China’s Open Checkbook

China’s Open Checkbook

Loans to Africa, Latin America help infrastructure but not job markets, trade deficits or transparency

With a thirst for raw materials and jobs for its workers, China’s spending in Africa and Latin America has captured the world’s attention.

Since 2000, China also has emerged as Africa’s largest trading partner, exchanging U.S. $160 billion worth of goods a year, according to a report by The Economist magazine. During the coming decade, Chinese leaders said they intend to invest U.S. $250 billion in Latin America.

Such far-flung investments breathe life into much-needed public projects — roads, airports, railways, telecommunications projects and ports. By the second half of 2015, the Chinese state news agency Xinhua boasted that China had completed 1,046 projects, built 2,233 kilometers of railroads and 3,350 kilometers of highways in Africa.

Although many of these projects improve Africa’s infrastructure and elicit goodwill from borrower nations, they often don’t yield the full menu of public benefits that come with locally funded efforts, experts say. From a lack of local hiring to an absence of transparency, China’s investments in the two hemispheres draw criticism and praise.

A Chinese construction engineer works at a section of the Mombasa-Nairobi railway at Emali in Kenya. REUTERS

Local projects, Chinese workers

Reliable data on the number of Chinese citizens working in Africa are tough to pinpoint, but the most commonly used estimate is a robust 1 million.

“Africa needs to create a lot of jobs for its large youth populations,” said a July 2016 Brookings Institution report titled, “China’s Engagement with Africa: From Natural Resources to Human Resources.”

“To the extent that Chinese workers fill jobs, there are fewer opportunities for Africans,” according to the report by the nonprofit public policy organization based in Washington, D.C.

David Dollar, author of the report and the U.S. Treasury’s economic and financial emissary to China from 2009 to 2013, said in a July 2016 panel discussion at Brookings that the Chinese get a lot of attention for financing big projects in Africa, but he characterized the percentage of China’s infrastructure financing in Africa as “significant but not overwhelming.’’

Chinese workers bring much-needed skills to train others, he said, adding that African governments should focus on the need to create more local jobs on these projects.

Job creation may be one of Africa’s biggest challenges. Fertility rates remain high while infant mortality continues to decline because of modern medicine and the “spread of better health and education services,” the Brookings report said. About half of Africa’s population is below the age of 20.

The prevalence of Chinese workers at African construction sites is a mixed blessing, Dollar concluded. Chinese projects aren’t putting enough Africans to work. Chinese construction companies, however, work at competitive prices and provide Africa with “needed infrastructure at lower costs.”

Trade deficits, risky loans

Chinese investment is ubiquitous in Latin America and Africa. From a plan for a U.S. $10 billion railway linking the coast of Peru to Brazil to a U.S. $12 billion railroad project along the coast of Nigeria, Chinese financing sates the cash-starved appetites of developing countries.

Many of these borrower countries, however, run large trade deficits with China, “which imports mostly commodities from Africa and Latin America, and exports higher-value-added consumer goods to both regions,” according to a 2016 report from The Economist Intelligence Unit (EIU), a financial research and forecasting firm and sister company of The Economist magazine.

Risky loans are also causing financial pressure on borrowers.

Since 2000, China’s government, banks and companies have issued more than U.S. $86 billion in loans in Africa, according to the China Africa Project (CAP), an ongoing multimedia report by veteran journalists and academics studying China’s engagement in Africa.

The loans are sometimes secured against oil, minerals or other natural resources. With commodity prices dropping, leveraged African states find it difficult to repay the loans, the CAP reported. “In Angola, for example, much of the country’s oil exports are being used to repay at least [U.S.] $20 billion in Chinese loans. That means the country is not actually earning any real money (cash that is) from its oil exports, prompting a liquidity crisis that is also fueling inflation,” the CAP reported.

Similarly in Kenya, China is now the country’s largest creditor and owns more than half of its external debt.

