Chinese African loans in perspective: Facts, records, myths – Nigeria’s case By Dr. Kazeem Bello

There has been recent outcry about the Chinese loans for projects development in Nigeria and its implications for the sovereign Independence of the Nigerian Nation. The issue becomes more precarious when we consider this in the context of the legislative arm of government having different interpretations and conceptual understanding with the Executive arm, leading to investigation and the attendant media frenzy it has generated. It has, therefore, become necessary to examine the antecedents, facts, records and myths behind these loans-for-projects/infrastructure packages from the Chinese.

It will be expedient to start by first examining the reasons why China embarked upon an unprecedented and massive inroad into Africa for projects development backed with loan packages. China did not just suddenly wake up and start to invest in Africa as we have witnessed in the last 10 years or so. The primary drive was not the need to assist Africans bridge the massive infrastructure deficit across the continent especially in Nigeria where we are currently and grossly in huge infrastructure deficits that may gulp approximately $35 billion in annual investments for the next unbroken 10 years to cover at least 60% of the infrastructure deficits. It is more worrisome when you remember that Nigeria’s average annual population growth rate stands at 3.6% as against the average annual growth rate of infrastructure development standing at about 2% across the board. The result is that Nigeria’s infrastructure deficits shall continue to be stretched in relative terms to the population growth hence exacerbating the problems.

During one of my visits to China, we were having a chat with some top government officials in Beijing. I was inquisitive to know how the Chinese are able to harness the capacities to build and continue to showcase massive infrastructural development all across China. The official smiled and stated that he will answer my question with a puzzle. He said to us that what China consumed in Iron and Steel tonnage to reach the current development stage in 20 years is equivalent to what the USA consumed in 200 years. That was the genesis of China’s aggressive investments abroad and in Africa especially. Let’s take a look at that before we continue with the actual topic to assist us to understand China’s intentions clearly.

The above analysis simply explains the unprecedented success story of the Chinese economy in the last three decades. The economy was massively opened up for unparalleled development with robust sustained growth rate of China’s GDP. The Chinese GDP growth rate in 1994 was 14% and in 2007, it recorded another record breaking GDP growth rate of 14.23% with an indicated average growth rate between these period standing at 11.3%. This growth propelled Chinese economy which witnessed massive infrastructure development, unprecedented foreign direct Investment inflow into China (China FDI during this period was averaging 26% of the domestic investments) while the economy commenced an expansive outflow and export of Chinese technologies, goods and products to the rest of the world capturing on the average a significant part of annual global trades.

The Chinese then witnessed economic challenges that were a direct result of an overheated economy. The economic growth and development performances eventually created massive industrial productivity that increased from 13% in the mid 1990’s to 64% by 2004. The economy started to weaken as a result of the after-shock effects of these outstanding performances. The GDP started to decline steadily since 2007 and the Chinese knew they were heading towards a massive economic stagnation which will resurface an already banished poverty and erode all the economic gains of the last three decades. The pattern of the growth rate was predicted and the Chinese knew they were heading towards a disaster if something was not done in the short, medium and long term with economic strategies to address the fast encroaching stagnation in the land. The GDP growth rate started to post downward trends since 2010 (9.55%) and 2019 (6.11) and this position was obviously not acceptable to the Chinese hence they commenced strategic economic policies in 2008 that will change the central focus of the drives to generate necessary domestic growth rate of the GDP. The Chinese set out and opened up their industrial economic frontiers to the rest of the world to generate export- oriented growth rate they desired including permission for its highly skilled technical labor force to sojourn overseas, while the restriction policies for overseas business ventures by the Private Chinese companies were completely relaxed. . The Chinese are very hegemonic and creative in thinking.

