Chinese overseas development finance is unrecognizable from what it was just a few years ago. After suffering tens of billions of dollars in losses, Chinese lenders have moved to de-risk their lending to countries in Africa, Asia, and across the Global South. Instead of those once massive bilateral loans from the two main policy banks in Beijing, Chinese lending now encompasses a much more diverse array of actors, particularly in Africa.
This new approach was on full display last month when Kenya closed a deal with a consortium of Chinese stakeholders to finance the extension of the Standard Gauge Railway from the current terminus in the Rift Valley to the Ugandan border. A third of the cost to build the new railway will be paid for by the Kenyan government, around another third will be comprised of a consortium of Chinese investors, and the rest will be financed with loans from the China Exim Bank.
Yunnan Chen, a research fellow at ODI Global in London, and Teal Emery, an adjunct lecturer at Johns Hopkins SAIS in Washington, D.C., join Eric & Cobus to discuss their new report, which breaks down the latest trends in Chinese development finance, and to explain why the deal in Kenya should serve as a case study for other African borrowers.
Show Notes:
- ODI Global: Greener on the other side? — Mapping China’s overseas co-financing and financial innovation by Yunnan Chen and Teal Emery
- ODI Global: China’s creditor diversification in Africa: impacts and challenges of infrastructure debt-financing by Chinese commercial creditors by Yunnan Chen and Tianyi Wu
- South China Morning Post: After delay, new Chinese funding plan will help extend railway to Uganda, Kenya says by Jevans Nyabiage
About Yunnan Chen and Teal Emery:
Yunnan Chen is a Research Fellow in ODI’s Development and Public Finance programme. Her work centres on the changing development finance architecture and the role of global China. She holds a specialist interest in the role of Chinese development finance, overseas lending and debt architecture, and the role of national development banks and development finance institutions in Africa. Previously, she was a Global China Initiative Fellow at the Global Development Policy Centre at Boston University and a pre-doc fellow at the Center for Global Development (CGD). She has been a researcher at the SAIS China Africa Research Initiative (CARI) and a PhD candidate at Johns Hopkins School for Advanced International Studies. Her research and commentary has been published in academic journals, policy briefings and magazine articles, and she has featured in media commentary on development and China’s overseas lending and development cooperation.
Teal Emery is a research analyst who uses modern data science tools to uncover actionable insights relevant to policymaking, financial markets, and business. He worked for seven years as an emerging markets investment research analyst for Morgan Stanley Investment Management (MSIM). He traveled regularly to Africa, the Middle East, and across the developing world to meet with economic policymakers, business people, and civil society. He has a strong interest in sustainability issues and created MSIM’s first sovereign ESG framework. Over time, he increasingly moved towards a data science approach (using R and Python) to economic and financial analysis. In 2020, he left Morgan Stanley and began working as a consultant to the World Bank on analysis and thought leadership related to aligning sovereign debt investing with sustainability goals. Currently, he is the founder and lead researcher for Teal Insights, a research consultancy focused on sustainability, emerging markets, and sovereign debt.
Transcript:
ERIC OLANDER: Hello, and welcome to another edition of the China in Africa podcast, a proud member of the Seneca Podcast Network. I’m Eric Olander, and as always, I’m joined by CGSP’s Managing Editor, Cobus van Staden. Today, I think joining us from a secret hideout with lots of books in Johannesburg.
Is that correct, Cobus? Indeed. Yes.
Whenever I see the books behind you, I know you’re not in lovely Cape Town South Africa. Today, we’re going to be talking about an issue that we have talked about extensively over the years that we’ve done this podcast, and that’s Africa’s infrastructure deficit and financing from China. There have been a lot of changes, and it’s especially important to talk about this issue in the context of everything that’s going on today between the US and China, the Chinese economy, and all the changes that we’re seeing.
