China’s priority on Africa’s finance shifts from infrastructure to trade

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According to analysts, China’s finance commitments in Africa are changing away from large infrastructure projects and toward establishing greater trade flows and commercial investments.

The government launched an action plan in late November during the Forum on China-Africa Cooperation (Focac), which comprised roughly US$40 billion in commitments in the form of trade finance, commercial investments, and a part of China’s Special Drawing Rights (SDR).

Although a significant sum,  it is significantly less than the US$60bn promised at the two most recent forums in 2015 and 2018.

It also includes little in the way of concessional loans, which have been China’s major mechanism for financing a wide range of infrastructure projects across Africa, including trains, airports, highways, and energy projects.

The plans, which were announced alongside a virtual speech by Chinese President Xi Jinping to the conference, have reinforced perceptions that China is reducing state-backed exposure to Africa as several countries struggle under the weight of sovereign debt, including debt from non-Chinese sources.

“Perhaps the most notable feature of China’s Focac pledge this year is the entire absence of infrastructure from the narrative,” Yun Sun, a non-resident scholar at the Brookings Institute in the United States, noted.

According to analysts at the Center for Global Development, China is heading away from a “hard cash for infrastructure” approach and toward “soft cooperation on trade and human capital.”

In a December 9 research report, the Center stated that the drop in financing promises “demonstrates a pattern already well-noted by others. A decrease in China’s willingness to employ state-backed loans to finance its worldwide ambitions.”

“What came out of Focac was not unexpected,” says Kanyi Lui, a partner with law firm Pinsent Masons in Beijing. “There has been fairly significant infrastructure investment in Africa already. And while more is needed, governments also need to make sure these new infrastructures are put to good use.”

“If you look at historical Chinese lending activities. Many developing countries in Africa are probably approaching their country limits,” he tells.

This year, the G7 countries and the EU both announced aimed specifically at closing the infrastructure gap between developed and underdeveloped nations. Which are considered as competitors to the Belt and Road Initiative.

“The infrastructure gap is not going to be filled by just the Chinese and a global response is needed,” Lui says.

China and all African countries with diplomatic relations with Beijing have agreed to a new action plan that includes a promise of US$10 billion in trade finance over the next three years to support African exports, more than doubling the amount committed to trading in 2018. By the end of 2024, China hopes to have imported $300 billion worth of goods from Africa.

The strategy also aims to “enhance the competitiveness of African agricultural products” by “facilitating and expediting the entry of small-scale agricultural producers into formal processing, marketing, and distribution networks,” as well as simplify cross-border trade by increasing digitalization.

A total of US$10 billion in credit lines would be granted to African financial institutions for lending to small and medium-sized businesses across the continent, which is half of what was committed during Focac 2018.

“I believe the goal is to combine Chinese liquidity with local expertise,” Lui says.

“That fits in nicely with the idea that the Belt and Road Initiative is moving forward, at least for many African countries.” Now that bridges, roads, ports, and airports have been constructed, it’s time to use that infrastructure to boost the local economy.”

The US$10 billion, according to Lui, will most likely be utilized for letters of credit and revolving export credit arrangements, which will allow the credit to be recycled for greater impact.

The plan also states that during the following three years, “China will urge its enterprises” to invest a minimum of US$10 billion in Africa, mostly in manufacturing, agriculture, and the “green economy.”

The remaining US$10 billion will come from China sharing some of its SDR allotment with African countries, however, the plan does not specify how.

According to data provided by the Boston University Global Development Policy Center, Chinese governmental funding for large infrastructure projects decreased gradually between 2016 and 2019.

While the China Export-Import Bank and the China Development Bank remain the most active Chinese creditors on the continent, academics have noticed a growing trend of state-owned but commercial banks such as the Bank of China and the Industrial and Commercial Bank of China becoming more involved.

Chinese contractors working on African projects who have been unable to acquire financing from Chinese sources have approached European export credit agencies and commercial lenders, according to sources.

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