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________Leadership and advancement

China’s Strategy of “Predatory Lending” and the Recolonization of African.

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_________Why The Mounting Debt to China is Dangerous for Africa!

Xi Jinping on Africa

With the rise of economic prosperity in China over the last two decades, China is flexing its muscles internationally and lending to nations that are unable to fund national projects, while the projects may look very promising to the countries where they are being offered, China may have other motives as it sinks billions into Africa countries.

While China may be trying to build both economic and political influence in the Africa, Africa is a rich source of mineral resources for China’s rapidly growing economy. With Africa’s emerging market growing at a fast rate, China is bound to benefit from the growth having locked itself into the economy through lending to various countries and governments, many have argued that Africa is the next frontier, the underdeveloped continent seeking attention, while it has the fastest growth in both youth and overall population.

As at 2015 with a population of 1.136 billion, Africa accounted for 15.7% of the world population of 7.2 billion people, Africa’s population is set to hit 2.4 billion by 2050 and the continent will account for 25% of the 9.6 billion people, a stable middle class that will increase from 123 million in 2015 to 1.1 billion by 2060. Africa is a huge market waiting to be explored, so access to abundant mineral resources for its manufacturing in China and a huge market to sell its finished products is key to Chinese Economic Growth.

Today Africa is estimated to contain 90% of the entire world supply of Platinum and Cobalt, two-thirds of world manganese and 35% of the world’s uranium, and half of the world’s gold supply. Nearly 75% of the world’s coltan is in Africa, the major important mineral component used in electronic devices including cellphones. As a leading cell phone manufacturer, according to statistics, over 1 billion cell phones was produced in China between 2014 and 2015, but between January 2017 and June 2018 cell phone production had increased to 2.086.1 billion, China needs a constant flow of mineral resources to meet it demand and Africa is its target.

To meet its furniture demands in furniture, the Chinese are also championing the deforestation of Africa, in 2017, the Environmental Investigation Agency (EIA) a Non-Governmental Organization based in the United States released a report “The Rosewood Racket China’s Billion Dollar Illegal Timber Trade and The Deforestation of Nigeria’s Forest” the report chronicles how 40 containers of scares Rosewood trees are shipped put of Nigeria daily. The trees are cut down, converted to logs and leaves North-Eastern Nigeria everyday through Shagamu and eventually shipped out from Apapa port by the Chinese, the 40 containers are said to be equivalent to 5400 logs and 2,800 trees daily.

China is massively devouring Africa’s mineral and Natural resources, and to go to the same China for loans might spell doom for the continent, especially with China’s predatory lending style…

So What is Predatory Lending?…… and The Chinese Strategy?

Predatory Lending includes any unscrupulous actions carried out by a lender to entice, induce and assist a borrower in taking a loan that carries high fees. A high-interest rate, strips the borrower of equity or places the borrower in a lower credit rated loan to the benefit of the lender.

Predatory lending typically occurs on loans backed by some kind of collateral, so that if the borrower defaults on the loan, the lender can repossess or foreclose and profit by selling the repossessed or foreclosed property. Lenders may be accused of tricking a borrower into believing that an interest rate is lower than it actually is, or that the borrower’s ability to pay is greater than it actually is.

The lender, or others as agents of the lender, may well profit from repossession or foreclosure upon the collateral, and one of the big concerns around Chinese loans is the debt-trap diplomacy where the Chinese government will pressure countries that can’t pay into exploitative deals. In most or all cases, the repayment of loans is never the intent of the lender but how to takeover assets or collaterals of the borrower knowing full well that the borrower will default.

The Worries!!!….

On March 6th, 2018, the former US Secretary of States, Rex Tillerson stated that Beijing “Encourages dependency using opaque contracts, predatory loans practices, and corrupt deals that mire nations in debt and undercut their sovereignty, denying them their long-term, self-sustaining growth, Chinese investment does have the potential to address Africa’s infrastructure gap, but its approach has led to mounting debt and few, if any, jobs in most countries.”

Africa's debt to China

With the US lawmakers and government warning about Chinese Predatory lending in Africa and its subsequent effect on future economic growth of the continent, Sub-Saharan Africa’s debt to GDP is rising, in the 1980’s African economies were crippling under sovereign debts which alienated most of the countries from the global financial system in the mid-90’s.

In 2005, the rich lender nations reached a solution to forgive the loans of heavily indebted poor countries of which 30 were African countries from the World Bank, IMF, and African Development Bank. By 2008, median debt level to GDP was about 23%, and by 2012, Sub-Saharan African median debt level had risen to 30% of GDP and with subsequent borrowings increased to over 50% of GDP by 2017. Many fear that the debt level is getting worrisome and that most Sub-African countries will default on repayment and these are the countries holding most of the mineral and natural wealth of Africa.

