Why China is hesitant to finance Africa energy projects

The Chinese government has suspended funding for energy projects in Africa as rising risks of debt distress among several African countries and Beijing’s internal economic challenges push lending to the continent to below $1 billion, the lowest in about 20 years.

Beijing’s shift in its lending policy towards Africa has been bolstered by President Xi Jinping’s determination towards ‘greening’ his massive Belt and Road Initiative (BRI) and supporting small scale projects (with values under $50 million) which are economically feasible, with more beneficial social and environmental impacts.

Latest data from Boston University’s Global China Initiative (GCI) shows that Beijing has replaced funding for energy projects with new projects in environment and education sectors.

The GCI policy brief report dated September 2023 shows that although the African energy sector has historically received the most Chinese loans, no sovereign loans for energy projects were identified in the year 2021 and 2022.

So far Chinese lenders have extended $59.95 billion in loans to African governments, of which almost half is to fossil fuel projects (oil, coal, and gas/LNG).

“Given the heavy fossil fuel composition of Chinese finance for energy projects in Africa and China’s commitments to greening the BRI, it is likely that what appears to be a hiatus from funding energy projects may just be a pause, as lenders scope out greener projects,” according to the report.

For instance, from 2000 to 2022 Africa’s energy sector received the bulk of the Chinese funding at 35 percent followed by Transport (29 percent), ICT (8 percent), Financial Services (6 percent), and Industry, Trade and Services (5 percent) and others (17 percent).

However, in the past two years (2021 to 2022) the trend has revised with funding for energy projects, financial services and industry, trade and services dropped.

Instead, the transport sector received the bulk of the funding at 45 percent, followed by Environment (21 percent), ICT (12 percent), and Education (10 percent), Defence and Military (6 percent) and others (6 percent).
Leveraging future expectations

According to the report a new state of Chinese lending to Africa is unfolding, characterised by less large-scale loans over $500 million, more loans with smaller values under $50 million and loans with more beneficial social and environmental impacts.

“Emerging trends in Chinese global overseas development finance indicate shifts in Chinese lending are moving toward a “small is beautiful” approach. Loans are also supplied to sectors with more social and environmental impacts, such as environment and education,” says report.

According to the report, 39 Chinese lenders provided 1,243 loans amounting to $170.08 billion to 49 African governments and seven regional institutions during the period from 2000-2022.

This is equivalent to 64 percent of the World Bank’s $264.15 billion in sovereign loans to Africa and almost five times the African Development Bank’s $36.85 billion in sovereign loans to Africa in the same time period.

The Export-Import Bank of China (Chexim) committed 53 percent of all loans, twice as much as the next largest lender, the China Development Bank (CDB). However, together, Chexim and CDB committed 79 percent of all loans by amount.

Energy, transport and information and communications technology (ICT) sectors received 72 percent of all loans, showing that most loans were extended to infrastructure development sectors.

Angola, Ethiopia, Kenya, Zambia, Egypt, Nigeria, Sudan, South Africa, Cameroon, and Ghana borrowed 69 percent of the loans in the 2000-22 period finance.

The report however notes that in the recent years, the levels of large-scale Chinese loan finance to Africa have waned.

For instance, from 2021 to 2022, only 16 new loan commitments worth $2.22 billion from Chinese lenders to African government borrowers were recorded.

In 2021, seven loans totalling $1.22 billion were signed, and in 2022, nine loans amounting to $994.48 million were signed, signifying two consecutive years of lending to Africa below $2 billion.

The Export-Import Bank of China continued to be the top lender in Africa, providing nine out of the 16 loans, amounting to $1.42 billion or 64 percent of all loans by amount in 2021-2022.

For Africa, shifts in Chinese lending are a result of debt challenges in Africa and China’s changing domestic, regional and global priorities.

“Amidst borrower debt profiles for some African countries and rising domestic challenges, Chinese lenders’ priorities have shifted globally,” says report.

Although Africa’s economy grew by 1.6 percent to 4.8 percent from 2020-2021, respectively, bolstered by higher oil prices, growing global demand and domestic consumption in most countries, almost two-thirds of African countries experienced currency depreciation and increased external debt levels.

Read: Africa’s creditors come calling as debt distress looms large
Debt distress and relief

This was partly due to the effects of the Covid-19 pandemic, with about 40 percent of African countries being in high risk of debt distress and about 18 percent in debt distress in 2021.

By the end of 2021, 30 African countries out of 48 countries overall participated in the Group of 20 (G20) Debt Service Suspension Initiative (DSSI).
Particularly in Southern Africa, a region that historically received the highest amount of Chinese finance, some countries were managing unsustainable debts and sovereign downgrades.

Tightening global financial conditions, such as increased interest rates and Russia’s war in Ukraine, further exacerbated debt and slowed growth in 2022.

Some top African borrowers pursued debt relief in 2021-2022. For instance, Ethiopia and Zambia requested debt relief treatment under the G20 Common Framework in 2021, with Ghana following in 2022. Angola received $5.2 billion in debt deferment during the DSSI period.

Kenya, Republic of Congo, Ethiopia, Zambia, and Tanzania received debt deferrals and refinancing from Chinese lenders.

Some Chinese lenders expressed caution about adding to debt burdens.

Additionally, China experienced domestic challenges during the 2021-2022 period linked to declining real estate/land values and heightened government spending during the pandemic which led to revenue shortfalls for local governments in 2021.

Other Chinese challenges which have spilled over to this year (2023) include rising youth unemployment, an aging population and geopolitical tensions which began to impact the future expectations for the Chinese economy.

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