CSR Blog: Reducing the Political Influence of Chinese Lending through the COVID-19 Fallout

By Bartholomew Connolly

Background

The COVID-19 pandemic presents a unique opportunity for the U.S. to reframe its economic engagement with Africa.  African nations have currently issued approximately $115 billion in sovereign debt, with nearly $30 billion coming due in the next five years, according to the Financial Times.1  The ability of African states to service this debt has come into question due to the economic impact of COVID-19, necessitating massive debt restructuring and forgiveness.  As a result of the COVID-19 shock, African GDP is forecasted by the UN Conference on Trade and Development to contract by 1.4 percent, and perhaps up to 7.8 percent for smaller economies.Chinese lending accounts for approximately 20 percent of African external government debt.3  This means that many of Africa’s debt obligations that will need to be restructured due to COVID-19 will be those originating from China.  However, Chinese lending is driven by more than economic interests.  Chinese geopolitical imperatives have been a major motivation of this lending spree.  The policy first emerged as the “going-out” strategy and has now transformed into the Belt and Road Initiative (BRI).4  According to recent testimony before the U.S.-China Economic and Security Review Commission, this policy is driven by three interests: to bring Africa into its sphere of influence, to secure a supply of energy and raw materials, and to establish China’s primacy in the potentially growing African market.  Nevertheless, the current crisis has created strained relations between Chinese lenders and the recipient countries in Africa, which offers an opportunity for the United States and its western allies to provide development financing alternatives in Africa.  This essay proposes low-cost methods to decrease the influence of Chinese lending during this time of crisis while also improving the quality of investment and reducing unproductive external debt.

Challenges

China’s lending strategy in Africa is directly tied to its overall geopolitical aims on the continent.  Specifically, Chinese policy in Africa is aimed at increasing political influence, resource security, and gaining an economic foothold in a growing market.  Debt finance is one tool that China has used in order to further these goals, many of which directly or indirectly threaten U.S. policy interests.  This section will analyze how such financing arrangements support Chinese policy and why this is detrimental to U.S. interests.

First, debt finance is used by China to increase its political support among African nations.  China’s desire to have a leading role in international affairs has led to an effort to provide itself legitimacy in both multilateral institutions and bilateral relations.5  A key example of this behavior has been in the United Nations (UN).  China has used influence gained with African states through economic ties to further its political agenda in the UN General Assembly where African nations have significant voting power.6  This influence has been instrumental in minimizing China’s human rights abuses including its policies in Tibet and Xinjiang in these organizations.  Of the forty-five countries that supported China during a UN General Assembly debate on its alleged human rights abuses in Xinjiang in October 2020, twenty were African nations.7  Such political leverage reduces the ability of the U.S. and its allies to use multilateral institutions to pressure countries on issues of human rights, freedom and democracy, which are  central U.S. policy interests.

The political support of African nations has also been critical to China’s isolation of Taiwan and promoting its One China Principle.8  The small Southern African nation of Eswatini (formerly Swaziland) is the only country in Africa that maintains diplomatic relations with Taipei.9  According to the RAND Corporation, trade, investment, and loans are the largest factors that influence countries to switch diplomatic ties to Beijing from Taipei.10  For example, Burkina Faso cut ties with Taiwan in 2018 due to its growing trade relationship with China.11  This also has been demonstrated by Chinese dealings with the autonomous region of Somaliland, where it offered a development package to break off relations with Taiwan.12  However, unlike the case of Burkina Faso, Taiwan and Somaliland have recently strengthened diplomatic ties and China quickly made a statement that Somaliland undermines Somali sovereignty.13 The diplomatic isolation of Taiwan has made it incrementally easier for China to rationalize a hostile reintegration of the breakaway island.  Such an action would destabilize East Asia and would be extremely detrimental to U.S. foreign policy, given the security guarantees that the U.S. provides to Taiwan both in policy and statute.  Moreover, the U.S. would suffer an incredible loss of credibility in the eye of its Asian allies if it choses not to intervene. 

China’s investments in Africa also allow it to influence internal African politics by promoting its development model which combines authoritarianism with capitalism.14  This model aims to demonstrate that economic development can be successful outside of a democratic system, which is particularly salient given the ongoing trend of African leaders attempting to remain in power beyond constitutional term limits.  According to the African Center for Strategic Studies, since 2015, thirteen nations have seen avoidance of or reversals in term limits.15  Recently China has supported African leaders that moved to avoid term limits.  Ivorian President Alassane Ouattara won a much disputed reelection in Cote d’Ivoire in November 2020.16 Chinese loans to Cote d’Ivoire increased by 1,400 percent from 2010 to 2015 and include a port project that will be completed in 2021.17 China quickly endorsed Ouattara’s victory.18 In another example, Guinean President Alpha Conde was elected to his third term in October 2020 following a controversial constitution referendum that had scrapped term limits in March.  China quickly signaled its endorsement of Conde’s victory, likely due to its significant resource and economic interests in the country.19  U.S. and EU observers were skeptical of the election results and the Economist reported the vote exceeded 100 percent in areas of the country that supported Conde.20  In 2018, China provided a $20 billion loan to Guinea, an amount two times the size of its GDP,  tied to bauxite concessions, which is a critical component to Chinese aluminum production.21 These cases demonstrate how Chinese lending is tied to governance issues and ultimately the endorsement of the Beijing model, which is increasingly legitimized as more African countries adopt it.22  Such legitimacy undermines good governance and human rights that have been a tenet of U.S. foreign policy.23  