Perhaps, it is very important to state clearly with facts and evidences that, it is not only African Countries that were targeted by the perceived clandestine economic infiltration and imperialism of the Chinese in their effort to solve the problem of Economic Stagnation in China. One of the strategies adopted by the Chinese in their initial plan was to attract several overseas factories, manufacturing and wholesale distributing and merchandise companies to relocate their plants to China, offering massive opportunities in reduced cost of production, low taxation, increased revenue margin per unit of every manufactured products and liberalized export and revenue repatriation policies. This resulted in several companies from United States, Europe, North America, and Australia including China’s rivals, the Japanese, setting up plants in China. The objective was to increate Chinese export trade and generate significant revenue from exports. That strategy produced some significant success stories for the Chinese as its share of exports to the rest of the world rose to an all-time record high since 2010.

Secondly, the Chinese commenced a well-planned export of its technologies to the rest of the world to tackle the problems of over productivity in China (where industrial production capacity was declining steadily since 2010) and address the problem of Economic Stagnation. In response to this, several companies including the Chinese Central Government’s Agencies embarked upon several investment and infrastructural development projects overseas. Ask the Gulf Oil rich Countries and the South Asian countries about the success stories of the Chinese intervention in their infrastructure development. It has been amazing and overwhelming.

The Chinese were propelled by this success to create, introduce and commit to the One Belt One Road Projects across the world. China has committed over $2 trillion to the One Belt One Road Projects to date. That is how aggressively they are struggling to stop the Economic Stagnation they are confronted with. These are strategies carefully created in a clandestine manner to capture the Asian, Middle East, Eastern and parts of Western European markets. Not even the powerful European Union Commission barricades and stringent trade policies could stop the Chinese. The entire landscape has been littered with Chinese goods, technologies and projects. So, it is not only the African continent that the Chinese actually targeted with their Economic Imperialism to assist them increase their share of global trade and reduce the racing Economic Stagnation by returning the Economy back to sustain growth rate above 10% per annum.

In targeting the African continent, the Chinese knew fully well that the continent is faced with tremendous developmental challenges especially in terms of infrastructure development. The Chinese also knew that African countries possess about 34% of the global mineral resources and yet are undercapitalized and poorly funded. Records have it that African Countries without South Africa borrowed an estimated sum of $11.0 trillion dollars combined since 1960 and 60 years later, the continent remains as deprived and poor as it was in 1960. There is practically nothing to show for the massive borrowing which resulted in poor, nonfunctioning or abandoned moribund infrastructure projects all across the African continent. The continent has also been reported to have exported, lost or wasted the whopping sum of $17 trillion dollars in resources, economic assets and commodities since 1960. The Chinese analyzed these statistics and determined that the next investment frontier opportunities remained the African Continent but with different entry strategies.

In Nigeria, during the second republic headed by the late President Alhaji Shehu Shagari, Nigeria borrowed all kinds of non-compatible and economically reckless loans to pursue several white elephant projects. These were done in the name of opening up the country for the benefit of the then fledgling democratic dispensation. That was a disaster as the major economic challenges Nigeria is confronted with till today actually emanated from that time. We took loans to build the Mambilla Hydro Power plants – not completed till today since 1982; we borrowed funds for the development of Iron and Steel industry that would have placed Nigeria on the map as a major industrial country – that project was a disaster, moribund till today. We borrowed money for Iron Ore and Mineral development, for railways that never started talk less of being completed; we took loans for construction and development of Oil and Gas including new Refineries and massive Petrochemical Plant and Aluminum smelting Plant; we took huge loans for dams and river basin development and all kinds of loans. It was a jamboree and unwarranted flamboyancy without any core economic plan in place.

The trends continued till recently and we were made to pay for these loans and perhaps may have requested for massive debt cancellation and forgiveness. To demonstrate the recklessness and mismanagement we were confronted with, Nigeria, we later learnt, made several interest and principal over-payments for those loans resulting in refunds from the lenders. If that is not losing our economic independence, then I practically do not know what to call it. The sad and disturbing part of this episode is that no panel of enquiry or investigation were instituted or conducted to find out how that happened and put measures in place to avoid the same mistakes in the future. The Government collected the funds, and as usual, the largesse were distributed and ended up, largely, in private pockets. Several foreign loans previously attracted by the Federal Government were disbursed directly to our Government and what we ended up with are massive frauds, mismanagement and diversion of substantial parts of the funds, while all these projects became abandoned and moribund or dead outright.

