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Head of Emerging Markets,XL Catlin

Today, the focus of Chinese engagement with sub-Saharan Africa has broadened beyond the extraction of natural resources to the development of infrastructure, especially transportation projects, and the export of associated capital goods. China’s interests in the sub-region are growing at a time when many African economies are facing substantial external economic headwinds, especially major commodity producers like Nigeria and Angola. As sub-Saharan African governments increasingly look to Chinese financing and expertise for a more diverse set of projects, interests will further align and cooperation and investment flows are set to grow. Economic drivers: The changing focus of China’s economic engagement in Africa, away from natural resources and toward infrastructure, is being driven by China’s slower and less commodities-intensive economic growth. Chinese companies hard hit by their own decelerating economy – especially providers of construction goods and services – are looking for new sources of growth abroad. Consequently developing infrastructure projects that will spur the development of African economies and generate further demand for Chinese goods and services is a higher priority for China than securing supplies of energy and metals. The financing of major infrastructure projects in Africa is often tied to the use of Chinese construction firms who bring in Chinese capital and inputs (including labour) for the project. Further, the Chinese government itself and its state-owned enterprises play a substantial role as a catalyst for investment. Chinese President Xi Jinping’s $60 billion commitment, pledged in December at the Forum for China Africa Cooperation, is indicative of the two regions’ growing economic ties. The commitment also shows the growing diversity of financing instruments offered. The pledge includes $40 billion of preferential loans, non-preferential export credits and SME loans, $5 billion of equity investment by the China-Africa Development Fund (CADF); and a $10 billion pledge for a new China-Africa industrial cooperation fund. Of the total, only $5 billion is direct aid. As part of the “10-Point Plan” to be rolled out over the next three years, President JinPing has further pledged 2,000 education opportunities, 30,000 government scholarships and invitations to African scholars to visit China.  China has also agreed to help accelerate agricultural modernization by setting up development projects in 100 villages to raise living standards. The overall shift in engagement comes in response to changing trade patterns: Chinese exports to Africa have exceeded its imports of African goods since early 2015, challenging the stereotype of resource extraction and exports as the main drivers of the relationship (though commodities still remain an important component of China’s investment portfolio in the region).African governments have actively engaged with China’s interest. Low commodity prices, a weak global economic outlook and tight financing conditions are dragging on growth and limiting financing options for African governments. The prospect of large-scale financing deals (at semi-commercial rates) with the Chinese government are therefore politically attractive. Interests are aligned – the shift from resource extraction to infrastructure investment and technology exports suit African governments well. Most notably of late Muhammadu Buhari, Nigeria’s President, has negotiated a loan of $6bn and a currency swap deal with China. It now remains to be seen whether either measure will be enough to ease Nigeria’s economic slowdown but it is apparent that the increasing complexity of Chinese interests bodes well for the continent in a time when the cost of other financing options are rising.The Risk Landscape Though Chinese engagement has diversified, governance and insecurity will present key risks to projects in some African countries. Governance in Africa has improved substantially in the last decade, but countries with weaker institutions remain riskier for investing, whether by Chinese firms or others.  Chinese state-owned and private firms continue to face reputational and actual risks in the region stemming from previous instances of poor practice. With the fall in commodity prices over the past year, per capita GDP predictors coming in at weak levels and currency fluctuation (particularly in Nigeria and South Africa which between them account for more than 50% of the region’s GDP), governance and related controls will be tested. The challenge today is to move forward, looking at how lessons can be learnt from the past without impeding the huge opportunities of the future.


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