China’s approach to financing in Africa is undergoing a notable transformation, as evidenced by a significant increase in loan approvals to the continent in 2023. After several years of declining financial support, Chinese lenders approved $4.61 billion in loans last year, marking the first annual increase since 2016. This shift highlights Beijing’s evolving strategy to mitigate risks while continuing its economic engagement with African nations.

A Return to Lending Growth

For years, Africa benefited from substantial financial support under China’s Belt and Road Initiative (BRI), with annual loans exceeding $10 billion between 2012 and 2018. However, the onset of the COVID-19 pandemic in 2020 led to a sharp decline in lending, as both China and African nations faced economic challenges. Last year’s loan figure, a more than three-fold increase from 2022, indicates that China is cautiously re-engaging with Africa, albeit with a more strategic and risk-averse approach.

The Boston University’s Global Development Policy Centre, which tracks Chinese Loans to Africa through its specialized database, noted that Beijing appears to be seeking a “more sustainable equilibrium level of lending” while experimenting with a new strategy. This recalibration comes as China prepares to host African leaders at the Forum on China-Africa Cooperation, a triennial event that underscores the importance of Sino-African relations.

Focus on Financial Institutions and Renewable Energy

A key aspect of China’s new strategy is its focus on lending to African financial institutions rather than directly to national governments. More than half of the loans committed last year, amounting to $2.59 billion, were directed to regional and national lenders. This approach is seen as a risk mitigation strategy, allowing China to maintain its financial engagement with Africa while avoiding the debt challenges that have plagued several countries on the continent.

“Chinese lenders’ focus on African financial institutions most likely represents a risk mitigation strategy that avoids exposure to African countries’ debt challenges,” the Boston University study highlighted. This shift reflects a broader trend in China’s lending practices, where the emphasis is on financial stability and minimizing the risk of defaults in highly indebted economies.

Another notable trend is China’s increasing investment in renewable energy projects in Africa. Nearly 10% of the loans in 2023 were allocated to three solar and hydropower energy projects, signaling China’s growing interest in supporting sustainable energy initiatives. This marks a departure from previous investments in coal-fired power plants, aligning with global trends towards cleaner energy sources and sustainability.

Mixed Signals in China’s Financial Engagement

Despite these discernible trends, the study noted that China’s financial engagement with Africa does not yet have a clear direction. While the focus on financial institutions and renewable energy indicates a strategic shift, Chinese lenders also extended loans to struggling economies like Nigeria and Angola. These loans include a nearly $1 billion commitment from the China Development Bank to Nigeria for the Kaduna-to-Kano Railway, and a similar liquidity facility to Egypt’s central bank.

China’s relationship with Africa has evolved significantly since the early years of the BRI, when Africa featured prominently in Beijing’s plans to recreate the ancient Silk Road and extend its geopolitical influence. However, the momentum slowed in 2019 as China faced domestic economic pressures and African nations grappled with growing debt burdens. The pandemic further exacerbated these challenges, leading to a reduction in lending and leaving several infrastructure projects incomplete, such as the modern railway intended to connect Kenya with its neighbors.

Future of Sino-African Partnerships

As China continues to refine its approach to lending in Africa, questions remain about the long-term quality and sustainability of its partnerships on the continent. While the recent increase in loans suggests a renewed commitment, the varied nature of the 2023 loans reflects the complexity of China’s financial engagement with Africa.

“It remains to be seen whether China’s partnerships in Africa will retain their quality,” the Global Development Policy Centre observed. As Beijing balances its desire to support African development with the need to manage risks, the future of Sino-African relations will likely depend on the success of this evolving strategy.

(Adapted from EconomicTimes.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy, Sustainability