The Chinese knew that this is the same story all across Africa hence they designed an inclusive and asymmetric strategy to capture the African markets. The first bait was to donate a brand new headquarters building to the African Union. That completely sealed the deal once this building was completed and handed over to the African leaders. Then the Chinese created the China-African Funds to directly invest in Africa in the development of its infrastructure and its industrial capacity. This is of course an extended strategic policy to expand its Economic Imperialism, generate the much needed export oriented growth as pointed out above and also to gain access to Africa’s massive and lucrative natural resources which are badly needed in China. Again, it is clear that the Chinese are primarily interested in solving their domestic Economic Stagnation problems and also return its economy back to the desirable sustainable growth rate of the GDP.

Then between 2008 and 2012, the Chinese came up with the idea of exporting Chinese technologies and know-how in a manner that will not allow full import substitution by the beneficiaries. They have to export huge and massive technologies abroad by permitting Chinese public and private firms to undertake overseas ventures on projects and infrastructure development abroad. This is one thing that the Chinese had placed embargo on for such a long time. Now the embargo is being relaxed. The objectives are simple.

1. Use this to expand Chinese Satellite capture of several economies mostly targeting African countries. This has nothing to do with sovereign imposition in anyway.
2. Use this strategy to generate export oriented Growth that is badly needed in China
3 Use it to reduce active competition abroad. Chinese firms working on projects overseas have been recorded to grow their activities from just 11% in 2010 to over 33% in 2018.
4. Use the strategy to tie countries and businesses around the world to dependence on Chinese technology and reliance on that perpetually. Of course, that is a smart way to create permanent kind of markets for its overstretched industrial productivity.
5. They intend to use the strategy to create new economic colonies. Those economies will breathe and smell China all the time. China in turn can sustain its growth and maintain its market penetration in those economies through the Satellite economic focus. This does not result in loss of country sovereignty but of course it could result in the loss of economic freedom if not managed carefully.

This is perhaps the plan the Chinese designed for African countries and sadly these countries are falling into the trap. To achieve their goal, they needed to tackle the problems of these countries. The Chinese, for instance, know that African countries have serious infrastructure problems. They have the solution to these problems in excess and are seeking markets for them.

The Chinese also know that the greatest challenge to entering Africa with this approach would be funding. They know African countries do not have the money to pay for these infrastructures. They also know that Africa has abundant resources that they need in China. So they created Satellite economic strategies:
1. That will develop the infrastructure projects that are needed by these African Countries.
2. That empower its manufacturers to produce and ship to Africa from China on CKDs basis. No room for Import Substitutions…..it is banished.
3. That create loan portfolios with stringent conditions that will knot the Satellite Economic Strategic goals. This is synonymous to taking loans that are unsuitable or not in consonance with our defined economic plans, if at all we have a working Economic Plan. The implication is that you surely lose your Collateral in the process if there is a loan default ……which is the sovereign guarantees in most cases.
4. That create the much needed human capital to ensure no part of the deal is stolen. Chinese companies manufacture the equipment, secure the loans, present the manpower to construct and develop projects, present the operating manual and what you have is a project completely owned by a foreign nation at your backyard. If you are very lucky to generate adequate revenue from those infrastructure projects and make full repayment for the loan, it is fantastic. However, how many Africa countries can actually sustain that momentum?
5. The Chinese now have an advantage in perpetuity. Countries have to resort to the Chinese to maintain those infrastructures because it is their technologies and for its upgrades and possibly replacement.

This is the nature of transaction that Nigeria and other African countries are entering into with China. There is nothing wrong in incurring debts to acquire infrastructures and technology to build your domestic capacity. No nation is an island on this score.

