Policy﹀
A Study on the Effectiveness of China's Sovereign Financing in Africa
2023-10-12
A Study on the Effectiveness of China's Sovereign Financing in Africa
Abstract
October 2023
Department of International Development Cooperation
Institute of New Structural Economics at Peking University
Along with the economic development of China, the role of China as a creditor is increasingly predominant. The policy objective of China’s financing to African countries is in line with the 2030 Sustainable Development Goals of the United Nations. China is also becoming a major contributor to filling in the financial gap of the development of Africa, which will be beneficial to the delivery of global development policies.
China’s financing to Africa rose rapidly around 2006, especially after the financial crisis in 2008. According to the database referred by the report, for the past two decades, from 2000-2020, China has overall made 160 billion USD financial commitment to African countries, among which China’s official lender is the majority, amounting to 56% of the loans. In addition, around 90% of the lending goes to low-income and lower-middle-income African countries. This report focuses on the sovereign financing of African nations. The scope of this lending category referred to the definition of the Ministry of Finance of China. The impact of China’s financing in Africa is an interactive result along with other types of lenders. China’s finance to Africa is development-oriented, covering infrastructure mostly, which is different from the commercial lenders driven by profit maximization. Apart from infrastructure construction, China’s lending also covers a wide range of sectors, including social welfare and industries, such as health, education, vocational training, agriculture, food, and so on. The infrastructure support is proven to be beneficial to the social sector as well.
From the perspective of new structural economics, infrastructure can reduce transaction costs, the borrower should follow its comparative advantage, and develop industries based on what a country has. With the right industry that follows its comparative advantage, a nation can promote exports, generate foreign exchange, trigger structural transformation and economic growth, and improve debt sustainability on a self-sustaining development path. By applying this philosophy, this study tries to analyze the structural characteristics of lending, the heterogeneity of the creditors, the sector focus, and the income levels of borrowing countries. For methodology, we adopted case studies and econometric modeling to discover project-level loan effects, adopting data from open source. We select indicators assessing the economic, social, and debt-sustainable effects at the country level.
In terms of case studies, due to the lack of data on every single project, we select representative projects. We selected the Mombasa-Nairobi Railway (MNR) in Kenya for the transport sector. The average cost of a railway is the highest in the transport sector. In addition, it can incur challenging debt management tasks for owner countries. In general, railway projects are less ideal for financial credibility. The management of the railway therefore is significant to deliver economic and social impact. The MNR has achieved operational break-even within five years since the business opened. China also shared experiences on management know-how. This railway project also contributes to the carbon reduction of Kenya by replacing road transportation. Transport is the single largest sector for China’s financing to Africa, accounting for one-third, followed by the energy and ICT sectors. The Soubre Hydropower Plant in Côte d'Ivoire and the Adama Wind Farm in Ethiopia have overcome the electricity bottleneck by unleashing natural endowment potentials and delivered positive impacts for reducing carbon emissions. The Soubre Hydropower Plant can export electricity which improves the foreign exchange revenue of the nation, reducing debt pressure. More importantly, part of the infrastructure projects can deliver positive externalities as regional public goods, such as the Bole International Airport in Ethiopia, and the Tanzania National Fiber Optic Backbone. Last, the report also analyzed social sector projects, such as the rural well-drilling project in Senegal, saving the local habitants’ time for acquiring basic living materials, which in turn, they would be more inclined to go to school. The project improves the basic hygiene condition. Moreover, the project provides alternative methods for water purification. Previously, the residents burn wood to filter water, now instead, they have direct access to disinfected and clean water. This life transition also enticed a company from the private sector developing carbon trading for the local society and generating foreign exchange. Overall, China supported 33 training and education programs, which amounted to 1.6 billion USD, including both vocational training and the hardware construction of public schools. In one project, combined with the digital capacity, the University of Ghana developed a distance learning system that narrows the gap of the digital divide, improving human capital.
