Between 2000 and 2011, Beijing’s policy banks gave US$53.4 billion in concessional loans and lines of credit to 43 African countries; this trend accelerated after 2012, as noted above, bringing Africa’s debt to China sharply up to US$143 billion by 2017, with loans provided by the China Development Bank (CDB) and the EXIM Bank of China reaching US$35.5 billion and US$55.7 billion respectively. This represents roughly 22.9% of China’s total external loans and a similar percentage, 22% or so, of Africa’s entire external debts. The commodities collapse in 2014 and the slow recovery ever since put immediate pressure on African governments (with median debt rising from 30% of GDP in 2012 to 50% in 2017), to find ways of addressing payment shortfalls or delays as they struggled to meet their financial obligations.

At a time when Africa is busy dealing with the COVID-19 crisis, China will have to start taking measures to alleviate the debt burden of African countries in general, and those who are heavily indebted to China in particular, in order to avoid a potential crisis on the African side and financial losses for China itself. There are a couple of options that China has already taken or considered for now.

The first is debt cancellation of selected financial liabilities. In response to the debt distress of Mozambique, intensified by its default in early 2017 – the first sovereign debt default in Africa since Côte d'Ivoire’s in 2011 – China decided to waive four loans, totalling US$36 million; and at the 7^th Forum on China-Africa Cooperation (FOCAC) Summit held in September 2018 in Beijing, Chinese President Xi Jinping further declared that all interest-free loans owed by the LDCs (Least Developed Countries), HIPCs (Highly Indebted Poor Countries), LLDCs (Landlocked Developing Countries) and SIDSs (Small Island Development States) in Africa due by the end of 2018 were to be forgiven.

The second option, which has yet not materialized, is to provide short-term refinancing arrangements to African countries with payment difficulties. Whether this proposed option might work, however, has much to do with the debtors’ economic prospects in the short run – the refinancing arrangement of Western banks for Mozambique, for instance, did not pull the country back from the brink of default.

This in turn may also pose a dilemma for China in having to choose between financing ‘traditional’ infrastructure and power sectors which, despite their fundamental importance, cannot bring quick economic returns, and productive sectors such as mining and manufacturing to enable the host country to earn more money and repay the debts. The Chinese government, therefore, may have to make more cautious decisions this time round in how it disperses the US$60 billion announced during the last FOCAC in the coming three years in order to protect the interests of both the debtors and itself as the creditor.

In more urgent cases, the Chinese government may not be able to avoid the option of rescheduling the debts of those countries that simply cannot afford the payments. Sudan, for instance, during its severe economic crisis in 2012, secured a five-year delay on its debts to China. Caught in a critical debt situation since 2018, with 30% of its total US$9.3 billion external debt owed to China, the Zambian government has also been actively engaging with the Chinese trying to renegotiate the debt terms. And at the last FOCAC Summit, Ethiopia became the first amongst China’s top African debtors to secure a rescheduling deal, allowing it to enjoy a further 20-year extension for some of its debt to China (including the US$4 billion loans for the flagship Addis Ababa-Djibouti railway project).

Despite these measures, there are still a few potential challenges for China in managing this ‘new’ issue, i.e. debt, with its African partners.

First of all, for now, China does not have a comprehensive external debt management system including a workable debt sustainability evaluation framework or a unified debt restructuring mechanism for its external borrowers. There haven’t been stipulations on the circumstances, debtor qualifications, and specific rules as to when and how to apply debt relief, refinancing, rescheduling or other arrangements.

Moreover, China has not been deeply involved in international debt restructuring negotiations led by the Paris Club or multilateral creditors like the World Bank and International Monetary Fund (IMF). With the mounting loans to Africa, China may need to open up and talk to other lending partners (for it also relates to the interests of the debtors who may otherwise not be able to get further loans or need restructuring deals from their traditional creditors); and the jury is still out as to what extent China could maintain some of its long-held positions,  given either pressure from multilateral negotiations or concern about financial losses.

Secondly, the dangers of sovereign default and the resultant seizure of assets (and resources) in lieu of payment would test China-Africa relations. While a typical response to corporate defaults, the potential debt-for-equity option is more alarming to sovereign debtors. Against this backdrop of growing controversy around the ‘debt-for-equity’ option, it seems less likely to be adopted by the Chinese government on a large scale in future dealings with its external debtors, particularly those in Africa.

That said, although it may not be directly linked to debt servicing, a new trend may emerge among Chinese companies who are involved in infrastructure and power sectors (where from the majority of African sovereign debts to China derive) to transform from the previously EPC-style (Engineering, Procurement, Construction) contractors to BOT/BOOT-style (Build-Operate-Transfer/Build-Own-Operate-Transfer) operators and investors. If equity investment, regarded by China as the future direction in financing Africa, could gradually overtake traditional loans as one of the main financing methods and especially so in the infrastructure and power areas, it may help alleviate the dilemma between needed infrastructure development and deepening debt difficulties.