The Brookings study said about one-third of China’s loans to Africa are secured by commodities. Countries with such loans include Angola, the Republic of the Congo, Equatorial Guinea, Ghana, Niger and Sudan.

This type of financing enables them to get international loans on terms that would otherwise be unavailable, the report said. For China, using oil as security reduces the default risk and allows it to export in risky environments.

As China continues to invest abroad, business leaders in Latin America and Africa are starting to voice concerns about another financial quandary: growing trade imbalances.

Days before Argentine President Mauricio Macri was scheduled to meet with Chinese President Xi Jinping, business leaders in Buenos Aires in August 2016 aired their concerns publicly in a business summit.

“The trade ties between the two countries show a discouraging scenario,” said Argentine Industrial Union head Adrián Kaufmann in a report by the Buenos Aires Herald newspaper. “The trade balance has a deficit that has only deepened in the last few years. It’s an asymmetric relationship that has ill effects on the economy.”

Argentina’s exports to China were valued at nearly U.S. $5 billion in 2015 compared with imports from China valued at U.S. $10 billion, the Herald reported.

The EIU report adds detail to the imbalance.

Three-quarters of Latin American exports to China are made up of just four commodities: oil, copper, iron ore and soybeans. Meanwhile, China exports a large proportion of low- and high-tech consumer goods to Latin America. “This process of exporting natural resources to China and importing higher-value-added manufactures has produced large and growing trade deficits for most of the past decade,” the report said.

Weak commodity prices are making the problem worse. By 2015, Latin America’s trade deficit with China had quadrupled to U.S. $26 billion, the report said.

Unfulfilled promises

While China’s investments in Africa have attracted attention worldwide, many of its proposed developments never materialized. Plagued by many of the same roadblocks facing Western investors, Chinese firms have faced challenges ranging from a lack of local support to inferior infrastructure.

In one high-profile example, a large Chinese firm and Ugandan investors earmarked U.S. $1.5 billion for some of the least-developed parts of Uganda, according to an article in The Economist magazine. On the western edge of Lake Victoria, they envisioned a transformative free trade zone in which a 500-square-kilometer area would house a solar-powered airport, manufacturing facilities, a distribution hub, homes and agribusinesses.

None of these projects got off the ground.

In the Democratic Republic of the Congo, China promoted a U.S. $1 billion development to create a palm oil plantation. When work started, however, the Chinese found no roads in the area and a river that was barely navigable, The Economist reported. When a small patch of land was finally planted, the crop was stolen. The project eventually died.

Environmental questions

Academics and government officials in Latin America also have raised questions about China’s environmental stewardship.

The Brookings report noted that multilateral banks, such as the World Bank, have developed detailed policies to govern large infrastructure projects that could have significant impacts on the environment. A large development project funded by the World Bank, for example, would include environmental assessments, public comments and mitigation efforts to reduce negative impacts on the environment, Dollar said.

China’s approach to building in developing countries is to follow the local guidelines of the host country. While seemingly reasonable, the Brookings report said, the “implementation of regulations is poor in many developing countries.”

“Critics of China’s activity in Africa note that China’s own domestic environmental outcomes are also very unsatisfactory,” according to the report.

Those outcomes have been widely publicized.

Coal burning in China caused 366,000 premature deaths in 2013, according to a report by Chinese and American researchers released in August 2016. The study, “Burden of Disease Attributable to Coal-Burning and Other Major Sources of Air Pollution in China,” was led by Tsinghua University in Beijing and Health Effects Institute, based in Boston, Massachusetts.

A July 2015 report by Goldman Sachs Global Investment Research said China was emitting more carbon dioxide than the United States and European Union combined, and 60 percent of China’s groundwater was unfit for human consumption. “China’s Environment: Big Issues, Accelerating Effort, Ample Opportunities” pointed out, however, that these problems are leading to unprecedented government spending to remediate them.

