Unveiling the Diversity of Chinese Finance in Africa

Image: Flickr, Osrin
Image: Flickr, Osrin

China increasingly is playing a crucial role in African economies.

Two-way trade between China and Africa exceeded U.S. $106 billion in 2008 and Beijing is the leading trading partner with South Africa, the continent’s largest economy.

The role of Chinese finance is a key driver of this trend. Through diversification of instruments and sources it is setting the pace for Chinese engagement and concurrently providing a window into its changing approach to global finance.

The conventional view of Chinese finance in Africa is that it is a lump sum concessional loan, negotiated in secret between Beijing and the host government, built around the twin pillars of a substantive Chinese investment in infrastructure in exchange for access to African resources. The idea is that it is all wrapped in a commitment to non-interference and peopled by Chinese companies, unskilled labour and supplies.

Such is the power of this image that African leaders themselves have been seduced by it. Former leaders Olus?gun Obasanjo of Nigeria, Omar Bongo of Gabon and, most recently, Guinea’s Moussa Dadis Camara all believed that this was the definitive Chinese approach and pursued arrangements with Beijing on this basis. And in the main, their efforts to secure such deals have been dogged by controversy.

Chinese financing towards the continent, in fact, has always been more diverse than is commonly assumed. Financial restrictions on Chinese banks in the past have been placed by Beijing, which have limited their role to operating in the domestic setting when coupled with smaller reserves at the time and lack of experience. Following a series of policy innovations – especially after the establishment of national policy banks in 1994 and the subsequent opening of commercial banking – the scope for involvement abroad widened considerably.

Today, the spectrum of Chinese financial institutions operating in Africa ranges from those with direct ties to the government and its largesse to that of an emergent group of private banks and investment houses.

Those with the closest links to Beijing, such as the China Development Bank, are involved in conventional project finance as well as some more politically-motivated projects, such as the China Africa Development Fund.

China Eximbank, though obviously a policy bank and involved in large-scale infrastructure projects, nonetheless has increasingly sought to emulate the practices and conventions found in other leading national export banks.

Industrial and Construction Bank of China (ICBC), the world’s largest by market capitalisation, has pursued a joint venture strategy since 2007, purchasing 20 percent of Standard Bank and benefitting from its established position across Africa. It has been taking the lead in structured project finance deals and, through Standard Bank, is poised to use its financial resources to expand into retail banking.

Private finance like China Merchant Bank is testing the waters in Africa while the murky Chinese International Fund (CIF) is pursuing its own joint venture strategy in Guinea and Zimbabwe.

Understanding this diversity of Chinese financial actors is important not only for African policy makers and corporations, but it also sheds light on the changing nature of China’s business engagement with Africa.

With increasing Chinese government financing linked to real projects awarded to Chinese companies, the flow of these funds needs to be managed. Yet the presence of Chinese banks abroad and in emerging markets in particular is limited as these institutions are unable to handle remittances and advances in African countries. The pressure to have a more meaningful presence in Africa is to a large extent driven by the corporate customers of Chinese banks in the domestic market. Such customers would much rather be dealing with Chinese banks or banks that have partnered with Chinese banks.

A series of recent initiatives by Beijing has bolstered the exposure in Africa of Chinese financial institutions.

At the Forum on China-Africa Cooperation meeting in Egypt late last year, China announced it would support Chinese financial institutions in setting up a special loan of U.S. $1 billion for small- and medium-sized African businesses. This is a clear sign that Beijing wants to encourage them to take a credit view on local companies. This was further supported by a Chinese commitment to cancel debts associated with low- or interest-free loans that were due to mature by the end of 2009, paving the way for improved credit terms in the future for these countries.

The broader implications of Chinese experience in the financial sector in Africa and other parts of the developing world are manifold. Chinese corporates have seen a movement to conduct overseas trade on open-account rather than the more traditional letter-of-credit terms with overseas customers. Moreover, in the wake of the global financial crisis, China has demonstrated a willingness to play a much more assertive role in international finance by proposing alternatives to the U.S. dollar in settling international trade transactions.

China is currently piloting international trade settlements in renminbi (yuan) in a number of Chinese cities. The pilot scheme allows for 400 approved Chinese enterprises in five approved cities, including Shanghai, Guangzhou, Shenzhen, Dongguan and Zhuhai, to settle trades with their counterparts in Hong Kong, Macau and Asean member countries.

If the renminbi is finally allowed to trade freely it is only natural that a large part of international trade will be conducted in renminbi. For Africa, whose trade is rapidly shifting eastward but is still dominated by the dollar (except in Francophone West Africa) the switch to renminbi will be a natural progression if the current trends in trade continue.

Clearly then, as Chinese corporates evolve and their banking system becomes more internationalised, these changes seen in the developing world will be increasingly reflected in global trends in international finance.

7 Feb 2010