So earlier this week, we got some economic indicators out of China that’s starting to indicate that the trade war with the United States is beginning to bite. China’s factory activity contracted in April to its lowest level in 16 months. That is since December 2023, and that’s particularly important for African exporters in part because if Chinese factories are not producing as much, then they don’t need as many raw materials that they’re buying from Zambia and from South Africa and the Democratic Republic of Congo and Zimbabwe, et cetera.
So this data point is the Manufacturing Managers Index, which is the PMI. That by the way is an index that is used in the United States and Europe and many other places as a leading gauge to measure business confidence and business conditions. So just to give you a sense of where it was, analysts were expecting a 49.8, and usually above 50 is considered to be healthy, and the number came in at 49.0. It’s a small change, but it is again the first indication that the trade war is beginning to take effect. Now, the reason why this is so important, Cobus, is because we’ve seen over the past several years slowing Chinese economy, a changing Chinese economy, but that has had an impact on how much money China has allocated for overseas development finance. There have been a number of issues that relate to why China’s ODI, you know, Overseas Development Assistance, ODA, has contracted in years. Part of it is because the Chinese simply don’t have the money that they had 10, 15 years ago to lend to other countries.
Another problem, especially in places like Africa, there’s been a problem about do countries have the debt capacity to be able to borrow this much money. And so when we look at Chinese development finance, not only in Africa but across the global south, they’ve done a huge amount of lending, upwards of somewhere around a trillion dollars in the period, maybe from 2000 to about 2020 or so. We saw a sharp decline from 2016.
And then in Africa and in Latin America, it started to rebound. In Africa alone, Chinese creditors are estimated to have committed somewhere around 180 billion dollars of lending up until 2023. And the reason why this is so important is because the African Development Bank estimates that every year the continent needs somewhere between 130 to 170 billion dollars of infrastructure financing.
This is what they call the infrastructure deficit. And that financing gap is about 108 billion dollars between what Africans can borrow and pay for themselves and what they need. So Cobus, this slowdown in Chinese lending and this growing African infrastructure deficit really presents the challenge of the age if African economies are going to be able to kind of push themselves out of this current slump that people are in right now in terms of finding financing for roads, bridges, airports, ports and all the badly needed things that every economy needs in order to thrive.
COBUS VAN STADEN: That’s definitely true. It gets additional, there’s additional pressure on them from two directions. In the first place, you know, they have this this kind of world unique youth bulge, you know, of a very young population that potentially brings like it has a lot of potential for economic growth, for development and so on.
But it also is a kind of a double-edged sword. You know, if those if those people don’t get opportunities, then then it turns into possibly a you know, quite a different situation. And then also, of course, a lot of this is happening on top of a gathering climate crisis.
So green energy, you know, generation is particularly important. Integrating that green energy into into quite patchy grids is another is another challenge. And then finding ways for finding the kind of infrastructural ways of then of of integrating all of that into a larger kind of economic development, you know, strategy.
All of those all of those challenges are really have a ticking clock on them.
ERIC OLANDER: And remember that last year at this time, we were talking about the Partnership for Global Infrastructure Investment. That was the Biden administration’s big push to challenge the Belt and Road and to build infrastructure in places like Africa, and then also Global Gateway, which was from the European Union. We’re not hearing much at all about those two initiatives, right?
COBUS VAN STADEN
No, not much, although I did weirdly kind of like I was at just happened to be in Johannesburg and I saw a big sign for a Global Gateway kind of green hydrogen project. So I’m like, oh, it still exists. Okay.
So that’s, you know, kind of. But yeah, like it hasn’t been that prominent in, you know, kind of in the news in Africa.
ERIC OLANDER: Okay. It lives. It’s alive.
Let’s dive into some of these key financing trends right now. And today’s going to be a real treat for us because we’re going to be able to expand on some of the key trends from people who have been studying this and actually working in these sectors for a number of years. There’s a new report out by ODI Global, greener on the other side, mapping China’s overseas co-financing and financial innovation.
Now, bear with me. That is a wonky think tank title. And, you know, so if you’re already bored and thinking this isn’t going to be relevant for you, move past the title.