There are two levels of funding or loans being provided by the Chinese to fund projects in Africa. There are bilateral loans and the direct intervention loans which are technically commercial loans. Both loan facilities are being offered to African Countries through specific Chinese Government Agencies including the CADFUNDS; the China Development Bank; China EXIM Bank and a host of other Agencies. The strategy here is to remove the direct involvement of the Chinese Government in those transactions. An investigation into the activities of the CADFUNDS and its operational strategies and policies will clearly indicate that the Chinese have learnt from the past exploits of the Africans in the area of mismanagement of foreign loans and projects. This has carefully obliterated direct Chinese Government influence on the Loans for Projects in Africa. The Government only provides the much needed political climate at the top level while the core operations and management of these loans are saddled with the Agencies on commercial terms pure and simple.

From historical perspective, we know that African countries took massive loans from the Western world since 1960 but the funds were squandered and mismanaged over the years with unprecedented corruption all over the place including in Nigeria. This resulted in the Western lenders slowing down or stopping loans to the Africans since they are in the habit of returning to request or agitate for debt repudiation, reduction, cancellation and outright forgiveness after mismanaging the loans and the projects. In Nigeria, we ended up with massive infrastructure deficits that will take us more than 60 years of huge investments before we can catch up with the rest of the world. The Chinese learnt considerably from that past misfortune and experience hence they came out with a different approach to lending funds to African countries by foisting the following strategies:

1. Assist African Countries with infrastructure and the technology to do it. It is presumed to be a Win-Win situation since the Chinese provide the funds; technology and the manpower and Africans in turn build their domestic capacity.

2. Provide Commercial loans and not bilateral loans. This is to ensure loans are fully repaid without any avenue for debt forgiveness. The implication is that, the Chinese loan terms include clauses that guarantee the takeover of the project by the Chinese appointed Managers if the project turns out to be mismanaged or at the risk of being a failed project.

3. The Chinese refuse to disburse cash directly to the African Countries so that it can track and monitor the project development, and ensure it is completed. It also serves as a measure to implement one of the cardinal reasons why the Chinese entered into the African markets – to generate export markets for the stagnant domestic market.

4. The Chinese, knowing the reason behind these incentives to the Africans insist that every project must be executed by Chinese Firms using Chinese technologies. The Chinese build and construct the projects directly from Beijing and conduct direct Project Management strategies to ensure that the project is not abandoned as a result of diversion of the loan funds into private pockets. That way the project is completed and it can make projected revenue to pay back and expand in the future.

In recent times, Global Financial Analysts and other Global Watchdog institutions have joined voices to criticize China for injecting what is termed Debt -Trap Economy on African Countries. One very important message from the Chinese President to all African Heads of Governments is always to remind them that the loans from China shall never be forgiven or cancelled. Several definitions have been given to explain the meaning of Debt-Trap Economy which generally looks like Economic Imperialism or colonialism. Wikipedia defines it as “diplomacy based on debt carried out in the bilateral relations between countries with an often alleged negative intent. The creditor country intentionally extends excessive credit to a debtor country with the alleged intention of extracting economic or political concessions from the debtor country when it becomes unable to honor its debt. The conditions of the loans are often not made public, and the borrowed money commonly pays contractors from the creditor country. Although the term has been applied to the lending practices of many countries and the International Monetary Fund, it is currently most commonly associated with the People’s Republic of China loan package to the Africans. Recent bilateral agreements as part of China’s One Belt and Road Initiative have furthered this association, especially as to commodity-backed loans to developing nations and African countries.” The key word here is “Commodity-backed Loans.”

African debts to the Chinese which stood at about $10 billion in 2010 has skyrocketed to over $40 billion by 2018 with multiple stories of failed projects due to outright mismanagement. The leading debt trapped African countries with China include Nigeria (figure not known) , Angola ($25 billion), Ethiopia ($13.5 billion), Zambia ($7.4 billion), the Republic of Congo ($7.3 billion), and North Sudan ($6.4 billion). In its report cards for 2019 year, Chinese sources reported that their Loan backed projects in Africa is recording less than 30% in revenue performance matrix. Of course the Chinese will not entertain or welcome this dangerous trend which critically put their loans at risk of being lost or forgiven. They have to resort to invoking the terms of the loans and force takeover of the projects to generate revenues to repay the loans.