Second, China’s lending platforms are intended to secure natural resources for its heretofore export-led growth strategy.  Natural resources have always played an important role in China’s economic relationship with Africa due to China’s resource scarcity.24  However, as China turns inward and increasingly focuses on its domestic market, it has the potential to squeeze U.S. access to future economic opportunity and natural resources.  In a recent report, the Department of Defense has identified an overreliance on China for strategic and critical materials which utilize raw materials from Africa.25  Recently, China proposed rules to prohibit the export of 17 rare earth minerals critical to the production of the F-35.26  While in the near-term such access may not be critical due to domestic U.S. availability of both energy and rare earth metals, this does not mitigate potential future requirements especially in light of a possible Western-Chinese economic decoupling.27  

Lastly, Chinese investments in Africa will set the conditions for future economic exchanges on the continent.  While Africa currently represents only a fraction of global GDP, China’s ground floor entry strategy is predicated on the potential for significant economic upside in the future.  For example, the consultancy McKinsey & Company has estimated that by 2025 an additional 90 million people will join the consumer class in Africa.28  Moreover, notwithstanding the current economic downturn, African economies were growing at a substantial rate of around 5 percent per year.29  As Africa recovers from the current economic downturn, it is likely to resume similar economic growth rates, making it an important future market. The problems do not end at the possibility of lost export and investment opportunities but extend to the critical question of who will lay the digital infrastructure that will shape economic engagement into the future.  China has begun to build its domestically produced digital systems on the continent.  ZTE and Huawei are in the top five telecommunications providers in Africa and Huawei has partnered with China’s EXIM bank to provide $1 billion of digital infrastructure investment across Africa.30 Notable examples of existing infrastructure include surveillance technology being incorporated in Zambia, Zimbabwe, and Mauritius to cloud computing and e-commerce in South Africa and Rwanda, respectively.31 If Chinese digital infrastructure is successfully integrated into the African continent, this could preclude U.S. entities from participating in economic activity without risking a cybersecurity threat, unless a parallel western digital infrastructure was also built.32

Policy Recommendations

For all the challenges above, it is critical to present an alternative to Chinese investment on the continent.  COVID-19 has made this task easier by exposing the shortcomings of Chinese investment to African nations.  For example, Zambia, the first African nation to default due to the COVID-19 crisis, owes more than a quarter of its external public debt to China.33  The U.S. and like-minded allies should take advantage of this opportunity to promote multilateral and bilateral lending platforms that conform to internationally  accepted standards and reduce Chinese political influence in Africa.  This can be done at a relatively low cost through a number of avenues.  

First, debt restructuring advisors should be added to the deal teams that have been established in U.S. embassies across Africa to promote U.S. led and financed projects as a part of the Prosper Africa initiative.34  Unlike the deal teams, which utilize personnel already in the country with other diplomatic or trade responsibilities, the restructuring personnel should be experts drawn from the U.S. Treasury Department, multilateral development institutions or western banks.  These advisors should be dispatched to nations with a high proportion of Chinese debt and a decreasing ability to meet their debt service obligations.  Their mission will be to work with African nations’ finance and treasury ministries to devise prudent ways to negotiate the restructuring of their debt.  Additionally, through the presence of U.S. missions across Africa, American debt restructuring professionals will have an increased awareness of the opportunities in which both U.S. public and private institutions can participate.  African leaders might hesitate to accept U.S. advisors, especially those who benefit from the lack of transparency in Chinese lending.  This obstacle can be addressed through tying this technical assistance to bilateral aid as well as demonstrating the dividend from reducing corruption.  The International Monetary Fund has assessed that Sub-Saharan countries can add 1 to 2 percentage points to growth through good governance efforts.35

This effort should be complemented by allocating funding to distressed debt investing.  These funds can be used by restructuring advisors to offer alternative finance options to highly indebted African nations.  This will increase the negotiating leverage for African nations as well as decrease the likelihood of debt-to-equity swaps, in which Chinese entities take control of projects, the most detrimental solution for both host nations and U.S. interests.  U.S. distressed debt investments should be made in the most feasible projects, likely at a haircut of the original valuation.  This will ensure that U.S. investments will have a likelihood of positive returns and the ability to reinvest in the future.  

