Benefactor, Villain, None of the Above?
What’s the issue?
For the past twenty years, the Chinese Communist Party (CCP) has been funding roads, railways, airports, shipping ports, and investing in African countries at an unprecedented rate. At the last Forum on the China-Africa Cooperation (FOCAC ) in 2018, the CCP pledged $60 billion dollars in funding. It made the same pledge at the previous meeting, and before that pledges had been doubling at each successive forum. “China is catching up in accumulating outward FDI into Africa to a level which is commensurate with its economic size and long-term political ties with the African region.” Bruegel
But critics of the CCP argue that, until recently, loan deals have been fairly opaque. The CCP’s investments are concentrated in only two sectors, energy and infrastructure—two areas China has either a great need for (energy) or excess capacity (construction). Moreover, African nations are getting 20% fewer jobs than that of other nations receiving Chinese FDI. The European think tank Bruegel found China’s investments in Africa, on average, produce 1.78 jobs per US $1 million invested compared to 2.24 jobs per US $1 million invested outside of Africa (Bruegel).
Still others’ argue that the CCP is supplying funding to countries without regard for prior debt commitments. Thus, saddling poor countries with unsustainable debt levels. For example, Angola has US$21.2 billion dollars in debt tied to oil prices. That’s “roughly a quarter of cumulative Chinese loans to the entire continent,” DW.
As a result, the CCP has been accused of neo-colonialism, engaging in “debt-trap diplomacy,” and positioning itself to control critical infrastructure. The Chinese say they are doing nothing of the sort. They are a friend to Africa and support it in its growth. Many African leaders even echo that sentiment.
So what’s really going on? Is the CCP taking advantage of poor countries in order to control their infrastructure and natural resources?
Why does it matter?
Many African nations are heavily in debt and now heavily dependent on imports from China (Show growth Imports from China).
Table 1: Sub-Saharan Africa Debt to GDP Ratio Through 2025
Table 2: 2018 Sub-Saharan Africa Imports % For Top 5 Partners
The continent as a whole runs a trade imbalance with China, which simply means that when taken together, the countries of Africa consume more from China than they sell. In the short-term this isn’t necessarily a bad thing but in the long-term it means countries are earning less than they spend–that’s a deficit. To make up for it, countries allow foreign lending and investment and that again isn’t necessarily a bad thing. Foreign lending and investment is a vote of confidence in one’s economy and when used well, can be a source for long-term economic growth. The US underwent a similar scenario in the 1800s when foreign direct investment went into railroads and infrastructure much like Africa today. The risk comes if the money is not used well and a crisis occurs as was the case in the Asian Financial Crisis during the late 1990s. “The unfolding crisis in [Asia] illustrated how problems in the banking sector [led] to a pullback by foreign investors, setting off a spiral of depreciation, recession, and amplified banking sector weakness. The result was contagion, with foreign creditors pulling back from other countries in the region seen as having similar vulnerabilities,” (Federal Reserve). Foreign investors fled to safer havens and left the region at the mercy of the global financial markets. What makes the deficits for African nations worse is that for the most part African nations export lower-value added goods (like raw materials) to the CCP but import back higher-value finished goods. That’s like exporting jobs to the CCP. Furthermore, the over dependency on Chinese imports ties African economies to the CCP’s. The Africa Report wrote, “The World Bank has calculated that a one percentage point reduction in China’s growth, results in a 0.37 percentage point decline in South Africa’s GDP over a 2-year horizon. Against this background, a lower growth forecast for China is not good news.”
African politicians may view the CCP’s path to prosperity as something they can replicate. But economists like John Paige, Senior Fellow at the Brookings Institution, point out what worked for the CCP may not work for African nations. China and many other nations used manufacturing as a way to move up the economic value chain. But Africa, for the most part, lacks a manufacturing base. Indeed, “in 2017, manufacturing’s share of sub-Saharan Africa’s total GDP was just under 10 percent,” according to a Brookings study. Since then manufacturing has grown, driven mostly by a few countries, but it still has a long way to go and (though the data in not out yet) the COVID-19 pandemic is sure to have been a setback. Furthermore, the trend towards automation in manufacturing is quickly undercutting any labor advantage Africa has for transforming to a global manufacturing hub.
Loans from the CCP are often touted as having “no political conditions,” meaning the CCP doesn’t require any change in governance as a condition for the loan. This is likely a major factor for why African politicians overwhelmingly support the arrangements. It requires nothing from them yet they can point to very visible improvements. While civil society groups criticize the agreements for doing nothing to protect workers rights, the environment, or jobs.
