China is the biggest creditor of African countries. In order to catch up with the continent’s energy and mineral resources, China finances the nation’s roads, railways and ports with massive loans.
The 27-kilometer highway that opened in Kenya at the end of July is a big change for the residents of Nairobi. The road connects the center of Nairobi and the airport.
The Nairobi expressway, built with China’s support, will greatly ease the city’s traffic congestion. The road is not the first Chinese-funded project in Kenya, but the way the $585 million highway was financed is new.
The construction of the road was financed by China’s state-owned China Road and Bridge Corp, but not as a loan, as projects usually are. Under the agreement, the Beijing-backed company will collect tolls for 27 years before handing over the highway to the Kenyan government.
Finnfund’s economist Kristiina Karjalahti has investigated China’s role in international debt relations. He believes that this is one way China can ensure loan repayment if the country’s solvency is threatened.
– Several African countries are now in a really difficult situation, and many countries are practically insolvent or close to it. It is also in China’s interests that the countries’ economies improve and that can expand trade, Karjalahti states.
In recent years, China has been more actively involved in international cooperation, where the aim is to find solutions for the debt arrangements of the poorest economies, for example through the cooperation of the G20 countries.
The debt crisis is getting worse – countries are relying on China
Corona has worsened the debt crisis of African countries and the differences between the countries have grown. Some have drifted to the brink of bankruptcy or become completely insolvent. Some countries such as Nigeria, South Africa and Ethiopia are growing market areas.
South Sudan, the Democratic Republic of the Congo, Mozambique, Somalia, Chad and Zimbabwe are in the worst trouble with their debts.
In general, Western financing of African countries is also accompanied by strict conditions regarding environmental safety and human rights.
China has offered looser terms with its bilateral financing and rapid construction. Many leaders of African countries have taken this approach.
– Crisis countries have relied more and more on Chinese aid, especially in the 2010s, says Kristiina Karjalahti, economist at Finnfund.
China denies that it is triggering a debt trap
China has also been criticized for the so-called debt trap, in which China seizes the rights to manage roads and ports from borrowers who cannot pay their debts. Last year, for example, Laos handed over part of its electricity grid to China and received debt relief in return.
– China’s loan terms are not public. They often come with conditions that guarantee China income even if the country’s ability to pay is weak. Political conditions can also be attached to the loans, such as the fact that the countries’ diplomatic relations must be in order, says Karjalahti.
Overall, China has granted significantly more credit to African countries than previously known. According to World Bank statistics, developing economies would have owed China around $150 billion in 2019.
According to Karjalahti, the real amount would seem to be much higher, because according to research in recent years, about half of the loans granted by China have not been reported at all.
“Hidden loans” enable the use of power
Lack of reporting has created the problem of “hidden loans”. It means that no one has a clear overall picture of how much different countries owe China and what the terms of the loans are.
– China has become the largest single creditor of many African countries, but the amount of the total debt is in many cases very unclear. China is owed money, especially in the most indebted countries, sums up Karjalahti.
At the same time, the Chinese government continues to massively fund roads, railways and ports in Africa. With the loans, it is tied to the energy and mineral resources of the African continent.
China also uses debt diplomacy, i.e. influences the foreign policy views of the target country. Africa’s 54 countries have considerable voting power in, for example, the UN.
China’s new tactic
Last week, China unexpectedly announced that it would forgive 23 interest-free loans to 17 African countries and direct $10 billion of its International Monetary Fund assets to the continent’s nations.
Chinese Foreign Minister Wang Yi announced the cancellation of the loans at a meeting of the China-Africa Cooperation Forum. Wang did not provide information on the value of the loans, nor on which countries will receive debt forgiveness. At the conference, Wang promised that China will strengthen trade with Africa.
– China has clearly taken a new step in Africa. It is no longer just a lender for large public projects, but has increased investments in agriculture and the ITC sector, for example. China is interested in more than Africa’s natural resources. , says Karjalahti.
China presents itself as a climate leader
China has made agreements with 12 African countries to eliminate tariffs on almost all of their export products to China. This significantly increases the competitiveness of African products.
China also no longer wants to be only a lender to states, but in recent years has started to finance more and more of the private sector.
– Whereas the lending of the public side of African countries has decreased in recent years, the share of financing from the private side has increased. We see more potential in Africa, says Karjalahti.
Bringing climate change into the rhetoric is also new. China is starting several green projects with Africa, the purpose of which is to produce clean energy, protect nature and prevent poverty.
China also continues to provide food aid, economic and military aid to Africa. Wang also revealed last week that Beijing supports the African Union in its bid to join the G20.
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