So no disrespect to our guest today, but oftentimes the titles need to be a little sexier from think tanks in order to draw people in. So Yidan Chen is a research fellow at ODI Global and Thiel Emery is an independent consultant and founder of Thiel Insights and is also an adjunct lecturer at Johns Hopkins SAIS. Both of them wrote this fantastic report.
And thank you both for joining us today.
YUNNAN CHEN: Hi. Nice to see you. Nice to be here.
ERIC OLANDER: Thank you.
TEAL EMERY: A big pleasure to be here.
ERIC OLANDER: And of course, didn’t mean to diss the title right off the bat, but just wanted to make sure that I love the report and it was absolutely fascinating. And so I just want to make sure that we engage everybody on this. So again, you guys start the report right off the bat saying that, you know, China’s global development finance is in a state of transformation.
And again, I think this is really important because, Yidan, you know, we’ve been talking about this issue with you for almost a decade. And again, I’m just wondering if people are being able to keep up with all of the changes that have been going on in China and the way that they’re lending. And I think a lot of people still think of a Chinese loan is a sovereign bilateral loan from the China Development Bank or the China Exim Bank to a sovereign borrower in Kenya or Zambia.
And that’s the way it is. And that’s what Chinese overseas development financing looks like. Your report says that’s not at all what it looks like today.
Why don’t you start and just give us an introduction to what your key findings were, and then we’ll start to drill down a little bit as we go on.
YUNNAN CHEN: So I think to start, we’ve had this model of China’s overseas lending, right? Or it’s overseas development finance, which is largely through the form of loans from Chinese banks and credit institutions, not aid. It’s not concessional for the most part.
It’s usually tied to the export of Chinese goods and services or to Chinese strategic industries. And for the last decade or more, particularly under this heading of the Belt and Road Initiative, there’s been this kind of model of Chinese lending, which is, it’s very much targeted to hard infrastructure, economic productive sectors. It’ll be a mega project constructed by a Chinese contractor and sponsored and largely financed by a Chinese policy bank.
In Africa, this is primarily being China Exim Bank and to some degree, China Development Bank. And that model has been responsible for building a lot of bridges, a lot of the standard gauge railways we’ve seen, road infrastructure, skyscrapers in Addis Ababa. That model is becoming a little bit outdated.
And we really see a shift in this kind of state-driven idea of overseas development finance. And really after 2015, the picture has gradually started to shift quite dramatically. And I think in this post-COVID period, we’re really at an inflection point where this Chinese model of BRI lending that we’ve seen has had to recalibrate, has had to learn from some of the mistakes of the past.
It’s adjusting to a new reality of external risk as well as domestic systemic risk. And our paper focuses on co-financing as one of these emergent strategies in which we see banks trying to manage these pressures of external and domestic risks and emphasising greater risk discipline and risk mitigation in how they lend, while at the same time trying to balance the new expanded agenda of the BRI through the expansion of the Green Belt and Road Initiative.
COBUS VAN STADEN: Teal, when we talk about co-financing, what do we mean? Who is involved and how are these loans different from what I think a lot of people have come to, as Eric was saying, a lot of people have come to assume Chinese lending looks like?
TEAL EMERY: Sure, Cobus. In terms of co-financing, there’s a couple of different ways that this happens and reasons that it happened. And I think that it’s worth just contrasting it exactly with what we were talking about of the sort of traditional model of lending that happened through the China Development Bank or through the China Ex-Im Bank were large, relatively long tenor loans of high dollar amounts.
And you can think of the Kenya Standard Gauge Railway, for example. And what happened, the really short version is for the number of years after the global financial crisis and through the time of the launch of BRI, China was lending lots of, they had a large trade surplus, they had a lot of overcapacity, and so they were lending a lot of money out through the policy banks. A lot of that money went to oil producing countries, to Angola, to Ecuador, to Congo-Brazzaville, et cetera.