But the loans do have strings. They come as part of a “package deal” that includes;
- supporting the People’s Republic of China (Beijing, PRC) over the Republic of China (Taipei, ROC)
- the use of Chinese equipment and employees during projects
- and more often military access
This first point is nothing new. China has been using its investments as vehicles for politically squeezing Taipei off the international stage for quite sometime. The CCP forces countries to make a choice have relations with the PRC or the ROC but not both. When Burkina Faso dropped its recognition of Taiwan in 2018, that left Eswatini as the last African country to recognize the ROC.
Using Chinese labor and equipment undercuts job creation in the borrower’s home country. The Washington post found that most of the jobs on Chinese backed construction projects do employ local labor. But the management and technical positions are dominated by Chinese expats. The Post found this was true for American and European development firms as well.
Foreign companies justify these hires by explaining their preference for filling management posts with their own people. They also point to a lack of trained local employees with appropriate skill sets.Washington Post
But that’s kind of the point–African economies can’t advance without a skilled workforce. These large scale construction and infrastructure projects are the perfect opportunity for local workers to be trained alongside their foreign counterparts. Thus building skills in the workforce and ensuring the maintenance of the project after the foreign corporations leave.
However, a 2017 McKinsey report, Dance of the lions and dragons: How are Africa and China engaging, and how will the partnership evolve?, found that outside of the large SOEs, more than 10,000 small Chinese-owned businesses are operating across the continent. “Nearly two-thirds of [these] provided some kind of skills training. In companies engaged in construction and manufacturing, where skilled labor is a necessity, half offer apprenticeship training,” (McKinsey). McKinsey estimates that this translates into millions of jobs for Africans.
With respect to military presence, the CCP explicitly and publicly stated in 2012, “It will never pursue [military] goals.” But during his Congressional Testimony, Judd Devermont from CSIS explained that in early 2000 the CCP had troops in Africa that numbered in the hundreds. By 2017, the CCP created its first overseas naval base in Djibouti and by February 2020, the CCP had more than 2000 troops and staff on the continent. While most of these troops are part of UN peacekeeping missions, the CCP sent separate special forces units to protect Chinese citizens. Just recently, the Chinese expanded a pier in the Djibouti naval base to allow aircraft carriers to dock, (USNI News). Furthermore, the CCP is looking for additional sites around Africa for military bases, especially on the Atlantic side, says Jeff Seldin for VOA News.
How did we get here?
China has had a connection with the African continent for centuries, but its modern relationship didn’t start until the mid-50s after a conference in Bandung, Indonesia. This was the first mass meeting to promote Afro-Asian economic and cultural cooperation. The conference came at a time when many African and Asian nations were gaining independence from colonial rule but, despite an eagerness to participate, were often ignored during international discussions affecting their own countries.
Between the 50s and the 70s, China had three broad strategies; “breaking out of international isolation, battling the former Soviet Union for primacy in the world communist movement, and displacing Taiwan as the internationally recognized government of China,” that’s according to David Shinn and Joshua Eisenman, authors of “China and Africa.” The three goals were realized through political, military (in the form of small arms sales), and to a lesser degree, economic support for revolutionaries and ideologically aligned governments. But the CCP also sought support from African nations for its own seat in the United Nations, which at the time was held by the Republic of China (ROC, Taiwan)—then internationally recognized as the government of China.
The late 70s to the 90s saw dramatic changes in China, the geopolitical landscape, and the CCP’s relationship with the continent. The modernization policies of Deng Xiaoping began China’s transformation to a wealthy nation. But Africa was no longer important for China’s grand strategy. Indeed, the CCP even rebuked Africa and the rest of the developing world for “errors in policy making,” when it was apparent they hadn’t kept up.1 Deng went so far as to criticize Tanzania when he told the Tanzanian Vice President, “socialism does not mean poverty.”1 Taylor, I. 1998. China’s Foreign Policy towards Africa in the 1990s. The Journal of Modern African Studies, 36(3), 443-460. Retrieved April 16, 2021, from http://www.jstor.org/stable/161792
Tiananmen Square (1989) however, was another turning point for the CCP. They did not anticipate the intensity of the West’s rebuke of the violent response to the protests.
