Risky Business: New Data on Chinese Loans and Africa's Debt Problem

From modest beginnings in 1960, China has recently become a highly visible actor in Africa's lending landscape. African borrowers have built roads, installed electrical grids, and modernized their airports with Chinese finance. Yet when commodity prices and growth rates began to tumble in 2015, the specter of a new debt crisis arose. These fears expanded sharply with the impact of the COVID-19 pandemic. Are the African countries most vulnerable to debt distress those with high Chinese debt? Who are the Chinese lenders in Africa and how do they manage lending in risky environments? Is China a bigger lender than the World Bank? What kind of terms do we see on Chinese loans in Africa? Why have Chinese banks lent so much in risky environments? How often are loans collateralized with natural resource exports? Do Chinese banks require property as collateral for loans to African governments or their state-owned enterprises (SOEs)? 1. New data show that China makes up 22% of public debt stock (2018) and 29% of debt service (2020) in low income Africa. Yet China's role should not be overestimated. In over half of the 22 countries facing debt distress, China is a small lender. Their debt problems are not made in China. 2. In seven of these 22 countries, China accounts for a quarter or more of all public and publicly guaranteed debt: Angola, Djibouti, Cameroon, Republic of Congo, Ethiopia, Kenya, and Zambia. Four of these countries negotiated debt restructuring with Chinese lenders in 2018 and 2019. 3. Chinese banks' "project-by-project" analysis may have disregarded the overall debt risk in borrower countries. Only a quarter of Chinese lending is secured by natural resource exports. 4. Borrower government should plan their projects better before they borrow. A large portion of Chinese loan commitments are slow to disburse, partly due to borrowers' inability to meet their share of project responsibilities. Delays hurt the bank, the contractor, and the borrower government.