume, China is also considering a stronger focus on environmental concerns, improved social safeguards, and comprehensive due diligence. This is particularly important as Beijing and its banks seek to learn from the experiences of the Belt and Road initiative's initial ten years. According to a 2021 AidData report, approximately 35% of Belt and Road projects carried out exclusively by Chinese entities between 2013 and 2017 encountered "implementation challenges," such as environmental mishaps, corruption issues, and labor infringements.
Chinese President Xi Jinping addresses the annual gathering in New York City for the 76th session of the United Nations General Assembly (UNGA) on September 21, 2021. The event is attended by over 100 heads of state or government, with smaller delegations due to the Covid-19 pandemic. President Jinping's speech is displayed on a video screen as part of his participation. (Photo by Mary Altaffer - Pool/Getty Images)
Mary Altaffer/Pool/Getty Images
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China issued a guidance in 2017 to promote an environmentally friendly Belt and Road initiative that emphasized sustainable development and the need for reinforced environmental protection. Recently, officials have advocated for the implementation of "small and beautiful" projects, which are believed to be more appealing to the local communities.
Furthermore, in 2021, President Xi Jinping made a commitment that China would refrain from constructing any new coal-fired power projects outside its borders.
In contrast to Western lenders, who aim to enforce their environmental and other criteria on the projects they finance, China has historically allowed the receiving country to determine the project's nature. AidData's Malik suggests that this approach may restrict Beijing's ability to prioritize its green objectives.
Regarding Africa, experts at the Global Development Policy Center predict that future lending to the continent may involve fewer major loans exceeding $500 million. Instead, there could be a rise in smaller loans under $50 million, focused on generating positive social and environmental outcomes.
China is expected to continue directing funding in line with its geopolitical objectives, particularly in areas where it is competing with the United States. Although the global volume of China's financing for major infrastructure projects may have reached its peak, there is still significant enthusiasm for the Belt and Road Initiative, especially among China and its regional neighbors, according to HKU's Strange.
Chinese policymakers and project leaders have made significant investments in improving project management over the past decade. As a result, new projects should theoretically benefit from the lessons learned from previous experiences, as hindsight has the potential to be advantageous.