And then when oil prices went down, they lost a lot of money. Venezuela defaulted, there were large losses, and this comes at a time domestically for China where in their domestic financial system, they were also having increasing problems with bad loans. And so, there was a move towards de-risking the financial system generally, and this happens both domestically in China, but also in terms of their lending overseas.
And so, that’s the context in which this idea of co-financing becomes important. And so, what it means is that it’s not just the China Development Bank or the China Ex-Im Bank making a loan, it could be them, it could be one of the state-owned commercial banks like ICBC or Bank of China or China Construction Bank, and lending with a group of other lenders. And the reasons why they do that are a couple, and one of them can be that it’s a way to share financial risk.
You’re lending with 30 other banks in what’s called a syndicated loan, you’re part of the syndicate, you’re only taking a certain portion of the financial risk there. And the other has been as a way to outsource some of the due diligence in project preparation that I think the policy banks realized that they were not always quite so well equipped to do, that they were able to have large international banks or MDBs or other people that they’re co-financing with, not only sharing the financial risk of it, but also doing some of the due diligence and project preparation and other things like that, that made for more successful projects. And I think that that’s the context in which we’ve seen just general infrastructure lending coming from the policy banks has gone down dramatically. And we’ve seen, as the AidData Belt and Road Reboot report discussed in a lot of detail, a lot of emergency lending for lenders or for borrowers that were facing liquidity problems.
The one sort of place, aside from that emergency lending, that has been resilient in terms of Chinese overseas lending has been this co-financing.
ERIC OLANDER: Well, let’s talk, Yunnan, a little bit more about co-financing and then Teal also talk about syndicated products as well. And Teal talked about it purely in the Chinese context, but you also mentioned in the report that the Chinese are working with various actors outside of China. I was surprised to learn when I was in Singapore a few weeks ago that the Singapore Stock Exchange is starting to get involved in this, that the Chinese are also working with banks like HSBC and Standard Chartered.
And then you also mentioned in the report that local financial institutions in places like Africa and the Global South are also being hoarded and involved in these deals as well. Maybe talk about some of the actors outside of China who are part of these new financial strategies that the Chinese are employing.
YUNNAN CHEN: To just give a bit of context, the period that we really zoom in on when it comes to co-financing relationships is very much this period after 2015. And from previous research that we’ve done at ODI Global, that is the period where you see the big going out of these commercial banks. These are not the policy banks.
These are state-owned commercial banks that are deposit taking. Most of their portfolio is domestic in China. And I’m talking about largely ICBC, Bank of China and China Construction Bank or CCB.
And these three banks, our report finds, really sit at the heart of a lot of these co-financing networks and relationships where we see patterns of co-financing between these state owned commercial banks with other major international commercial banks in Europe, in Northern Asia. There’s an interesting cluster of Japanese banks like MUFJ and Sumitomo Matsui that come out quite strongly as recurrent partners in some of these relationships. But we also see a lot of co-financing via the DFIs or public development banks as well.
I think what’s interesting is not all of this is kind of co-financing in syndications. We use the definition of co-financing quite broadly, but we see Chinese actors trying to partner and collaborate with other financial institutions in a multitude of ways as ways to share risk. And also another one is to use other banks as financial intermediaries where they may provide liquidity in that institution or provide a line of credit, which has been on to other projects or to other needs to serve the operations of that bank.
And one case study of this that’s very interesting in the African context is this relationship between ICBC and Standard Bank, which is a South African, a major South African entity. And this has been a strategic partnership going on over 15 years. ICBC took a 25% stake, I believe it was 25, but please correct me if I’m wrong, in Standard Bank in 2007, I believe.
And since then, Standard Bank has been the local partner responsible for bringing in ICBC into a lot of these co-financed transactions. And Standard Bank has also been the recipient of some of these syndicated loans as well, which can then be used to on-lend for its own operations.
ERIC OLANDER: Cobus, I think we have a great case study here. Just last week, we talked about the Kenyan government’s successful closure of, well, at least we think it’s a closure, of phase three of the Standard Gauge railway deal. And this is almost a perfect timing for this report, because let me just read you the partners here and then Teal and Yunnan, I’d like to get your feedback on it.
