President Xi pledges $60 Billion to African Countries, but at what Cost?

China recently pledged $60 billion in investment and loans to African countries during this week’s fifth FOCAC summit that was held in Beijing. But all this at what cost? What’s the catch? Africa needs to realize that it is just a tiny piece in China’s puzzle towards achieving global dominance and disrupting the current status quo that is dominated by the United States and its western allies.

Let’s start off by understanding China’s Belt and Road initiative that several African countries are part of, together with other 65+ countries across the world.

The Belt and Road Initiative is the most ambitious and expensive infrastructure program in modern history. It is a trillion dollar project in form of loans and investment for projects across 65+ countries in South East Asia, Middle East, Europe, Africa, and South America. China is investing in this project to strengthen its infrastructure, trade, and investment with 65+ countries that collectively account for 30% of global GDP, 62% of the population, and 75% of known global energy reserves.

Why is China investing trillions in the Belt and Road initiative?

Different IR schools of thought argue for or against the rise of China as a superpower. The realists who fundamentally believe that the international system is anarchic and that great powers compete for power argue that China is challenging the status quo that is currently dominated by the United States and its western allies. China, just like any nation-state, is driven by its own interests and wants to compete for power in a zero-sum game. China needs to grow its economy as well as its military prowess to achieve power and influence.

The Chinese economy is transitioning from a manufacturing to an innovative, service-oriented economy, which is more sustainable. To achieve double-digit GDP growth for close to three decades, China executed policies that focused on the expansion of Chinese manufacturing capabilities making it the “world’s factory”. China is currently facing a problem of overcapacity, where it has structurally over-invested and subsequently dragged on its productivity growth. China can, however, not afford a stagnant or declining economic growth.

China political stability is strongly dependent on sustainable and significant economic growth. The China Communist Party (CCP) has been able to govern a country with such a large population, among other complex issues because it has enabled the continued growth of the Chinese economy. A prolonged stagnation or falling economic growth would weaken the legitimization of CCP’s regime and create domestic instability in the country. Additionally, CCP propaganda has increasingly become an effective weapon for stable governance. President Xi is popular across China for his Belt and Road Initiative, which has been pursued by his party as a “priority” and one that is set to serve as a “new platform for international cooperation” that promotes shared development.

Under the Belt and Road Initiative, China is solving for its overcapacity problem, increasing its companies revenues, and deploying capital to build and control strategically-located infrastructure it needs along its trade routes.

Africa is currently facing an infrastructure funding gap of $130 — $170 billion annually and is also expected to face additional costs due to climate change of $20 — $30 billion per year. This is a goldmine for Chinese state-owned companies (SEOs), which can build and fund these infrastructure projects and as a result generate more profits. Chinese firms signed 1,922 new engineering contracts in 61 B&R countries, with a total contract value of $47.79 billion. The combined revenue of Chinese companies from contracted engineering projects in countries along the B&R increased 17.8% in the first half of the year. As a result, Chinese companies are dramatically moving up global rankings with 107 Chinese firms (75 state-owned) listed on Fortune’s Global 500 countries' largest companies by revenue in 2017 up from only 10 firms (9 state-owned) in 2000.

Chinese SEOs engagement in the Belt and Road initiative is not only for profit generation but a strategy to create one of the most extensive maritime networks in the world. This involves acquiring strategically-located port assets in countries in the Indian Ocean, the Middle East and Africa, the Mediterranean and northern Europe, and Latin America. China’s involvement in Djibouti is a perfect example of how China is doing this. Djibouti is a small country in Africa, strategically located at the intersection of the Red Sea and the Gulf of Aden in the Horn of Africa. It also regards itself as a critical entry point into African markets — where 85% of cargo traffic in Djibouti is either going to or coming from Ethiopia, with the small country handling more than 90% of its neighbor’s larger trade.

How important is Djibouti, really? Djibouti occupies a strategic location adjacent to the Bab el Mandab Strait, where 12.5–20% of global trade passes every year — making it the world’s critical corridor for international shipping. With the growing Chinese investment and loans, China owned 75% of Djibouti’s external debt.

Djibouti is slowly becoming the world’s key military base where it is currently hosting its former colonial power — France, China, the United States, Japan’s only foreign military base, Italy, while troops from Germany and Spain are hosted by the French. Located between Somalia, Eritrea, and Yemen, Djibouti occupies a strategic location adjacent to the Bab el Mandab Strait, which is a critical corridor for international shipping. It’s geographic location and stability in a volatile region have made it an important playground for world powers who are either carrying out surveillance and counterterrorism strikers or deterring the threat of piracy to international shipping lines.

China’s involvement in Djibouti has been in building a military base just miles from a critical U.S. military base, the Doraleh Multipurpose Port, Africa’s largest free trade zone and high-speed rail that connects Ethiopia to Djibouti. The high-speed rail that was built to connect Ethiopia to Djibouti is part of a trans-African rail project that will be crossing the African continent from the Red Sea to the Atlantic Ocean. Djibouti International Free Trade Zone (DIFTZ) will be managed by Djibouti along with three other Chinese companies: China Merchants Group, Dalian Port Authority, and IZP.

Djibouti is projected to take on public debt worth around 88% of the country’s overall $1.72 billion GDP, with China owning the lion’s share. Djibouti has been flagged as one of the eight countries that are threatened by the Belt and Road debt, according to the Center for Global Development’s report. But what happens to countries that are in debt with Chinese loans? The debt has either been forgiven or China takes control of the infrastructure as recompense.

