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Competing in Africa: China, the EU and USA

The China-in-Africa story may be increasingly familiar, but its complexity cannot be overstated.

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Competing in Africa: China, the EU and USA

The China-in-Africa story may be increasingly familiar, but its complexity cannot be overstated.

17 April 2018 Tuesday 20:17
Competing in Africa: China, the EU and USA

By Witney Schneidman 

Given recent developments in the global economy, especially Brexit and the Trump administration’s “America First” policy.

It is worth assessing how Africa’s three largest commercial partners China, the European Union, and the United States are likely to impact the region in the near future as it relates to trade and investment trends.

China Leaping ahead

The China-in-Africa story may be increasingly familiar, but its complexity cannot be overstated.

As China’s domestic growth began to surge at the end of the last century, demand for natural resources and job creation forced China to look for markets abroad. Africa was a willing partner, due to its abundance of commodities and need for infrastructure development.

China’s role on the African continent has been defined by the financing of more than 3,000, largely critical, infrastructure projects, according to the AidData Project.

China has extended more than $86 billion in commercial loans to African governments and state-owned entities between 2000 and 2014, an average of about $6 billion a year.

In 2015, at the sixth Forum on China-Africa Cooperation (FOCAC), President Xi Jinping pledged $60 billion in commercial loans to the region, which would increase lending to at least $20 billion a year if that pledge is fulfilled.

As a result, China has become the region’s largest creditor, accounting for 14 percent of sub-Saharan Africa’s total debt stock, according to Foresight Africa 2018.

In Kenya, for example, the volume of Chinese loans to the government is six times larger than that of France, the country’s second-largest creditor. The FOCAC that will be held in Beijing later this year is likely to continue this trend of extending commercial loans for infrastructure projects.

While China’s level of foreign direct investment (FDI) is relatively low, accounting for just over 5 percent of total FDI inflows into the region in 2015, two-way trade has grown 40 times over the last 20 years and now exceeds $200 billion.

More recently, there has been a surge in Chinese private investment combined with a continued, but more limited, state engagement. A 2017 McKinsey study reports that there are more than 10,000 Chinese-owned firms operating in Africa today, about a third of whom are involved in manufacturing.

Notably, French academic Tierry Pairault points out that the overwhelming majority of these enterprises are small and micro businesses. McKinsey also reports that Chinese investment in Africa increasingly contributes to job creation, skills development, and the transfer of new technologies, practices more generally associated with Western business norms.

As China works to implement the Belt and Road Initiative, the largest public works program ever, the issue of China’s commercial loans and the subsequent debt incurred by African governments is likely to increase as a public policy concern.

There is room to limit the negative consequences of these loans: China should consider transitioning toward a blended financing model, based on Western and Chinese sources of financing, for its support of Africa’s much-needed infrastructure projects.

In addition, Africa would benefit if China were to more actively open tenders to international competition as opposed to tying commercial loans to the exclusive use of Chinese companies and materials on terms that are often opaque. A larger portion of grants, as opposed to a singular reliance on commercial loans, even at concessional rates, would be in Africa’s interest.

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