This ultimately takes us to the point where we can now draw attention to the current debates in Nigeria between the Legislative and the Executive arms of Government over the potential loss of Nigeria’s sovereign independence to the Chinese in the event of loan defaults. In summary, the primary intentions of the Chinese are well known and clear as indicated above. They are never after grabbing anybody’s sovereign independence as being generally portrayed. But it is clear that the Chinese are looking for Economic domination like Imperialistic Satellite Economic bases. Again, the reasons behind these are very clear, to get the Chinese economy back on sustainable growth rate; address the long run economic stagnation confronting the Chinese economy and of course to enable them grab a sizeable percentage of the global annual trade balances. The USA is currently battling and wrestling with China over the huge trade imbalances and currency disparaging disputes between the two world’s economic giants. The pertinent question is, if the giant USA can easily get entangled in this trap with all its alertness, what do we expect to happen to the African Countries that are paying very little or zero attention to the Chinese Greek gifts in loans for projects and infrastructure.

Let us examine one aspect of this pitfall among several of them. African Countries are accessing loans from China on the basis of commercial loan transactions which ultimately carries commercial loans terms and conditions. The loan imposes collateral requirements unlike most bilateral and multilateral loans. The Chinese loans are tenured with maximum life span of about 20-25 years. The loan terms are predicated on Asset collateralized strategies which could result in Asset takeover if there is default in loan repayment. The loans are institutionalized through risk coverage strategies that ultimately put the responsibility for loan repayment and guarantees on quazi-Government owned commercial oriented Debt portfolio companies. What this means is that, it becomes clear that the Debt cannot be cancelled, forgiven or repudiated in any circumstances. The Chinese know that the Africans, based on historical traditions, will turn around to ask for debt forgiveness. In fact, some calls are already in the offing calling on China to cancel some debts due to the Coronovirus pandemic.

Obviously, the Chinese already provided the barrier to stop that agitation by constituting the Debts in purely commercial terms. They will not entertain any request for debt cancellation or forgiveness under any circumstances. The option left in to invoke the implementation of the commercial terms in the loans, which is to appoint Management Firms controlled by the Chinese Agency to manage the project to recover its loans. This also allows the Chinese to avert the risk of losing the loan by ensuring that the debts are effectively traded in the secondary markets in China through debt insurance risk mitigation process called Debt hypothecation. With the risk aversion strategy in place, typical loans can be sold by China which means the host or receiving country will lose its sovereign rights to own those projects. For projects of strategic economic importance and economic independence, that Country ultimately stands to lose that economic independence on that premise. It is that simple.

Secondly, the projects are commonly tied to what you can refer to as dependency on China for demand and supply side economic tractions. What this means is that, in the case of African countries with huge export potentialities like Nigeria, Kenya, Angola and others with Oil and Gas and other mineral resources which the Chinese need badly, there are clauses included in the loan agreements to instigate or force an export of the borrower’s resources to China in exchange for the Debt payments. This happens especially when most of the projects constructed with the loans itself are underperforming and not generating desired revenues to repay the debts. Nigeria and Angola are top in Africa in this entanglement. Nigeria and Angola already accrued millions of dollars in due loan repayment to China as at the end of 2017. The loans moratoriums have expired and the payments are due but the projects are not generating any commensurate revenue to enable the countries pay back. What we currently have happening is that Nigeria and Angola are delivering cargo loads of Crude oil to China without it being paid for, to offset and keep the loan repayment in active position. These countries have no option or alternative as they are massively seeking to obtain more loans from China and defaulting on existing loans may jeopardize these opportunities. The Honorable Minister of Transportation in Nigeria, Chibuike Rotimi Amaechi, actually alluded to this fact in a social media viral press interview recently.