Lastly, partnering with like-minded European allies will strengthen these efforts and allow for syndicates of western distressed debt lending in Africa.  There is already an existing framework for this cooperation.  The Development Finance Institution (DFI) alliance, which includes fifteen European institutions as well as those of Canada and the U.S., has already agreed to combine their efforts to address the economic impact of COVID-19 in developing nations.  Using such a framework will increase available funding, reduce risk, and take advantage of network synergies.  Also, the benefit of having diverse voices echoing the same message to African leaders will surely lessen the influence of Chinese lenders.   COVID-19 is producing untold stress on developing economies, as six economies have defaulted on their debt in 2020.36  At relatively little cost, these policy recommendations will reduce detrimental Chinese influence as well as promote a sustainable debt finance environment in Africa.  More resilient economies in Africa with less dependence on China  will benefit both the continent and the U.S.

Bartholomew (Bart) Connolly has had a diverse career in the military, finance and government. During his military service he was a Naval Aviator and a Foreign Area Officer (FAO). He continues to serve as a Navy Reserve FAO. In the private sector, Bart has worked at Goldman Sachs and is now a government contractor.He is a graduate of The Ohio State University, the University of Southern California and the Naval War College. He is currently a Doctor of International Affairs Candidate at the Johns Hopkins School of Advanced International Studies (SAIS).

___________________________

1 Anna Gross, “African Countries Face ‘Wall’ of Sovereign Debt Repayments,” February 10, 2020, https://www.ft.com/content/8c232df6-4451-11ea-abea-0c7a29cd66fe.

2 Grace Gondwe, “Assessing the Impact of COVID-19 on Africa’s Economic Development,” July 2020, 21.

3 BBC, “Reality Check: Is China Burdening Africa with Debt?,” BBC News, November 5, 2018, sec. Africa, https://www.bbc.com/news/world-africa-45916060.

4 Jean-Pierre Cabestan, “Beijing’s ‘Going Out’ Strategy and Belt and Road Initiative in the Sahel: The Case of China’s Growing Presence in Niger,” Journal of Contemporary China 28, no. 118 (July 4, 2019): 592–613, https://doi.org/10.1080/10670564.2018.1557948.

5 Yanzhuo Xu, China, Africa and Responsible International Engagement (Milton, UNITED KINGDOM: Taylor & Francis Group, 2017), 42, http://ebookcentral.proquest.com/lib/jhu/detail.action?docID=5092144.

6 Yun Sun, “Chinese Campaigns for Political Influence in Africa,” 1, https://www.stimson.org/2020/chinese-campaigns-for-political-influence-in-africa/.

7 Catherine Putz, “2020 Edition: Which Countries Are For or Against China’s Xinjiang Policies?,” October 9, 2020, https://thediplomat.com/2020/10/2020-edition-which-countries-are-for-or-against-chinas-xinjiang-policies/.

8 Sun, “Chinese Campaigns for Political Influence in Africa,” 2.

9 Ibid.

10 Scott Harold, Lyle Morris, and Logan Ma, Countering China’s Efforts to Isolate Taiwan Diplomatically in Latin America and the Caribbean: The Role of Development Assistance and Disaster Relief (RAND Corporation, 2019), 7, https://doi.org/10.7249/RR2885.

11 Salem Solomon, “Once Influential in Africa, Taiwan Loses All But One Ally,” May 26, 2018, https://www.voanews.com/africa/once-influential-africa-taiwan-loses-all-one-ally.

12 Thomas J. Shattuck, “China-Taiwan Competition over Somaliland and Implications for Small Countries,” Foreign Policy Research Institute, August 28, 2020, https://www.fpri.org/article/2020/08/china-taiwan-competition-over-somaliland-and-implications-for-small-countries/.

13 US News & World Report. “Bucking China Pressure, Taiwan, Somaliland Establish Ties.” Accessed February 19, 2021. https://www.usnews.com/news/world/articles/2020-07-05/bucking-china-pressure-taiwan-somaliland-establish-ties. 

14 Sun, “Chinese Campaigns for Political Influence in Africa,” 2.

15 Joseph Siegle and Candace Cook, “Circumvention of Term Limits Weakens Governance in Africa,” Africa Center for Strategic Studies (blog), September 13, 2020, https://africacenter.org/spotlight/circumvention-of-term-limits-weakens-governance-in-africa/.

