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What China’s new lending rules will mean for African states

This will be a deviation from the dolling out of infrastructure funds that China has been known for in the past decade, reaffirming its commitment to change lending policy in Africa and cut investment projects.

China will be looking at countries’ pending debt payments before clearing any more loans to African states, which have increasingly been indebted in recent years.

“We are willing to listen, discuss and improve cooperation as equal partners […] The Chinese may fit in some programmes so going forward the priority of our cooperation will be decided by two sides involved,” Chinese Ambassador to Kenya Zhou Pingjiang said in a recent press conference in Nairobi.

This followed the end of China’s Communist Party (CPC) National Congress meeting which endorsed President Xi Jinping for another term.

President Jinping is expected to oversee a significant change in China’s economic strategy, including the Belt and Road Initiative (BRI), a colossal infrastructure project dotting African states.

Ambassador Pingjiang reiterated maintaining a cordial relationship with Kenya’s new administration, which is facing a funding headache for its key China-backed infrastructure projects. For one, the Standard Gauge Railway (SGR) struggles to break even.

China is working towards fiscal conservation, which has seen its offensive lending to Africa considerably slow down in recent months, leaving some projects under BRI incomplete.

‘No trigger point’

With China’s new economic leadership expected to take charge next year, it remains to be seen whether the world’s second-biggest economy will approach the foreign market differently or rejuvenate its BRI investment.

However, experts say the latest pronouncement by the ambassador neither addresses the debt burden nor does it deviate much from China’s current lending policy.

Placing loan caps and freezing clause confidentiality would be a significant policy shift but those are not likely to happen, argues Churchill Ogutu, an economist, and analyst at investment firm IC group.

“I don’t think that [confidentiality clauses] will change. There will be no trigger point being that nothing has changed in the last 10 years,” says Ogutu. “Right now, most countries might be vigilant in terms of not exposing their assets while engaging Chinese lenders.”

Non-disclosure

Details of Chinese contracts, including interest rates, are hardly made public, unlike other lenders. Economist Mihr Thakar says should China consider shifting from non-disclosure, some limitations might still be maintained.

“There can be internal communication on loan caps but confidentiality clauses will depend on the wording of the contract. There might be limits on what a government can disclose and potential ramifications around those areas,” says Thakar.

The adjustable nature of the interest rates of China loans is pushing Africans on the edge of default.

There can be internal communication on loan caps but confidentiality clauses will depend on the wording of the contract.”

The tightening of fiscal policies by rich democracies has contributed to a rise in interest rates as Africa’s local currencies weaken. As such, the dollar-denominated debt repayment to China is becoming more expensive to African states just when they can barely raise enough revenue.

Concessional loans for Kenya

Kenya, which was recently reported to have been fined Sh1.32bn by China for late SGR loan repayment, currently owes Beijing more than Sh700bn (nearly $42bn) in total.

The East African nation is deprived of funds for its key projects and pending bills, meaning it will be active in the capital market in the current fiscal year.

The central bank of Kenya (CBK) has floated two infrastructure bonds this year amounting to Sh140bn from the 18-year and 14-year tenured security.

“Kenya will be looking forward to concessional loans and relying on tax revenues. There are talks around road bonds. That is simply telling us we are not going to rely on external commercial debts, and that is where China loans come in,” says Ogutu.

Across developing countries, China is increasingly finding itself in a difficult position. On the one hand, other big economies are putting pressure on China to help poor countries with debt restructuring, and on the other hand, its massive loans may never be repaid in full or the repayment period could extend more than expected, given the weakening economic situations on the back of global inflation and Russia-Ukraine tension.

In Angola, 40% of external debt is owed to China, which has financed various infrastructures like roads and housing. The oil-rich country has benefited big from the prolonged hike in fuel prices but is still lagging on debt obligations.

Zambia also owes Beijing creditors close to $6bn. The southern African nation was recently forced to cancel an undisbursed $1.6bn fund from China to avoid more commercial debt and save the collapsing economy.

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