Sri Lanka, unable to pay off its Chinese debt, recently lost one of its major port — Hambantota port — on a 99-year lease to Chinese firms. The Hambantota deal was valued at $1.1. billion, whose recompensation cleared the debt. Djibouti partnered with China Merchants Ports Holdings Company, or CMPort — the same state-owned corporation that gained control of the Hambantota port in Sri Lanka — to build the Doraleh Multipurpose Port. Djibouti is at a high risk of losing its port to a similar deal if it is not able to pay off its growing debt.

The B&R Initiative is not only meant to push China’s overcapacity outwards but to also change the global trade order that China considers highly imbalanced to the western powers’ favor. Given its size, the B&R is a key vehicle for the Chinese government to implement its thinking behind global trade and investment system.

The People’s Bank of China Governor Zhou Xiaochuan gave a speech in 2009 called for a reform of the international monetary system, where he described the current trade system premised on the US dollar as unsustainable. China has been pushing for its currency, the Yuan (RMB), to replace the USD as the world’s global currency to give it more control over its economy, given that China still relies on the dollar for the bulk of its trade and to store foreign reserves. Achieving this would not only ensure that the yuan sets prices of international commodities from oil to iron ore but also act as an acknowledgment from the west that China is a rising superpower.

“Proper representation and a bigger voice for the developing countries are the need of the hour. For instance, being the world’s third-largest economy and the largest foreign reserves holder, China should get its due place in the monetary body.” — Yi Xianrong

But this change in global currency push by China has been met by a lot of obstacles, where it would require acceptance from nations that have long used the dollar and hold huge stockpiles of the U.S. currency. The Belt and Road Initiative is, however, boosting RMB internationalization. The use of RMB in countries involved in the Belt and Road Initiative helps Chinese investors get around bottlenecks in exchange rates, financing, and debts, and furthermore promote the currency’s status in the international monetary system. Settlement in RMB ensures that Chinese companies operating in the continent, avoid exchange risks and this will also increase Chinese companies’ financing capacity and extend Chinese financial institutes’ presence overseas. China is becoming a major creditor on the platform of the Belt and Road where many projects undertaken by Chinese companies are supported by Chinese financial institutions.

In 2005, Zimbabwe announced that it would make the Yuan its legal tender after China canceled $40 million in debts. Several African countries are moving towards using Yuan as their reserve currency. A number of countries in Africa, including Nigeria, Zimbabwe, and Ghana, are already using the RMB as part of their settlement and reserve currency. With the increasing Sino-African trade and investment, there is a growing demand for cross-border RMB resettlements that would increase the penetration of the currency into the African market. Nigeria also signed a currency swap worth $2.4 billion with China, allowing companies to avoid the difficulty of dealing in dollars while doing business in China and vice-versa.

It is clear that Chinese interests in Africa are part of China’s global dominance strategy, with the Belt and Road Initiative creating the necessary infrastructure for this. When African leaders say that China’s involvement in the region is a win-win relationship, I often worry that they don’t see the bigger picture. This is not indeed a zero-sum game and China’s involvement in Africa comes at the expense of the continent.

Rwandan President Kagame endorsed China’s involvement in Africa, during the FOCAC 2018 summit shared, “Africa is not a zero-sum game. Our growing ties with China do not come at anyone’s expense. The gains are enjoyed by all who do business with us.” But is this necessarily the case?

Ghana recently got into a “barter arrangement” with China to acquire $2 billion worth of infrastructure financing support and China would, in turn, take refined bauxite from Ghana. The $2 billion infrastructure financial support provided by Sinohydro will not be added to the debt stock and will involve a moratorium period of three years to give Ghana time to establish an aluminum refinery. After which, Ghana will fulfill its part of the barter agreement over another 12-year period. Critics worry that the value of bauxite that will be acquired during the contracted period is set to be worth more than the pledged $2 billion. If so, how will Ghana be tracking and quantifying the value of bauxite acquired? In addition to the $60 billion, President Xi pledged debt forgiveness to Africa’s least developed countries that could not pay off their debt. But what else is part of this debt forgiveness package?

I am not calling for China to stop investing and financing in Africa. China’s infrastructure financing in the continent is crucial given the infrastructure funding gap that is impeding the region’s growth. What matters most is that African governments need to start making sure they negotiate for better deals that also match their own state as well as regional interests. Africa’s engagement with China is far from a win-win deal situation. Africa, via the African Union, needs to be strategic with its engagement and the first call of action is by creating an “Africa -China Strategy Taskforce”.

The Africa — China Strategy Taskforce will provide a comprehensive approach on how Africa can strategically deal with China, to ensure that Africa is not a zero-sum growth. This task force/department will also actively acquire data on Chinese engagement in Africa. The current lack of transparency in China’s involvement in Africa has made it hard to, for example, comprehensively see whether past FOCAC pledges from China actualized to real projects. Additionally, it is important for African governments to conduct feasibility studies on the economic benefits of projects before signing up with China. President Xi pledged that China’s investment in the region was not for vanity projects — but how do you define a vanity project from an African perspective? Such data-driven decisions will be informed by a strategic task force, whose main agenda is to ensure that Africa benefits from its relations with China.