To gain a more thorough understanding of China's effectiveness in financing development in Africa, as demonstrated by the aforementioned case studies, this report utilizes regression analysis with Chinese loan data, provided by Boston University, to 49 African countries from 2000 to 2020. The report also considers the potential for endogeneity bias. For more detail, it employs regression methods to estimate causal relationships between Chinese loans and six pivotal dimensions: economic growth, job creation, infrastructure improvement, export earnings, foreign direct investment, and school enrollment rates. In addition to ordinary least squares (OLS) estimation, the report employs the instrumental variable two-stage least squares (IV-2SLS) estimation method to address endogeneity concerns of Chinese loans. The instrumental variables used in this report include China's steel production and foreign exchange reserves. The estimation results demonstrate statistically significant positive impacts of Chinese loans across the six dimensions. Specifically, the findings are as follows. The positive impact of Chinese loans on African economic growth ranges from 0.176% to 0.300%, indicating that a 1% increase in loans contributes to at least a 0.176% increase in African economic growth. Additionally, there is a positive influence on infrastructure improvement, ranging from 0.027% to 0.084%, suggesting that a 1% increase in Chinese loans results in at least a 0.027% improvement in infrastructure across African countries.
Moreover, the finding indicates that the positive impact on export earnings ranges from 0.244% to 0.33%, indicating that a 1% increase in Chinese loans results in at least a 0.244% increase in export earnings. Similarly, the coefficient for foreign direct investment inflows ranges from 0.293% to 0.533%, suggesting that a 1% increase in Chinese loans attracts foreign direct investment inflow of at least 0.293%. Furthermore, a 1% increase in loans leads to a 0.118% to 0.212% increase in enrollment rates and a 0.143% to 0.167% increase in industrial job creation, respectively. The report also conducts a structural analysis to observe the effectiveness of Chinese loans in African country development based on characteristics such as creditor type, borrowing country income level, and the sectoral allocation of loan flows. Therefore, notwithstanding China's burgeoning significance in African financial development, it does not fundamentally alter the conventional rules of global development finance, as intimated by certain viewpoints. Instead, Chinese loans constitute a new and significant impetus in development financing.
The report has put forward several suggestions. To the Chinese creditors, 1) at the macro level, we encourage to promote financing to Africa in the future, build a multilayer Chinese financial system, and improve the support to Africa for the prosperity of the global economy. 2) We encourage to reinforce the policy impact of the official creditors, also to move forward the triangular cooperation in Africa. 3)At the micro level, we reckon the continuing support of significant infrastructure projects. Also, the financing will support human capital development and African integration. From the perspective of new structural economics, the project could take industrial parks as a tool for cultivating industries that share comparative advantages and create quick success. 4) We encourage working out a theoretical framework, to enhance the capacity of the research unit, and also to adopt advice that draws on international experiences.
For advice to African countries, 1) we recommend adopting the country ownership principle. The African nations should perform their leading role in the policy focus and enhance the evaluation of their sovereign financing projects. 2)The African countries can improve long-term development capacities, to form country-level mechanisms for the better operation of the infrastructure projects and conduct long-term data collection. 3)We recommend highlighting the sector focus or the loan flow, understanding the characteristics of the impact, and optimizing the planning of the fiscal budget. 4) As debt is mostly dominated by US dollars, African countries can adopt all currency financing, reducing the reliance on US dollars, and leverage the synergy of various sources of funding.
For the international community, 1) we call for a louder voice of the African nations about their financing needs, as well as the lending needs of the emerging donors, to fill the financing gap of global development. 2)We can better take advantage of the country’s debt management strength of the international organizations by applying their low-cost financing or grants to African nations to alleviate the debt pressure and create space for long-term project financing. 3) We call for advanced economies and industrialized countries to have their strategic focus on infrastructure projects in Africa, and build the ground for Africa’s development. 4)For the international debt evaluation system, we recommend highlighting the debt use. In addition, to run an assessment at the project level for debt sustainability. 5) The global society could promote the role of these newly established multilateral development banks funded by emerging economies to support global development. 6) To secure global financial security, we need to reinforce the responsibility of the private and commercial lenders, for their critical role in the sovereign financing of Africa.
Download reports：
A Study on the Effectiveness of China's Sovereign Financing in Africa