China's Africa loans 'underestimated risk, like those of US, Japan in past'

The slowdown in Chinese lending for African infrastructure projects was likely to happen because it mirrored past lending by other countries, and the coronavirus pandemic has only accelerated the trend, a Beijing-based finance professor has said.

Michael Pettis, a senior fellow at the Carnegie-Tsinghua Centre for Global Policy and a finance professor at Peking University, said that 10 to 15 years ago the Chinese government was largely following the same path every country before it followed when first investing abroad.

"It was significantly underestimating risk, and would soon begin pulling back sharply on its lending once it discovered how risky these loans could be," Pettis said. "Covid-19 - as it has done with so many other trends - seems to be accelerating this process."

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At the turn of the century, China moved aggressively into Africa in the hope of securing raw materials for its industries and markets for its products. In return, Africa received billions of dollars in loans for construction of infrastructure megaprojects, including ports, railways, airports, roads and power dams.

Chinese lending peaked in 2013 and has since been flat or declining, aside from a major deal by China Development Bank in 2016, when it recapitalised Angola's state-owned oil and gas company Sonangol.

China advanced US$17 billion in 2013, then US$12 billion in the next two years, according to the China Africa Research Initiative at the Johns Hopkins University school of advanced international studies.

In 2016, lending rose to US$29 billion, of which US$18 billion went to Sonangol. By 2018, loans had fallen to US$9 billion. In total, China has funded US$148 billion worth of infrastructure projects in the past two decades, making it Africa's biggest bilateral lender.

Pettis said a lack of experience and familiarity with international lending, notably to developing countries, caused China to underestimate the risks.

"I know a few people who are directly or indirectly involved in this process here in Beijing, and in every case I find that they know almost nothing about the history of lending to developing countries," Pettis said. "While they may have heard of previous periods of instability, they tend not to understand their causes."

He said this was not unique to China and had occurred every time a country had lent on this scale in the past century, such as the United States in the 1920s, the Soviet Union in the 1950s and '60s, and Japan in the 1970s and '80s.

"In every case, the country underestimated risks and expanded lending very rapidly at first, only to pull back sharply after a few years when it began to recognise how difficult and risky development lending can be," Pettis said.

In the past two years, a growing number of countries in Africa have fallen into debt trouble and have sought relief from wealthy nations and the Group of 20, including China.

Zambia became the first African country in the Covid-19 era to default - on a US$42.5 million repayment of one of its dollar-denominated Eurobonds after holders of the US$3 billion bond rejected the country's request to defer interest payments for six months.

Since then, Zambia and Angola have received debt relief from China to help alleviate debt service payment difficulties. Several other countries, including Djibouti, Ethiopia and the Republic of Congo, are in discussions with Beijing to restructure their debts.

Recently, China said it had suspended US$2.1 billion of debt service payments from 23 countries as the pandemic ravaged economies in Africa.

Deborah Brautigam, a professor of international political economy at Johns Hopkins University and founding director of the China Africa Research Initiative, said she expected lending by China to continue declining or remain flat.

She said that before the coronavirus outbreak, there were already many reasons countries were experiencing or at risk of debt distress, including economic collapse driven by war (Burundi, Central African Republic and South Sudan), populist spending (Ghana) and currency depreciation.

Since 2014, debt distress in African countries had been "primarily because of the collapse of commodity prices across the continent, particularly oil", Brautigam said.

China's big borrowers - Republic of Congo, Angola, Cameroon and Zambia - were all significantly affected by this, she said.

This article originally appeared on the South China Morning Post (SCMP).

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