China Exim Bank is involved. There’s going to be about 30% of the loans. The Kenyan government is going to put up 30%.
The rest is going to be by syndicated loans from commercial banks. The African Development Bank is also involved, and a consortium of Chinese state-owned companies will be involved. I mean, if you want a case study of what you’re writing about, this seems to be it, where the risk now is no longer China Exim Bank fronting $6 billion the way they did for phase one and two, and them being worried if they’re going to get all that money back.
Now we’ve got a dozen partners potentially involved in this project, who all do seem to be aligned. But Cobus, this was very interesting that the Kenyans were so patient and so effective in their negotiating. Remember, it took them almost a decade to negotiate this deal.
But it shows that within the Kenyan Ministry of Finance and somewhere within the Kenyan government, there are some very knowledgeable people about how to put these deals together.
COBUS VAN STADEN: Yeah. I mean, it’s also very interesting to see how Kenya itself has pivoted towards a new kind of loan structure. So it seems like everyone’s…
Well, they got it.
ERIC OLANDER: They seem to understand what Yunnan and Thiel are talking about.
COBUS VAN STADEN: Yeah. It seems that everyone was kind of learning lessons from the earlier iterations of the Standgate Railway, which had some problematic kind of contract issues and also a very large kind of debt impact on Kenya itself. So maybe Thiel first and then Yunnan.
I was wondering what you made of the announcement of the Kenyan deal. And also, I wonder if you could talk a little bit in somewhat basic terms about whether you feel that does this effectively spread risk in a way that actually would have avoid the kind of like impact of Phase 1 and 2 of the Standgate Railway, which I think ended up being both politically and financially a very tough kind of situation for Kenya. So do you think these measures will kind of ameliorate risk and more specifically, how will it?
TEAL EMERY: So I think, and actually I say this, I used to be a creditor of Kenya and in a past life I was a sovereign debt investor and so spent a lot of time in Nairobi and meeting with the Kenyan government. And I think that they are quite sophisticated. And I think also the financial system in Kenya is quite sophisticated.
So in that sense, it doesn’t necessarily surprise me to see this. But when I heard about it, I thought exactly the same thing, that this is exactly the sort of risk sharing that we’re looking at. And while I think there are a lot of details that remain to be answered, and particularly as you folks have raised on the show previously, just about the economics of taking the SGR past Naivasha towards the Ugandan border, like, you know, is there enough traffic?
If you build it, will they come? You know, those I think are unanswered. But just in terms of the pure structuring of it, I think it’s exactly in line with what we found in our report in terms of a move towards risk mitigation and risk sharing.
And I think that the one thing that we do know, while some of those answers will remain unanswered until it’s built, that the project preparation and other things, you know, there are a lot more people involved, there are a lot more organizations involved that all have to bring things past risk committees and past other sorts of gatekeepers that hopefully will make it so that the actual planning of it and the structure of it is more sound. And the fact that there’s public-private partnerships and other things like that are very relevant to the fact of Kenya’s overall debt situation and trying to move in light of that, you know, which I think is something that will have implications for the rest of the continent as well.
There are a lot of other countries dealing with debt issues. Younan, what’s your take?
YUNNAN CHEN: Yeah, I think it’s a really interesting trend and a pioneering model, right, compared to the first phase of the railway was the kind of classic model. You had Ex-Im Bank providing a concessional loan and an export buyer’s credit. It covers usually about 85% of the project risk, of the project value, sorry, and then the remaining 15% is held by the Kenyan government.
This time we’re seeing Kenya taking on a bigger share of that risk exposure, but we’re also seeing some of the trends that our report highlights, which is that from the top down the signals from Beijing are that the companies themselves, the SOEs, need to take on a greater stake in these projects. They can’t just do the EPC and kind of wash their hands of the projects, especially if it goes badly, right? There’s been this kind of systemic moral hazard in a lot of these BRO transactions where it’s the company often that incepts the project or brokers the project with the host government.