It’s that track record that has some Latin American business and community leaders urging caution. The proposed 5,000-kilometer, Chinese-funded railway linking the soya farms and iron ore mines of Brazil to the southern Peruvian port of Ilo would provide the Chinese with a cheaper and shorter route to extract natural resources. The route preferred by the Chinese, however, would cut across heavily forested areas in the Amazon and require the construction of an entire city in the rainforest to house the workers needed to build the railway.

Brazil’s state-run rail operator in August 2016 criticized the China Railway Eryuan Engineering Group’s choice, saying it bisects an indigenous reserve and would damage sensitive ecosystems.

A 2015 Boston University study, “China in Latin America: Lessons For South-South Cooperation and Sustainable Development,” echoed the notion that the “China boom” in Latin America could be cause for environmental alarm. Exports to China cause large increases in greenhouse gas emissions, the report stated, because most are directly linked to the extraction of natural resources. Those exports, however, “do not account for the most important cause of deforestation: roads, canals and railroads to get those products to ports.”

These access roads open up Amazonian forests to human settlements and interrupt animal migration patterns, the study said.

Rewards for loyal voters

Trade imbalances and environmental questions aren’t the only concerns when China eyes a nation for investment. China’s financial involvement in Africa comes with political strings attached.

A project based at the College of William and Mary in Virginia shows that China rewards African countries that vote with it on United Nations resolutions.

While China gives proportionally more money to poorer countries, it largely supports with greater amounts the countries that vote with it, the AidData project shows.

For example, the two countries that voted with China the most frequently — Ethiopia and Zimbabwe — received the most development assistance from China from 2000 to 2012.

No transparency

Doing business with democracies typically requires financial disclosures from government officials, public hearings on development projects and competitive bidding, but doing business with a secretive regime poses transparency challenges.

Leading up to the September 2016 G20 summit, an international financial forum, China proposed that world leaders adopt new principles that promote international cooperation for returning corrupt individuals to their countries to face justice. Transparency International, a nonprofit organization that works to fight corruption, wrote that China’s lead role in this discussion should raise a red flag because the Chinese government still uses methods including “forced confessions and a lack of an independent judiciary, which means it is not possible to know if those arrested are political targets.”

“Given its push to win business around the world,” Transparency International wrote, “China could have more impact on the G20 anti-corruption agenda if it took its commitment to investigate and prosecute Chinese companies that bribe foreign officials more seriously.”

Other world leaders have called on China to increase transparency when reporting economic data. Ben S. Bernanke, former chairman of the Board of Governors of the U.S. Federal Reserve System, co-authored a report for the Brookings Institution in March 2016 that said China needs to better explain policy initiatives and improve data transparency by reporting believable growth numbers, which is a “difficult transition for a government accustomed to secrecy.”

That secrecy cloaks some of the downsides of Chinese investment, according to the Seven Pillars Institute (SPI) for Global Finance and Ethics, which analyzes issues of moral philosophy in global financial markets.

The largest source of Chinese investment in Africa is the export credit program in which China lends money to a recipient government to finance exports from the lender. For example, it could finance construction projects in African states using Chinese construction companies, workers and equipment, the SPI report stated.

“What makes Chinese export credit ethically questionable is the conditions under which it is extended to African states,” the SPI report said.

Interest rates don’t conform to internationally established norms, the report said. They are typically below market rates, and the length of the repayment period is much longer. While these export credit agreements have strict quotas for local hiring, “there is very little evidence that these quotas are met,” the report stated.

Still, the Chinese loans are welcomed by governments across Latin America and Africa as countries push forward with overdue modernization projects.

Oliver Wonekha, Uganda’s ambassador to the United States, views China as playing a complementary role to the U.S. and other Western lenders. In the July 2016 panel discussion at Brookings, she noted that her president, Yoweri Museveni, has visited China five times and that such collaboration is improving two of Uganda’s airports. She also pointed out that China is financing a U.S. $350 million highway project linking the capital city of Kampala to Entebbe International Airport.

Africa, she said, needs lenders willing to take risk. She summed up her country’s growing relationship with China succinctly: “China has a great appetite for risk.”