CONSUMER INSIGHTS | 30 NOVEMBER 2022

The evolution of
China-Africa lending

Author-Kai-Zhu

Kai Zhu

Head: China-Africa
Corridor at Absa CIB

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China has long recognised the investment potential of Africa, deepening its relationship with the Continent over the past two decades. By establishing itself as a crucial partner to Africa on trade, and as a substantial lender and investor, China has supported key projects, from infrastructure, ICT to agriculture.

The Centre for Global Development recently found that throughout Africa’s infrastructure projects, China’s policy and development bank‘s lending reached $23bn USD over a period of 13 years.

It is therefore not surprising that Chinese banks now make up about one-fifth of all lending to Africa. Most of this is concentrated in resource-rich countries including Angola, Djibouti, Ethiopia, Kenya and Zambia – with annual lending peaking at $29.5bn in 2016.

However, throughout the pandemic, China’s lending to Africa has slowed down significantly, falling by 78% to a 16-year low in 2020. This change is largely a result of the impact of Covid-19 both in China and Africa, meaning that China’s risk appetite has lessened. While this might cause initial concern, the impact of Covid-19 does appear to be waning.

The impact of COVID on China-Africa lending

China’s ‘Dynamic Zero Covid’ policy has meant that the country has stayed relatively locked down towards cross border travels since the initial outbreak of Covid-19 in the early part of 2020, this has meant that the government’s focus has been directed towards internal policies and stabilising its domestic economic growth, rather than external strategies.

The impact of Covid-19 both on Africa, and in China, has been two-fold.  On one hand, the pandemic eliminated travel by government and business travellers to and from China which has previously been an essential part of brokering new financial agreements and funding projects in the region.  Compared to 2018 and 2019 which saw 66 and 43 loan agreements penned, there were only 11 new loan agreements in 2020.

This decline in loans has been further exacerbated by Chinese banks adjusting their lending practices in the wake of Covid-19.  With the economic fallout of the pandemic– including inflation, interest rates rising, and deployment of more government funding to covid fights – continuing to play out, many Chinese lenders are taking an inward-facing approach to investment strategy.  They are moving away from the previously high-volume, high-risk paradigm that they once used, and shifting into lending practices that are smaller and more manageable.

This has meant that there are fewer deals being penned between Africa and China, and funding, especially in the infrastructure and energy space, has almost come to a halt.  However, there is reason to believe that this won’t be an ongoing trend, but will be short-lived.

Do all “good things” have to come to an end?

While on the surface shifting Chinese lending patterns are a problem for the Continent, these factors should not be cause for immediate concern as the bottlenecks to investment are short-term shocks and Africa has also the ability to reattract waning capital inflows.

Chinese lenders are often risk-adverse, and Africa must instil a level of confidence through good governance and stability - and we’ve already seen that Africa is making long and fast strides to gain investor trust.

Across Africa, technology, AI and automation is driving a digital revolution that is not only enhancing efficiency and competition, but also transparency and governance, crucial elements to increasing investor confidence.  Africa is also focusing on strengthening its capital markets by ensuring high-quality, timely and trustworthy data which can help investors make sound decisions and can protect economies from volatility.

Further, the General Administration of Customs of China recently noted that bilateral trade between China and Africa amounted to $254.3 million in 2021, an increase of 35.3% from 2020.  In the first quarter of 2022, China’s Customs Data confirmed that trade between the two regions increased by 23% to $64.6 million.

As trade and lending picks back up for African countries in debt relief and restructuring discussions, China, similar to other lenders such as Eurobond holders, Western banks and DFIs, needs to focus on existing projects under construction, rather than on new greenfield projects.

Because of the ongoing relationship between China and Africa over the past decades, there are a huge number of incentives for China to continue its involvement on the continent.  While Chinese lending to Africa is still down from pre-pandemic levels, Beijing has reaffirmed its long-term commitment to Africa by taking on a more active role in African stability, notably hosting the Horn of Africa Peace Conference in Addis Ababa at the end of June, as well as recently forgiving 23 interest-free loans for 17 African countries.  In the grand scheme of things, Covid-19 is a short- to medium-term problem which is still being felt heavily in China. As borders continue to open up, the negative impact it has had over the past couple of years on African investment will likely subside and return to pre-pandemic levels.

Author-Kai-Zhu
Kai Zhu

Head: China-Africa Corridor at Absa CIB

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