(Bloomberg) —
Most read by Bloomberg
Huge Chinese loans to Africa have created a dilemma in which China will struggle to recoup its money while maintaining its image as a friend of developing countries, Chatham House researchers said.
Africa’s external debt has quintupled to $696 billion between 2000 and 2020, with Chinese lenders accounting for 12% of that, according to a new report by the London-based think tank.
While Chinese lending to Africa has been criticized by the US and other Western nations as opaque and aimed at seizing African assets offered as collateral, the researchers said that was not the case.
“Far from being an elaborate strategy to dispossess African assets, profligate Chinese lending in its early stages may have created a debt trap for China – entangling it deeply with stubborn and increasingly assertive African partners,” the researchers said.
China, for example, is a big creditor to Zambia, which has defaulted on its debt. It has also lent to other African nations struggling to meet their debt obligations, including Angola, Ethiopia, Kenya and the Republic of Congo.
The economic fallout from the pandemic and Russia’s invasion of Ukraine have eroded the ability of many African nations to service their sovereign debt.
The continent is heading for a debt crisis, with 22 out of 54 nations threatened by a so-called debt crisis, according to World Bank and International Monetary Fund criteria.
Largest African debtors to China:
Angola – $42.6 billion
Ethiopia – $13.7 billion
Zambia – $9.8 billion
Kenya – $9.2 billion
China has been criticized for its perceived lack of engagement in global efforts to reduce developing countries’ debt burdens; US Treasury Secretary Janet Yellen has repeatedly said that Beijing has become the biggest obstacle to progress.
The story goes on
Jose Fernandez, undersecretary for economic growth, energy and the environment at the US State Department, said in an interview last week that China needs to be more transparent about the debts of African nations.
Concerned about the inability of many nations to repay their loans, Chinese institutions have slashed the amount of credit they will extend to Africa in recent years, Chatham House said.
New Chinese loans to African governments went from a peak of $28.4 billion in 2016 to $8.2 billion in 2019 and just $1.9 billion a year during the coronavirus pandemic back in 2020, the researchers said.
“China’s approach to African debt is a dynamic shift, with patterns of Chinese infrastructure-linked lending in Africa moving from resource-based profligacy to more calculated business or geostrategic decision-making,” Chatham House researchers said in the report, titled “The Response on the debt crisis in Africa and the role of China.”
“The image of China as a predatory lender intent on expropriating African assets is, in most cases, not tenable,” they wrote.
Still, there are indications that China may have lent money to the tiny Horn of Africa nation, Djibouti, to secure political clout, they said. Between 2012 and 2020, China provided $1.4 billion in investment and infrastructure loans to Djibouti, whose annual gross domestic product is about two hours of China’s economic output.
China has also established a military outpost just six miles from a US base in Djibouti on the Bab el Mandeb, a narrow strait through which about 30% of the world’s shipping en route to the Red Sea and Suez Canal leads .
“Djibouti provides a clear example of the tension between lending to certain African countries that are likely to struggle to make repayments in the future and the geostrategic need to build and maintain influence,” Chatham House said. “Djibouti is in a debt crisis, but the country may be too important for China to allow a default.”
China now faces the dilemma of enforcing its right to receive payments or adopting a more accommodating approach to maintaining its political ties, the researchers said.
China’s dilemma
While China initially sought to address debt repayment issues bilaterally, it is increasingly engaging in multilateral talks and will need to continue doing so if it wants the best chance of repayment, they said.
“Ultimately, China may feel that it needs to become more vigorous in collecting payments through unilateral action,” Chatham House said. “This would be particularly detrimental if China resorted to appropriating major assets such as ports, railways or power grids in response to defaults – the vision of ‘debt trap diplomacy’ is not impossible, but it is hard to overstate the strategic and political costs that would.” bring.”
Most Read by Bloomberg Businessweek
©2022 Bloomberg LP