Are red flags enough to turn the tide of Chinese investment in Africa?

In its recent report, the China-Africa Business Council (CABC) made no secret of the fact that it expects the economic relationship between China and Africa to deepen in the coming years. According to the report, if Chinese businesses continue their engagement at the current rate, Beijing will become the biggest investor in the region by 2024. What’s more, while other countries scaled back their investment in Africa during the pandemic, China even upped foreign direct investment across the continent by almost 10% last year, reaching a total investment stock of $47 billion. 

The plans set out in CABC’s report set the stage for the Forum on China-Africa Cooperation (FOCAC), slated for November in Dakar. This triennial event will see Chinese officials convening with African leaders to create further inroads into Africa in line with China’s colossal Belt and Road Initiative (BRI), of which Africa is already the biggest benefactor. 

So far, readily flowing Chinese cash has found a warm welcome among African leaders hoping to drive development without the preconditions usually attached to Western aid and investment. Indeed, the draw of Chinese finance is so strong that nearly double the number of African leaders attended the previous FOCAC than appeared at that year’s UN General Assembly. 

However, the more Chinese cash is thrown at investment projects from Djibouti to Tanzania, the more the flipside of this monetary influx is becoming apparent. A number of African countries’ debt piles have soared to unsustainable levels, and past experience has shown that Beijing is not afraid to weaponize this financial leverage. As China-backed projects continue to go awry, they could eventually hurt Beijing’s standing in Africa as well. 

Legally dubious favouritism harms Djibouti and Beijing alike

Djibouti, the tiny country at a strategic maritime crossroads, is one of the quintessential examples of how African interests and relations with foreign investors are harmed by excessive Chinese debt. Beijing has doubled down on the Horn of Africa nation in recent years, opening its only overseas naval base there and spending some $14 billion in investments and loans in Djibouti between 2012 and 2020. Indeed, Beijing now holds the majority of Djibouti’s debt, which has reached the startling level of 70% of the small country’s GDP.

Given this extensive economic foothold, it’s not surprising that Djibouti feels the need to do favours for Beijing. Some of these favours, however, have dented both Djibouti’s and Beijing’s reputations on the international stage. In particular, Djibouti’s 2018 decision to forcibly nationalise the Doraleh Container Terminal, expropriating it from Dubai-owned port operator DP World, has cast a long shadow. 

While Djibouti claims to be running day-to-day port operations themselves, observers state that Chinese state-owned firms are in fact calling the shots on the docks. The years following the port seizure, meanwhile, have seen DP World bring seven arbitration proceedings against Djibouti—all of which were concluded in the Dubai operator’s favour, most recently in July 2021. Despite this legal consensus, Djibouti’s authorities have ignored every one of the rulings and continued to prioritise Beijing’s interests, abrogating their responsibility to other long-standing investors and spooking would-be financiers.

Beijing’s hand in Kenya’s debt crisis

Djibouti’s stubborn loyalty to China may prove misguided given China’s fickleness towards its other African partners. Kenya’s government learnt that lesson the hard way through their 470-kilometer Nairobi-Mombasa Standard Gauge Railway (SGR). The rail line, as well as its subsequent extension, were predominantly financed by a total of $4.7 billion in Chinese loans—adding to Kenya’s already-substantial debt to Beijing. 

Questions about Kenya’s ability to service the debt abounded, and particular alarm bells over the deal began ringing following reports that the strategic port of Mombasa had been pledged as collateral in case Nairobi defaulted on its loans for the SGR project, the grace period for which recently elapsed. That possibility was temporarily averted when Kenya secured a debt repayment holiday, but Nairobi’s finances remain extremely strained by the railway project. In order to whittle away at the railway’s losses, Kenya is hoping to take over its operations from China sooner than planned—but this, too, comes with a price to pay. The Chinese operator managing the rail line is demanding that Nairobi clear its debts—which amount to some $345 million, a tough pill to swallow as Kenya’s economy suffered its worst performance in 29 years amidst the coronavirus pandemic. 

Tanzania exemplifies repercussions in store for China

The tough situation Kenya is in, with its key assets remaining in the lurch as it falls ever further into China’s debt trap, is a warning to the whole continent. Indeed, some African nations have already become more cautious about embracing Chinese investment. Tanzania’s $10 billion Bagamoyo megaport project, for example, was once tipped to be the largest in Eastern Africa. After Tanzanian President John Magufuli came to power in 2015, his government cast doubt on the terms and conditions agreed with China Merchants Holdings, in particular the Chinese firm’s insistence on a 99-year lease as well as other conditions which were seen as exploitative. Magafuli didn’t mince any words on what he thought of the deal, deeming it the equivalent of selling Tanzania to China.

After Magafuli’s untimely death in office this March, his successor Samia Suluhu Hassan has reopened negotiations on the port’s potential development, but the saga will undoubtedly have left other African policymakers wary of blindly signing investment deals with Beijing.

All too often Chinese investments have encouraged crooked business models and caused African countries to rack up unsustainable debt instead of prompting much-needed development. This, in turn, has sapped Beijing’s credibility as a good-faith investment partner.  The upcoming FOCAC may serve as a bellwether for whether these problematic deals have eroded both African leaders’ and Chinese investors’ appetite for further Sino-African agreements. 

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