The danger in this arrangement is that these countries are permanently tied to China forever. It is a vicious cycle that may not have an end in sight. This may be what some folks are referring to as losing the country’s sovereign Independence to China. By and large, if the countries have to deliver products to China not paid for to settle indebtedness to China, then substantial parts of the Country’s exported hard earned foreign income will be handed over free to China in exchange for loan repayment. It translates to the fact that the Country will need to turn to China to balance its budget annually and rely heavily on China to sustain growth and development and to acquire additional future infrastructure projects. This, in simple economic terms, means that the host country is largely running a Satellite Economy based on the dictates from the Chinese financial situation. The Country will have to export only to China, and be forced to accept further debts to undertake critical economic projects and infrastructure yearly which ultimately shall be with the Chinese only. This is complete loss of economic independence as a sovereign nation.

There are several drawbacks in the loan facilities being brandished by China in Africa. Again, there is no doubt that there is need for these loans to assist bridge the huge infrastructure deficits in Nigeria for instance. With gross mismanagement of our resources and very uncertain income streams from the oil and gas sector unlike in the past, it seems the major option available is to turn to the Chinese. If this scenario is true for Nigeria, then it would have been more expedient for Nigeria to level up with the Chinese in the loan agreement terms. We currently have several listed projects in Nigeria being funded through the Chinese largesse such as the railways, Road network, Airports, Seaports and several others. We may suddenly wake up in Nigeria to find out that the Chinese are running and managing everything in Nigeria to the detriment of our economy due to gross deficiency in loan negotiations and accepting strategies.

We would need to get creative with the loan terms and attendant conditions. We have to invoke strong financial engineering strategies to tackle the problem and level up with the Chinese in terms of loan package and resolving issues relating to bad loans when the actual project fails. Well it is no secret that Nigeria and Angola can sustain delivering Crude Oil to China in exchange for debt repayment but how prudent is that and for how long can this be sustained especially with poor revenue indicators all across the board. We can consider what are known financial cushions and strategies to avoid these pitfalls from the Chinese loan packages. These include several instruments and financial engineering strategies that can be presented to the Chinese not in any way tied to sovereign capital or assets of the country.

1. We can offer the well-known Loan backed by Sinking Funds collateralization. This has proven to work successfully for large financed projects around the world instead of delivery of our God given mineral resources to China dissipating and mortgaging the future of our next generations.
2. We can adopt the Debt-Asset Securitization strategies that ultimately block the Chinese from unwarranted invasion of the country in the name of taking over the Asset Management.
3. We can also follow suit with the Chinese by subjecting each project to further capitalization by ensuring that these assets are placed under risk aversion portfolio through debt hedging in the market.
4. We can equally counter play the Chinese in this game by insisting on Import Substitution Projects which will ultimately automatically present the Chinese as stakeholders in the project instead of being a de facto Lender. As indicated and stated above, we know why they are investing in Africa and a well-informed understanding of the reasons underlying the perceived Greek Gift to the Africans in Loans must be priority in this case.

Prior to the global economic slowdown as a result of the Coronavirus pandemic, the Chinese already had projected that its economy would see a jump in the growth rate number to about 9% in 2020. The fact remains that they are under tremendous pressure to achieve their primary economic goals hence we have a bargaining power as well at the negotiation table. It is not known if our negotiators fully understand the issues at stake and can contrive strategies to negotiate with the Chinese instead of just running to Beijing asking for free loans not minding or bothering about the inherent delicate and unfriendly terms and conditions of the loans.

There are several other strategies which can be adapted and invoked to correct the seeming deficiencies in the Loan agreements with the Chinese as it stands now. I am not able to expatiate on the above listed four suggested strategic options to tackle the problems. These are my own trade secrets as well. If the Nigerian Government needs help, they should consult experts to assist negotiate and repackage the current and future debts or loans with the Chinese. The ultimate is that already executed loan agreements may have the chance to secure better debt management alternatives as it is certain that the Nigerian government may need the assistance of global financial experts and specialists to help tackle problems that the Chinese loans will create in the nearest future.

Dr. Bello is Principal Partner/CEO- Afrique Capital and Equity Funds Ltd, New York, USA, President, Nigerians in Diaspora, New Jersey chapter and Chairman, Steering Committee of the proposed Nigeria Federal Credit Union.