China-Africa Relations: Debt and Investment – Are there new models for engagement?
Published on: 26/02/25 By: Raka De
As net capital outflows from African countries to China have become negative, a key question for dialogue is how China-Africa relations can adapt, particularly in light of recent uncertainties surrounding development support from the United States, declining Official Development Assistance(ODA) for low-income countries, and various global headwinds.
Professor Tang Xiaoyang, Chair and Professor of International Relations at Tsinghua University, spoke about the general global financing conditions, including high U.S. interest rates following the COVID-19 pandemic, which have exacerbated capital outflows from emerging markets. Contrasting with the 2010s, there is now a prolonged period of low commodity prices and significantly constrained fiscal space. The decline in risk appetite among international investors leads to higher premiums and lower volumes for African countries. Coupled with reduced bilateral and multilateral sources, there has also been an evolution in bilateral lending through the emergence of a non-Paris Club, which includes lenders such as China and India.
These new lending flows are different, and in the current context, bilateral lenders will likely remain cautious due to uncertainty from both the interest rate environment and increasing restructuring risks. At the same time, the appetite to invest in Africa remains strong: Commitments at FOCAC amounted to RMB350 billion, or about $50 billion, but whether these will take the form of new investments or lending remains in question. The international environment – and the role of multilaterals such as the IMF and the World Bank, collaborating with the newer BRICS multilaterals, will remain central. Together, they can help avoid turbulence in the international financial markets while also channeling investment towards regional initiatives.
The second speaker, Hannah Ryder, CEO of Development Reimagined, highlighted the dynamics of supply and demand for investment, noting there has been excessive focus on the supply-side factors from China, while the unique dynamics of Africa remain underrepresented. The $50 billion USD commitment from FOCAC takes into consideration not only the evolving Chinese strategy but also recognizes the intentions of African agencies and governments.
She highlighted five trends that reflect the evolving China-Africa relationship. First, large flagship projects will still exist but will be more selective and oriented towards regional connectivity and cross-border integration. Second, FDI projects, deemed “small but beautiful”, will target innovation and strategic impact and diversify Chinese stakeholders. Third, Chinese institutions will seek to engage with multilateral agencies to allocate funds more efficiently. The recent MOU signed between the Africa Finance Corporation and China’s Exim Bank is an example. Fourth, the type of contracting will change: African governments will continue to self-finance many projects, and Chinese companies will remain important players in these procurements.
However, investment will move away from traditional engineering, procurement and construction (EPC) contracts towards Public-Private Partnerships (PPP), particularly with Build-Operate-Transfer (BOT) contracts. Moreover, African governments are seeking greater local participation in these projects and must enhance their capacity to successfully implement such complex PPPs. Fifth, in the context of the ODA slowdown and the freeze on USAID assistance, China will not replace existing ODA but may think about a localization agenda as part of its evolving engagement. While China has been able to substitute for US funding in some context (especially through the UN system), this is the exception more than the rule. China remains important as an exit strategy from traditional forms of aid. The concept of coevolutionary pragmatism was also discussed, calling upon a convergence of approaches across multiple sectors such as agriculture, infrastructure and environment. Coordinating mechanisms on the ground in one sector may have positive spillover impacts or alleviate constraints for other sectors.
In the discussion, participants raised questions about new modes of engagement among Chinese actors in development finance: new actors will need to emerge, while main actors such as Exim Bank and CDB are likely to evolve and focus more on a smaller set of projects. Panda bonds are viewed as instruments with strong potential, although Chinese investors worry about default risks. Another avenue would be to further use collaboration with multilateral funds.
The discussion generated five themes as avenues for future research for African institutes:
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1. How regional connectivity projects can have a greater impact while mitigating the usual risks of exposure to one single country.
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2. Identification of FDI projects that have worked, especially to allow complementarity between infrastructure and industrial projects; coevolutionary pragmatism
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3. Lessons learned from successful projects and how they might be used in different contexts
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4. Role of Chinese support in the context of regional institutions, such as the African Development Fund
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5. How institutional investors in Africa channel investments and how they can do so more effectively for the continent.
The discussion concluded with the energies for new approaches between African and Chinese actors, the need to strengthen African institutions to be more self-reliant, to think beyond debt in favor of trade and investment, and for a stronger voice in the multilateral system.