The demonstrations and subsequent shootings around Tiananmen Square resulted in a severe crisis in China’s relations with the West, and the depth of Western condemnation surprised the Chinese leadership.1
Consequently, China underwent a major reevaluation of its foreign policy. It found itself turning (or turned) away from the West and looking to rekindle its relationship with Africa.
The rapprochement in the late 1980s with the former Soviet Union and its subsequent fall in 1991 ended any ideological competition between the two communist nations. This gave China the freedom to support whatever government it chose, regardless of ideology, now with a burgeoning economy.
The rise of Xi Jinping marked the start of a new era in China’s foreign policy. President Xi called for the rejuvenation of the country and ushered in a more assertive international agenda, grounded in the idea that China was long overdue to take its place as a global power.
This narrative [of rejuvenation] is a well-understood and powerful one in China. It evokes memories of the country as the Middle Kingdom demanding tribute from the rest of the world; China as a source of innovation, creating paper, gunpowder, printing, and the compass; and China as an expansive, outward-facing power, with Ming dynasty Admiral Zheng He commanding a naval fleet of more than three hundred ships and sailing throughout Asia to the Horn of Africa and the Red Sea.Council on Foreign Relations
This bolder China looks to reshape the world order by way of a global South-South development cooperation. This strategy promotes solidarity across developing countries not just in South Asia but also Africa and Latin America with the idea of developing nations working together as equals. Although, China is hardly their equal anymore.
What’s the verdict?
A study by Aid Data looked at 100 loan agreements by Chinese State Owned Enterprises (SOEs) to African countries. The study dispelled some of the mystery around China’s intentions in the region but reinforced others. The study looked at publicly available documents and compared them to 142 loans made to Cameroon (one of the few developing economies to make their project-loan agreements public) and the London-based Loan Market Association lending template. The study found that Chinese SOEs for the most part use a mix of standard and unique borrowing agreements to “maximize commercial leverage over the borrower and secure repayment priority over other creditors,” (Aid Data).
- Far-reaching confidentiality clauses: do not allow borrower to disclose the terms of the loan, and in some cases the existence of the loan itself. This has the effect of hiding debt from other creditors and, more importantly, from civil society that could hold government borrowers accountable.
- Special off-shore accounts: funded by revenues from the project or from revenue unrelated to the project. This places cash flows outside the control of the sovereign borrower. When combined with the confidentiality clauses this simultaneously overestimates a borrower’s debt-service capacity (how much they can afford to borrow) and underestimates the risk of debt distress (the chance a borrower won’t be able to repay the loan).
- No “Paris Club” agreements: prevent borrowers from renegotiating their loan with the group of 22 nation creditors (of which China is not a member) and any other similar debt restructuring, like the G20’s Common Framework for Debt Treatments (of which China is a member). Meaning debtors need to go through China to refinance their agreements.
- Easy Triggers for harsh penalties: Changes in a borrowers’ environmental or labor laws, foreign policy, or any event deemed “adverse to the interests of the PRC entity” can trigger severance of diplomatic ties with China and initiate demand for full repayment.
China pursues its own interests with a very well thought out plan. It knows what it wants and pushes hard for terms in its favor. That doesn’t make the CCP a villain, nor does it make China Africa’s friend, as is commonly celebrated at forums. China is a typical government advancing its own interests in the region. And African leaders know this.
Way back in 2013, Sanusi Lamido Sanusi, then-governor of Nigeria’s Central Bank said as much;
We must see China for what it is: a competitor. Africa must recognize that China—like the U.S., Russia, Britain, Brazil, and the rest—is in Africa not for African interests but its own.Sanusi Lamido Sanusi
Rather than China being the “bad actor” it may be politicians on the other side of the negotiating table aren’t advocating strongly enough for their nation’s interests. If that’s because they view their position as weak, it is unfounded. China’s strategy depends on Africa. Indeed, some argue, “China needs what Africa has for long-term economic and political stability,” Forbes. As such, African politicians have much more room to push back than they are currently using. And as more loan agreement details emerge from studies like Aid Data’s, African nations will face more pressure to create more jobs, protect workers, and the environment.
President Barack Obama had a similar sentiment during a 2014 interview with the Economist magazine:
My advice to African leaders is to make sure that if, in fact, China is putting in roads and bridges, number one, that they’re hiring African workers; number two, that the roads don’t just lead from the mine to the port to Shanghai, but that there’s an ability for the African governments to shape how this infrastructure is going to benefit them in the long term.The Economist
Indeed, if African nations don’t change the narrative of lending terms, the Chinese SOE’s template may become standard practice.