They will pull in China Ex-Im Bank or another financier in behind them and you, who of course have a mandate to support that company and support Chinese goods and services, but then at the end of the day, if there’s a default, it’s the bank or it’s the insurer, signer short that ends up holding the, what’s the metaphor, holding the baby?
ERIC OLANDER: Yeah, holding the bag.
YUNNAN CHEN: Yeah. So I think this is also about pushing companies to take on a bigger share of risk through some of these kind of PPP models. And we’ve also seen in Kenya, another example of the Nairobi Expressway as well, which is also financed through a PPP with a Chinese SOE.
I think the other interesting aspect in this is the involvement of Africa, of AFDB, the African Development Bank. And really we’re seeing this slightly in trends in Africa in terms of lending data where there does seem to be a rising interest in financing to these regional financial institutions as intermediaries, but also just a quite salient appetite to work more with these MDBs who are experienced. They have the local knowledge, they have much better expertise, they have the high standards.
And I think Chinese creditors like Ex-Im Bank are also keen to learn from these international partners.
ERIC OLANDER: And we’re seeing more of these public-private partnerships start to roll out. And we talked earlier on the show about the Tanzania-Zambia Railway, Tazara, which they recently signed an agreement, I don’t know if it’s a contract or an MOU, but some type of agreement for a $1.4 billion renovation that is going to be done on a PPP model similar to what China Road and Bridge Corporation did with the Nairobi Expressway, which they had a 27-year runway basically to make back their money.
And then at that point, they’re going to hand it back over to the local authorities. They’re doing this also in Cambodia. There’s really nothing unique about Africa in this context.
They’re doing this model in lots of parts, lots of places around the world. This brings up this question as to, you know, the changes are happening so quickly. I mean, just in the time of our conversation here in the past 25 minutes, we’ve talked about so many players, so many actors, ICBC, Sinoshore, the China Development Bank.
I mean, it’s not easy to follow. You see in Washington how just backwards the understanding is about China today. Fantastic article in the Wall Street Journal earlier this week that said most of the advisors around President Trump haven’t been to China in 20, 25 years, if at all.
I mentioned last week in our show from Salzburg how I was surprised that 25 years into China’s engagement in Africa, senior African stakeholders, ambassadors, ministers and whatnot, have very little, if any, knowledge about China. They’re just not focused on it. In the level of granularity that you’re talking about in these reports, clearly some folks in the Kenyan Ministry of Finance and the Kenyan government really get it.
But in your understanding, and when you talk to stakeholders not only in the U.S., but in Africa and elsewhere, how well do you think that they understand the trends that you’re trying to highlight in this report? Because if the Chinese get it, if the Singaporean financiers get it, but if stakeholders in the Global South are struggling to keep up, then there’s an asymmetry in information. What’s your what’s your take on that?
TEAL EMERY: My take on it is, I mean, I think it’s going to really depend on and obviously this administration in particular in the United States has totally abdicated U.S. leadership. And I think that in my experience dealing with this, which I’ve been doing for about a decade, again, I was I used to be an investor in China and meet with with Chinese officials as well. And in that capacity would meet with folks from the State Department, from the Treasury, from other places that that were incredibly knowledgeable.
You know, so there is a sort of technocracy in Washington that was very well informed and truly understood what the issues were. Those people are not empowered right now. You know that right now, I think that there’s there’s a real challenge.
You know, I think in Washington, there’s the technocracy. You know, there are the people in in these agencies of which I think that there’s there’s a lot of understanding of China, even if it could be even better. Then there’s Capitol Hill.
And I think that this is something that I see as having been a trend since, say, the late portion of even the Obama, you know, last Obama administration, where it was a fairly bipartisan thing on the Hill to be anti-China. You know, it was it was a way to win points across partisan lines, you know, but that obviously has gotten even worse now. And I think there’s a real, you know, lack of understanding of China, you know, amongst the current administration.
