China and Africa: Whither the Belt and Road?
While economic ties between China and African countries have vastly expanded over the past decades, falling commodity prices and rising debt levels risk reversing this process. Can China’s Belt and Road Initiative reinvigorate the relationship?
Economic links between China and Africa have increased dramatically over the past 20 years. Trade has risen more than 40-fold since the mid-1990s, and China is now sub-Saharan Africa’s largest trading partner. China’s foreign direct investment in Africa has also risen sharply, although based on official statistics, China still only accounts for about 3 percent of the stock of FDI in Africa. And finally, China is a major source of loan financing for public infrastructure projects, with available data suggesting that China is now Africa’s largest bilateral creditor, with total debt of about $94 billion in 2015. Natural resources feature prominently in the economic ties between China and Africa. For example, in 2015, 70 percent of Africa’s exports to China consisted of fuels, metals, or mineral products. But Chinese investment tends to be more diversified, covering sectors from telecommunications to financial services, and Chinese-financed projects range from hydroelectric dams to ports and railways.
Figure 1: Sub-Saharan Africa’s total exports by partner (billions US$)
Source: Direction of Trade Statistics (IMF) and authors’ calculations
This rapid growth in economic ties has served both Africa and China well. For Africa, trade with China has boosted economic development in many countries, and the financing of infrastructure projects, for which little concessional financing is available, has helped address crucial bottlenecks to industrial development and structural transformation. For China, while trade with Africa remains a small part of its total foreign trade, many of its project loans are tied to Chinese suppliers, and, as a result, about a quarter of all Chinese engineering contracts worldwide by 2013 on a stock basis went to sub-Saharan Africa, with most of these contracts being awarded in energy (hydropower) and transport (roads, railways, ports, aviation).
Recently, however, these ties have come under strain. With sharply falling commodity prices, Africa’s export receipts have declined since 2014. While there are many different reasons behind this decline in commodity prices, one key factor has been the rebalancing of China’s growth model away from investment towards relying increasingly on domestic consumption. This in turn has had a negative impact on growth in Africa. The continent’s almost decade-old trade surplus with China has now turned into a trade deficit as lower growth in China curbs import demand.
Figure 2: China’s exports to and imports from Sub-Saharan Africa (Billions US$, 6-month moving average)
Source: Direction of Trade Statistics (IMF) and authors’ calculations
In addition, borrowing space in African countries is shrinking rapidly. After the debt reductions of the 1990s and 2000s, many African countries had comparatively low levels of external debt. At the same time, traditional partner countries were shifting from providing loans to grants, and many were focusing on social sectors rather than infrastructure. Against that background, Chinese lending agencies started to provide significant financing for infrastructure projects in Africa. It is estimated that between 2000 and 2015, the Chinese government, banks and contractors extended US$94.4 billion worth of loans to African governments and state-owned enterprises. At a political level, this was underpinned by the Forum for China Africa Cooperation (FOCAC), which beginning in 2000 brought together African heads of state and the Chinese leadership on the occasion of triennial summits. At the most recent FOCAC summit in Johannesburg, China pledged support of US$60 billion over the period 2015-18. China’s recently-launched Belt and Road Initiative carries the potential for providing further financing for Africa. But the reality is that many countries are facing shrinking borrowing capacity. Public debt in the median sub-Saharan African country rose from 34 percent of GDP in 2013 to an estimated 53 percent in 2017, and debt service as a share of revenue has doubled. In some oil-producing countries such as Angola, Gabon, and Nigeria, debt service amounts to more than 60 percent of government revenues. More than 40 percent of low-income countries in sub-Saharan Africa are now classified at high-risk of debt distress. As a result, both the demand and the feasibility of large infrastructure projects is falling. And some are already facing difficulty servicing existing loans.
With shrinking borrowing space, can FDI pick up the slack? Based on official data from China’s Ministry of Commerce, FDI flows from China to Africa peaked in 2008 and 2013 and have slowed down markedly since then. Notably, this decline in Chinese FDI to Africa is occurring despite a surge in Chinese outward capital flow, especially by Chinese corporations, signaling investors’ continued appetite for investments and high returns outside China. Of course, this trend is only indicative of the short term. Much of China’s lending to Africa – as well as the political initiatives from FOCAC to the Belt and Road Initiative (BRI) – is based on the recognition that, over the longer term, Africa’s growth potential is significant. Provided African countries can pursue sound economic and social policies, the continent is expected to benefit from a huge demographic dividend, which could raise GDP per capita by 25 percent by 2050.
But there are at least two caveats to that rosy forecast. First, tighter fiscal space and rising global interest rates will make foreign financing less ample. In the absence of compensating FDI flows, this will put a premium on the development of domestic financial sectors in Africa and reinforces the need for a much more rapid expansion of domestic revenue bases. Second, dramatic advances in artificial intelligence (AI) and robotics may call into question the assumption that Africa can become the next manufacturing hub of the world. In a recent study of the impact of automation on workers in advanced economies, the OECD estimated that about 14 percent of workers are at a high risk of having most of their existing tasks automated over the next 15 years, and another 30 percent will face major changes in the tasks required in their job and, consequently, the skills required. Another study by McKinsey estimates that automation will displace almost 13 percent of South Africa’s current work activities by 2020. With many African countries still on the threshold of development, this may block industrialisation, which is often seen as the road to productivity growth and income convergence. Of course, AI can also create new opportunities for Africa, enhancing labor productivity and providing cheaper and more reliable services, for example in education and health care. But reaping these benefits will require nimble policies, both in the economic and social areas. This is likely the most important challenge – and not only for Africa.
Can the Belt and Road Initiative help address this challenge? If it is limited to more official lending for infrastructure development, it is unlikely to be the solution, given the shrinking borrowing space in many African countries. But if the Belt and Road Initiative can catalyse more private investment, including in sectors that boost productivity in Africa, then it may fulfill its promise.
Authors: Wenjie Chen, Economist, Research Department, International Monetary Fund. Roger Nord, Deputy Director, Institute for Capacity Development, International Monetary Fund.
 Unrecorded FDI is likely to be much larger, particularly through small-scale investments. See China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa by Howard French.
 Chen, Wenjie and Roger Nord. “A Rebalancing Act for China and Africa – The Effects of China’s Rebalancing on Africa’s Trade and Growth”. International Monetary Fund, African Departmental Paper Series, 2017.
 International Monetary Fund (IMF). “African Regional Economic Outlook: Slow Recovery amid Growing Challenges.” Washington D.C.: IMF, 2018.
 IMF, 2018, op. cit.
 For example, China is one of the principal external creditors of the Republic of Congo, which has recently embarked on a restructuring of its external debt.
 International Monetary Fund (IMF). “African Regional Economic Outlook: How Can Sub-Saharan Africa Harness the Demographic Dividend?” Washington D.C.: IMF, 2015.
 Organisation for Economic Co-operation and Development (OECD). “Transformative Technologies and Jobs of the Future.” Paris: OECD, 2018.
 McKinsey Global Institute. “Jobs Lost, Jobs Gained, Workforce Transitions in a Time of Automation.” 2017.
 Rodrik, Dani. “Premature Deindustrialization.” Journal of Economic Growth 21 (2016); Rodrik, Dani. “Unconditional Convergence in Manufacturing.” Quarterly Journal of Economics 128, No. 1 (2013).