Chinese debt traps in Africa? The bigger worry is bondholders, study finds

China is the continent’s biggest bilateral creditor but most of the debt is due to private Western holders of African debt, according to a new report
Private-sector manoeuvring rather than Chinese scheming more likely to induce a wave of defaults, researchers say

Belt and Road Initiative

Jevans Nyabiage

Published: 11:00am, 6 Jun 2022

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The rise in African debt due to Chinese lending pales in comparison with the debt burden created by private creditors in the last decade, according to a new report taking aim at accusations that Beijing engages in “debt-trap diplomacy” on the continent.

The study – by Harry Verhoeven from the Centre on Global Energy Policy at Columbia University, and Nicolas Lippolis from the department of politics and international relations at the University of Oxford – says the debt-trap narrative is a function of China-US strategic and ideological rivalry rather than a reflection of African realities or perspectives.

“What keeps African leaders awake at night is not Chinese debt traps. It is the whims of the bond market,” the report says.

Debt-trap diplomacy involves extending loans to countries and taking control of key assets if the debtor defaults on repayments.

While China is the continent’s biggest bilateral creditor, most of the debt is due to private Western holders of African debt, according to the researchers. Capital, in the form of debt repayments, thus continued to flow from Africa to Europe and North America, the study said.

Verhoeven said the percentage of African debt owed to China was less compared to that borrowed from private creditors.

“[Chinese debt] is not the most rapidly growing segment of debt. Other credit lines have grown a lot more in recent years, especially those towards commercial creditors,” said Verhoeven, co-author of the report “Politics by Default: China and the Global Governance of African Debt”.

“These are bondholders, people from London, Frankfurt and New York who are buying African debt. That segment in the last couple of years has grown much faster than any liabilities that African states owe other creditors.”

Are Chinese loans putting Africa on the debt-trap express?

The report cited confidential estimates of international financial institutions (IFIs) that showed sub-Saharan Africa’s government debts to Chinese entities at the end of 2019 totalled around US$78 billion. This was about 8 per cent of the region’s total debt of US$954 billion and 18 per cent of Africa’s external debt.

The researchers said roughly half of Africa’s public debt was domestically issued, and the other half was owed to external actors. Of the latter, one-third was owed to bilateral official partners, one-third to international financial institutions and one-third in the form of Eurobonds denominated in a currency other than that of the issuing state. Of the bilateral debt, the IFIs estimated that about half was owed to China, the researchers said.

This is broadly supported by the World Bank’s publicly available International Debt Statistics, which show the continent has about US$427 billion in external debt.

Moreover, the publicly available data shows that Chinese-held debt makes up roughly half of the bilateral debt stock, again in line with the IFI estimates.

The Global Development Policy Center at Boston University and the China Africa Research Initiative at Johns Hopkins University estimate that Beijing has lent about US$150 billion to African countries since 2000, mostly through the China Eximbank (60 per cent) and the China Development Bank (25 per cent), suggesting that about US$75 billion has been paid off already.

“This is a sizeable amount, but not large enough to have been the main driver of the debt build-up since 2004–05,” the study said.

Furthermore, it said the data revealed that Chinese lending, rather than driving a continentwide expansion of debt, was heavily concentrated in five countries: Angola, Ethiopia, Kenya, Nigeria and Zambia.

“The idea that Chinese debt traps jeopardise the entire continent is hyperbolic,” the study said.

Africa has a question for Beijing: will you forgive us our debt?

It is also a claim that China has repeatedly rejected.

In Nairobi in January, Chinese Foreign Minister Wang Yi said the debt-trap claims were an “utterance trap” created by those forces that do not want to see Africa speed up development.

“China has never attached any political strings or imposed anything on others,” Wang said.

Some African leaders have also dismissed the debt-trap allegations, saying Chinese money had helped build infrastructure on the continent that the West had shunned.

Among them is Zimbabwean President Emmerson Mnangagwa who said last month: “We have seen Chinese capital supporting landmark and iconic infrastructural projects across the African continent.

“Here in Zimbabwe, China has helped fund and implement several projects in the sectors of energy, air transport, water, real estate, industrial value addition, mining and defence.”

02:06

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In the last two years, China has also come in for criticism for allegedly not doing enough to help African countries struggling to make repayments amid the coronavirus pandemic.

To give poor nations time to cope with the ravages of the pandemic, the Group of 20 wealthy nations, the IMF and the World Bank, proposed the Debt Service Suspension Initiative (DSSI) and followed up with the Common Framework plan for restructuring debt.

Beijing, through the Ministry of Commerce and China International Development Cooperation Agency, and China Eximbank signed up to the G20 initiative, freeing up more than US$1.3 billion in service payments from dozens of low and middle-income countries, mostly from Africa.

CDB and Industrial and Commercial Bank of China, which Beijing claims are not official creditors but rather for-profit lenders, initially opted out. In response to US criticism, these institutions made numerous “goodwill” gestures, postponing roughly US$750 million in repayments by countries such as Angola and Zambia, the study said.

According to the World Bank, from May 2020 to December 2021, the DSSI suspended US$12.9 billion in debt-service payments owed by participating countries to their creditors.

Report casts doubt on Chinese debt-trap threat to Kenya’s Mombasa port

But little else has happened as a result of the DSSI and the Common Framework. Only three countries – Chad, Zambia and Ethiopia – sought help and not one of them has received any debt relief.

In any case, private capital is the single greatest growth factor for African debt in the last decade, and it is under no obligation to abide by the DSSI or the Common Framework, according to the authors.

“Contrary to the debt-trap narrative, if a wave of African defaults materialises in the near future, as IFI officials have been fearing since at least 2015, it will be catalysed more by private-sector manoeuvring and intransigence than by Chinese scheming,” the study said.

“All efforts are demanded of official creditors – which is a very clear targeting of China,” Verhoeven said. “We argue it is more about the competition for power and influence between the United States, and China rather than thinking about what African states need.”