And I don’t want to hold any water for them. But, you know, if what they’re trying to do is is to, you know, show American global leadership, they’re clearly not doing a very good job because they’re absolutely ceding the entire field to China, both in terms of soft power.
ERIC OLANDER: Yeah. And what are you seeing in the global south in terms of your engagements with Africans, Latin Americans, Asians and others and on that same issue?
TEAL EMERY: I think in terms of understanding of China, you know, my my sense and in my experience has been that, like, there’s still an understanding of China that’s very much I would say the most broad sort of understanding is the sort of classic BRI one, you know, is the like Chinese diplomatic delegation shows up, you know, and then there’s some large checks that are written from, you know, CDB or from Exim. And that that was the way things worked for a while.
But that is not the way that it works now. And so I think that part of what we were trying to do in this paper is trying to build upon some great research that other folks have done, you know, that started to talk about what this shift is, but but be able to say, like, what does this actually mean for the green energy transition? You know, like, is there actually funding of green projects?
And then secondly, like, what does this mean for for Africa in specific? And I think there, you know, something in my, you know, discussions with African policymakers in the past, you know, I think that there’s still a lot of understanding that that needs to happen in terms of like, what does it mean that these these are no longer things that have to do with diplomatic favor? You know, like like a lot of the policy bank lending may have been, but instead is going to be driven much more by purely commercial factors.
And I think that there’s there’s a little bit of an uphill battle in Africa in terms of getting this funding, you know, that that in terms of the mix of funding that was heading towards Africa, a lot of it was the bilateral policy bank lending from CDB and Exim and much less of it is actually this this syndicated lending, you know, and so I think that’s, you know, we’re seeing, like you’re saying in Kenya, like you’re saying in Tanzania, you know, there are people and there are policymakers that really are getting the memo and are adapting to the times, you know, and hopefully that that message, you know, we’ve tried to make our our paper be something that that can be actionable in terms of showing what the current landscape is.
COBUS VAN STADEN: You know, as Till was mentioning, the report basically has a dual focus in the sense that you’re mapping these large project financing trends, but you’re also trying to pass, you know, whether it is having a green transition impact. So I was wondering what your what your main findings have been in relation to whether new financing models is actually having this kind of like secondary impact.
YUNNAN CHEN: So I guess it’s one of these both yes and no answers, right, where there’s a lot of optimism, I think, that we can have around co-financing as a perhaps more resilient, more risk balanced modality of supporting projects and providing financing for development. But the reality is that that co-financing has not really pivoted to green projects. It’s still very much concentrated in more commercial sectors, in energy mining, in more higher income economies rather than the economies in Africa that perhaps needs financing the most.
And the nature of syndicated lending is also that it’s it tends to be more expensive and it’s relatively short tenors. So it’s not really ideal for financing infrastructure investments in green energy that are very that require quite a long term patient capital. The key finding, however, that we excavate from this from from this the social network analysis that you’re very expertly executed is the role of this distinct network of of public finance.
So multilateral development banks, development finance institutions and these public financial institutions that have many of which have a strong development mandate and their co-financing relationships with with Chinese as well as other commercial creditors. Those those are the relationships. And that ecosystem is the most important when it comes to the green projects that we’ve seen get financed over the last two decades.
But it’s a very bifurcated network. You know, you don’t see they’re very distinct in their lending relationships with each other. But we see that these Chinese banks, particularly the state and commercial banks, clearly have like a very strong bridging role that they could play in potentially working with with these public development banks and potentially bringing in more of that private sector capital into some of these green transactions.
And the other thing to add is also that we see a very salient role for particularly co-financing with MDBs via some of these major co-financing funds that were set up in the early 2010s. These co-financing funds at the African Development Bank, at the Inter-American Development Bank, also play quite a significant role in in a lot of the green projects that we see get financed. And then there’s a kind of open question on, OK, well, what do we do going forward?
How can we replenish these funds that have clearly been quite affected so far?