16 Peltier, Elian. “Ivory Coast President Wins Third Term in Disputed Vote.” The New York Times, November 3, 2020, sec. World. https://www.nytimes.com/2020/11/03/world/africa/alassane-ouattara-election-ivory-coast.htm 

17 Daily Sabah. “France Challenged by China in Former African Colonies.” Daily Sabah, July 22, 2018. https://www.dailysabah.com/economy/2018/07/22/france-challenged-by-china-in-former-african-colonies; Quirke, Joe. “China Loans Ivory Coast $875m for Port Construction – News – GCR.” Global Construction Review, December 11, 2014. http://www.globalconstructionreview.com/news/china-loans-ivory-coast-875m-po5rt-c5on4struc4tion/.

18 Xinhua. “China Congratulates Alassane Ouattara on Re-Election as Cote d’Ivoire’s President – Xinhua | English.News.Cn,” November 11, 2020. http://www.xinhuanet.com/english/2020-11/11/c_139508937.htm.

19 Reuters, “China Offers Backing to Guinea President after Disputed Election,” Reuters, November 9, 2020, https://www.reuters.com/article/us-guinea-election-china-idUSKBN27P0YA.

20 Economist, “A Disputed Election Leads to Violence in Guinea,” The Economist, October 31, 2020, https://www.economist.com/middle-east-and-africa/2020/10/31/a-disputed-election-leads-to-violence-in-guinea; France24, “Guinea’s Conde Says There Is No ‘witch Hunt’ against Opponents,” France 24, November 16, 2020, https://www.france24.com/en/live-news/20201116-guinea-s-conde-says-there-is-no-witch-hunt-against-opponents.

21 Reuters, “China Offers Backing to Guinea President after Disputed Election”; Lowy Institute, “Belt and Road: Colonialism with Chinese Characteristics,” l, 2019, https://www.lowyinstitute.org/the-interpreter/belt-and-road-colonialism-chinese-characteristics.

22 Sun, “Chinese Campaigns for Political Influence in Africa.”

23 Grant Harris, “Why Africa Matters to US National Security,” Atlantic Council (blog), May 25, 2017, 20, https://www.atlanticcouncil.org/in-depth-research-reports/report/why-africa-matters-to-us-national-security/.

24 Xu, Yanzhuo. China, Africa and Responsible International Engagement. Milton, UNITED KINGDOM: Taylor & Francis Group, 2017. http://ebookcentral.proquest.com/lib/jhu/detail.action?docID=5092144 

25 Department of Defense, “Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States,” September 2018, 95.

26 Yu, Sun, Tom Mitchell, and Demetri Sevastopulo. “China Targets Rare Earth Export Curbs to Hobble US Defence Industry,” February 16, 2021. https://www.ft.com/content/d3ed83f4-19bc-4d16-b510-415749c032c1 

27 Cullen S Hendrix, “Policy Brief 20-3 What US Strategy Gets Wrong About China in Africa,” 2020, 18.

28 Yaw Agyenim-Boateng and Bill Russo, “Winning in Africa’s Consumer Market | McKinsey,” July 1, 2015, https://www.mckinsey.com/indUStries/consumer-packaged-goods/our-insights/winning-in-africas-consumer-market#.

29 The Economist. “Africa Is Attracting Ever More Interest from Powers Elsewhere.” The Economist, March 7, 2019. https://www.economist.com/briefing/2019/03/07/africa-is-attracting-ever-more-interest-from-powers-elsewhere.

30 Beach, Sophie. “Will China’s Investments Reshape Africa’s Internet? | China Digital Times (CDT).” China Digital Times, December 6, 2018. https://chinadigitaltimes.net/2018/12/the-imitation-game-will-chinas-investments-reshape-africas-internet/ 

31 Roy, Kritika. “Deciphering Beijing’s Digital Connection in Africa | Manohar Parrikar Institute for Defence Studies and Analyses,” January 2019. https://idsa.in/africatrends/beijing-digital-connection-in-africa-kroy#footnote8_gtkwwhh.

32 Harris, “Why Africa Matters to US National Security.”

33 Clara Ferreira Marques, “In Africa’s Debt Fog, China Loses Too,” Bloomberg.Com, November 15, 2020, https://www.bloomberg.com/opinion/articles/2020-11-15/china-is-also-a-loser-in-zambia-s-covid-19-debt-default.

34 Nicolas Cook and Brock R Williams, “The Trump Administration’s Prosper Africa Initiative,” n.d., 3.

35 Nelson Sobrinho and Vimal Thakoor, “Tackling Corruption in Sub-Saharan Africa – IMF F&D,” September 2019, https://www.imf.org/external/pubs/ft/fandd/2019/09/tackling-corruption-in-sub-saharan-africa-sobrinho.htm.

36 Robin Wigglesworth, “Zambia’s Debt Crisis Casts a Long, Global Shadow,” November 16, 2020, https://www.ft.com/content/35c58b5f-f890-4390-967a-28c0a0a1fb50.

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