Climbing out of the Chinese debt trap

Beijing must play a pivotal role in soothing African economic distress, says Alex Vines.

The World Today Published 3 August 2022 Updated 20 January 2023 3 minute READ

Poorer countries across the world – including many in Africa – are facing $35 billion in debt-service payments in 2022. According to the World Bank, around 40 per cent of this total is owed to China.

Across the African continent, the economic impacts of the coronavirus pandemic have increased rates of extreme poverty and inequality. Since early 2022 the situation has worsened even further, due to the knock-on effects of spiking inflation and interest rates following the Russian invasion of Ukraine. Shortages of fuel and foodstuffs have caused prices to leap upwards. Urban unrest is on the rise, and African governments are having to make tough economic choices as their budgets are squeezed ever more tightly.

Across the continent, progress on the UN’s Sustainable Development Goals is being jeopardized, and non-energy-producing lower and lower-middle income African governments are struggling to repay their loans.

During the Covid pandemic, the G20 assisted 31 out of 36 eligible African countries with its Debt Service Suspension Initiative (DSSI). Established in May 2020, the DSSI helped countries concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people before it expired at the end of 2021. From 2022, it has been replaced by the G20’s Common Framework for Debt Treatments.

As the second-largest economy in the world after the United States, and the dominant lender for many African states, China has an important role to play in such initiatives. Beijing still tries to keep a low profile and renegotiate its terms on a bilateral basis – although it did support Angola’s early call for G20 action on an initiative that would fulfil what the DSSI delivered. The challenge is to encourage more consistency and trust in such initiatives, as Chinese officials consider them to be too western-oriented. 

China’s lending to Africa peaked in 2016

Contemporary views of Chinese lending in Africa remain coloured by the rapid expansion of Chinese finance from the early 2000s to resource-rich African states, and oil producers in particular. The reality is that much of China’s lending has evolved, and is neither intrinsically predatory nor problematic for African partners – and China increasingly prefers to do business with states it considers to be better run.

In fact, as commodity prices and growth rates declined from 2015, Chinese lending to Africa fell significantly, from a peak of $29.5 billion in 2016 to $7.6 billion in 2019. The socio-economic impact of the pandemic has made this situation worse.

Over the past two decades, Chinese finance has contributed to an infrastructure boom in many African countries

That China has attracted criticism is often due to a lack of transparency in its investments, especially those in Kenya and Zambia. This reputation has not been helped by opaque lending arrangements imposed by Chinese state-owned banks, requiring borrowers to prioritize them for repayment. This could lead to cutbacks in key areas of social spending, with direct impacts on African communities.

Over the past two decades, Chinese finance has contributed to an infrastructure boom in many African countries. Angola, for example, was able to undertake a rapid post-conflict reconstruction of its infrastructure, with new roads and bridges being built across the country. New models of financing are being developed: in Kenya, the new Nairobi expressway was constructed under a $600 million Build-Operate-Transfer model that provides for ownership to revert to the national government after a 30-year concession period.

Chinese companies have helped African countries build and upgrade over 10,000km of railway, around 100,000km of highway, 1,000 bridges and 100 ports, as well as power plants, hospitals and schools.

China’s involvement in African debt has varied considerably between countries and over time. Although in recent years this involvement has been framed in the context of the Belt and Road Initiative, it has for the most part been uncoordinated and unplanned, with credit being offered by competing lenders with links to different elements of the Chinese state.

In recent years, as reports have emerged around the poor quality of some of China’s past lending, the authorities in Beijing have sought greater control over new development lending and have imposed new sustainability requirements. At the same time, African countries have sought to diversify sources of supply for infrastructure contracts beyond China. Loans are generally now on a smaller, more manageable scale.

With the introduction of its Global Development Initiative in September 2021, there are indications that China is moving to a ‘new development paradigm’, with the emphasis on providing flows of foreign direct investment rather than loans and a focus on supporting small and medium-sized enterprises, human capital investments and green development.

African debt distress

A paper drawing on expertise from Chatham House’s Africa, Asia and Global Economy and Finance experts will be published before the G20 summit in Bali in November 2022. It examines seven African countries that the World Bank deemed in 2020 to be in most debt distress or at risk of debt distress because of their Chinese stock – Angola, Cameroon, Republic of Congo, Djibouti, Ethiopia, Kenya and Zambia. Two countries – Côte d’Ivoire and South Africa – have received new loans from China and are not in any distress.

The paper observes that a lack of transparency over the nature of the terms agreed by these African governments has led to intense domestic criticism and international accusations that China is seeking control over strategic assets.

China may have fallen into its own debt trap through profligate and uncoordinated lending to Angola and Zambia

In fact, in Angola and Zambia, China may have accidently fallen into its own debt trap through profligate and uncoordinated lending.

Zambia became the first pandemic-era default in 2020 and is seeking relief on $17 billion of external debt. After holding general elections in August 2022, Angola and Kenya will also seek additional debt relief, but both may also seek more funds from the private commercial market because of the slow progress of the G20’s Common Framework – something flagged as a concern by China.

All seven of the countries that are most indebted to China are actively seeking to reduce this financial reliance on Beijing in the future.

China has a pivotal role to play in finding effective solutions to these and other African countries’ debt distress. Improved coordination and cooperation between creditors in China and in other parts the world could enhance the positive impact of multilateral initiatives, such as the Common Framework, which has aimed to bring China and India to the negotiating table along with the IMF, the Paris Club group of creditor nations and private creditors.

So far, Chad, Ethiopia and Zambia are the only African countries to have signed up to the framework since its launch in 2020. Although China is suspicious of the IMF, if African states collectively encouraged Beijing to engage with the Common Framework, it could be improved so as to provide debt relief to those African countries finding it difficult to repay their loans.