China’s overseas energy financing has fallen to a decades-long low after its promotion of Belt and Road projects in developing countries was blocked, with most of the money going to energy projects in Africa, which analysts say may become the focus of Chinese energy investment in the future.
Of China’s $4.6 billion in overseas energy loans in 2020, more than half went to projects in Africa, according to the Boston University Global Energy Finance Database. A Chinese gas pipeline in Nigeria is driving more than $3 billion in financing, with other smaller projects in Lesotho, Rwanda and the Ivory Coast.
Compared to 2019, China’s overall overseas energy investment fell 43% to the lowest level since 2008. Outside the African continent, China has only lent to projects in Bangladesh, Serbia and Pakistan.
The disruption of China’s energy investments abroad is in line with the serious challenges facing the Belt and Road project as a whole, due to negative impacts such as the new crown Epidemic and the lack of transparency in the project. Experts say the trend of Chinese investment in African energy projects will continue.
Africa’s energy investment gap
The African continent faces a huge energy investment gap, while investing in energy projects in Africa also meets Beijing‘s strategic needs.
According to the World Bank, only 47.7 percent of people in sub-Saharan Africa had access to electricity in 2018, compared to 98 percent in East Asia and the Pacific and 100 percent in Europe and North America.
Tim Zajontz, a researcher at the Centre for African Studies at the University of Edinburgh, told Voice of America, “The African energy market has huge potential for growth because of the growing demand for electricity as urbanization progresses. The African Union, regional economic communities and African governments agree that increased access to electricity is critical to the continent’s social and economic development.”
A report by McKinsey & Company found that Africa’s demand for electricity will quadruple from 2010 to 2040, and the need for power infrastructure will only increase in the coming years.
However, the continent has long faced the challenge of raising sufficient funds for infrastructure investments, particularly in the energy sector. McKinsey reports that despite sufficient interest from international investors to invest in Africa, 80 percent of infrastructure projects fail at the feasibility and business planning stages.
Stephen Chan, professor of politics and international relations at the School of Oriental and African Studies at the University of London, told Voice of America, “Although not all, China has provided significant loan liquidity on more generous terms than Western lenders. Some see this as a possible debt trap. From the perspective of many African governments, it’s a means of stimulating development at a faster rate than otherwise, but it’s risky in terms of debt.”
In addition, China has accumulated significant excess capacity in nuclear, hydropower, solar and wind power generation, and Chinese policy banks have encouraged Chinese companies in these sectors to participate in large energy projects in Africa by providing loan financing and insurance for investments in Africa.
As the world’s largest consumer of energy and the top importer of Crude Oil, China’s increased investment in Africa also aims to enhance energy security and diversify its sources of supply.
China understands that an electrified Africa will be a more receptive market for Chinese exports,” said Stephen Chen. China is also interested in oil production in Africa, and this is with an eye to China’s domestic energy needs, so China is emphasizing the need to ensure that oil sales are prioritized.”
Belt and Road projects blocked
China is also increasing its investment in Africa because its options are limited. After nearly a decade of ambitious growth, China has sharply scaled back its overseas lending program for its two largest policy banks.
Loans from China Development Bank and China Exim Bank fell from a peak of $75 billion in 2016 to $4 billion last year, according to data compiled by Boston University.
Belt and Road projects often have poor governance standards, inviting a series of scandals and complaints from debtor countries, which has led to little success in Beijing’s goal of using economic resources to expand its political influence.
Last year, Zambia became the first African country to default on its debt under the new crown epidemic, while Pakistan, a major recipient of loans for Belt and Road projects, accused Chinese companies of inflating the cost of power projects by billions of dollars.
In recent years, China’s economic resources are shifting to domestic rather than overseas projects, shifting from export-led growth to an emphasis on domestic investment and consumption. At the same Time, the new crown epidemic has put China’s domestic investment in health services to the test.
According to a recent report by the Overseas Development Institute, a think tank, the Chinese government has realized that its approach to lending is unsustainable.
This report writes, “The old model, in which the interests of Chinese companies and local elites took precedence over those of the borrowing country, and the borrowing country bore too much of the risk of project failure, will become even more unsustainable as countries’ capacity to assume debt and risk declines.”
Zahunz, who works as a research fellow at the Center for International and Comparative Politics at Stellenbosch University in South Africa, expects Chinese investment in African energy markets to continue to grow, but that project implementation will shift more toward public-private partnerships to avoid the risk of sovereign default on projects financed by Chinese loans.
He said, “We will see more energy projects implemented through private project financing, with Chinese investors organizing loans or providing equity investments and recovering their investments through pre-agreed purchase agreements or shares of user fees.”