A report written in 2016 by Deborah Brautigam, a professor of international political economy at John Hopkins, estimated that Chinese banks, contractors, and the government lent approximately $86 billion to Africa between 2000 and 2014 and about $29 billion of that was loans backed by natural resources.

China's Loan to Africa

Of the total debt of about $453 billion Sub-Saharan Africa owes in external debt stocks, Sub-Saharan Africa has borrowed $136 billion from China, which the Chinese government extended to Africa from year 2000 – 2017, that is 30% of Sub-Saharan total external debt stocks, and with the new $60 billion loan approved recently by the Chinese government, Africa’s debt to China will increase to almost $200 billion.

While China’s influence and loans continue to increase in Africa, Trade balance has also been skewed in favour of China, in 2015, China’s Export to Africa was about $150 billion in mostly finished goods while Africa exported about $38 billion worth of goods to China with majority being raw materials and unfinished goods. In 2016 Chinese Export to Africa was $88 billion and only imported $40 billion from Africa.

China’s long term strategy is to outdo the western world in its loans and grants to African, using them to buy influence and position itself to access the abundant mineral and natural resources, including the gain of geopolitical influence.

The Takeovers!!!……and the Future Takeovers

The Chinese predatory lending spreads across not only Africa but other poor countries as well, in 2010, China invested $1.5 billion to build the Hambatota port in Sri Lanka, and when the country couldn’t repay the debt, Sri Lanka signed a 99-year lease of the port with a Chinese state-owned company to service some of the billions it owed.

Recently it was reported that Zambia was in talks with China over a possible takeover of the country’s electricity company, ZEWASCO, after defaulting on loan repayment, and possible takeover of the Kenneth Kaunda International Airport also belonging to Zambia should they fail to meet their debt obligations with China, though government has refuted the claims but many claiming the takeover bid to be true.

Recently a lawmaker in Kenya addressed the house warning the government of the impending disaster ahead claiming if Kenya does not wakeup the country will end up selling its national assets to China, 66% of Kenya debt is to the Chinese. China constructed the Lamu Port in Kenya fr $16 billion, and Kenya is set to default in three years’ time unless they can pay 1 million Kenyan shillings per day. Lamu Port is the biggest port in east Africa and will be handed over to the Chinese for 99 years. The challenge will be when a major importer  and exporter of your mineral resources take over your port.

Of the $136 billion loan given to Africa since year 2000, Angola which is mineral and natural resource rich country accounts for $42 billion. Angola used oil as part of its collateral for loans from China and as oil prices plunged, it found itself with more oil flowing to China for debt repayment and less to sell in the international market to plug budget deficits. It also means that to make their money, Western Oil companies which manage Angola’s production with exports of 1.8 million barrels/day will take more for their investments and services.

In 2017, Djibouti leased land to China for $20 million per year after lending billions of dollars to an heavily indebted Djibouti and the country unable to pay back the loans, China has used the land to set up its first oversea military base just a few miles from a US naval base which is the only permanent US military facility in Africa.

The story is the same across Sub-Saharan Africa for most countries that have courted China in loans for development, from Sierra Leone to Liberia, from Ghana to Nigeria where the Chinese are building the railways and some other major projects, and from Djibouti to Zimbabwe which many believe will soon start defaulting on its loan with China. While the loans are given, no cash is given to the countries, China executes and builds the projects using labour, materials, and equipment from China and undermining if there are available labour in those countries.

Most Asian Countries are starting to understand the predatory lending of China and are taking steps at cancelling such loans, they include Malaysia, Philippines, and Singapore who have recently cancelled some loans they see as being predatory.

With China using the debt-trap diplomacy on Africa and Africa’s debt increasing daily to China, African countries may well be positioned in the future to be recolonized through China’s strategy of Predatory Lending, but the worrisome part is the first colonization of Africa was through the use of force, while Africans basically used debt to entrap themselves this time around.

Author: Roman Oseghale

Roman Oseghale holds Masters degree in Architecture and a graduate of Executive MBA from the Telfer School of Management and Leadership, University of Ottawa, Canada, he is a Consultant and Business Intelligence Analyst and the CEO of IntelServe Inc. a Canadian Business Consulting Company. He is a passionate analyst and writer on Leadership and Economics, He is a strong advocate of Investing in Human Capital Development to drive Economic Growth and Sustainability.

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