ERIC OLANDER: I guess I was surprised when I read in your report, Yunnan, that the green is not a priority or as much. And obviously, mining is one that, you know, a lot of banks can get around. But given the emphasis that we’ve heard from the Chinese on the small and beautiful or smart and beautiful focus of the BRI, and then all this talk about solar, particularly in places like Africa, and I just kind of assume that a large solar power plant, the kinds that are being built in Africa and other developing countries, is exactly what investors want, because the moment you turn on the power, money starts to come in through electricity bills. And so that would think to me that’s the kind of investment that would be very attractive to this new model of financing.
But it’s interesting that you point out that it’s really not, though.
YUNNAN CHEN: Maybe it’s not yet. And the caveat is also that, you know, the data that we have on some of these on these co-financing transactions goes on to on to 2021. 2021 is when we see.
ERIC OLANDER: So these might have picked up since then, in the four years since then, this might have picked up.
YUNNAN CHEN: Potentially, potentially. But I think there’s also there’s a lag time. So really, it’s after 2020 that you see, you know, the green BRI was already kind of percolating through the system.
But really after 2020 is when you see this kind of acceleration and a growing emphasis on greening BRI, supporting more clean technology. And that’s also around the time when China’s own domestic industries are starting to hit overcapacity in EVs and renewable energy, solar panels, et cetera, et cetera. And, you know, just as the BRI 10 years ago was exporting the overcapacity then of railways and roads.
Now I think the BRI is going to be supporting the overcapacity of these frontier sectors. But COVID, of course, has had a big impact on the lead times for a lot of these projects. So it may take some time for those trends to set.
But I’ll turn it to you, because I think you want to answer this.
TEAL EMERY: Sure. Yeah, I’ve done a decent amount of work on looking at renewables in Africa previously as well. And so I think I’d say a couple of things is that exactly, you know, that there’s a confluence of interest and time remains to tell whether this is something that just hasn’t happened yet or whether there are structural issues here, you know.
But you have overcapacity in solar and other sorts of areas. So, you know, you can think of this not necessarily as just being a purely, you know, goody goody thing, but a real politic like export overcapacity issue. You know, you have small is beautiful.
You have these other sorts of things that are pointing towards a reason why there sure could be, you know, more green financing and more financing of solar and wind and these other projects. What we’ve seen so far, and again, you know, I think we’re very cognizant that the data has huge lags and, you know, and lots of gaps. But but is that basically like is that the turn towards a green BRI and the turn towards ESG and this is something that’s happened globally and something I wrote about quite a bit at the World Bank previously, you know, has been much more part of the risk management strategy, you know, and this is this is true for Western financial institutions as well.
So this is not a China specific thing, you know, but there’s great peace in the Belt and Road reboot report from AidData, you know, where they looked at contracts that had higher ESG standards. And what they found were that those contracts had, you know, lower delays and less cancellations and less other things. And so it’s been very successful in a certain sort of way, but it’s very much part of this risk management and risk mitigation strategy as opposed to something that is explicitly targeting, you know, energy, energy transition in lower income countries.
And I think that we do a lot of fun and fancy things. I’m a big nerd and I, you know, ran a LLM, you know, an AI model to basically try to identify green projects, you know, from within all of these Chinese loans between 2000 and 2021, you know, but the real sort of policy takeaway there is that, you know, who’s actually financing or co-financing these? And as Yunnan was saying, you know, it’s either the policy banks themselves or it is co-financed with policy driven lenders, you know, like, you know, the African Development Bank or IFC or these other people.
They do not get co-financed by commercial lenders, you know, and it’s a completely distinct system, you know, and network than we found for the overall co-financing relationships of Chinese co-financing overall. And that, you know, I think what that means is that, like, if you want that to happen, you know, there are policy levers to play. You know, if the Chinese, if Chinese officials, you know, want to step in where the U.S. has abdicated its, you know, leadership roles in, you know, climate and other things of this sort, you know, that they can do that, but they’re going to have to do that through, you know, giving a slightly more explicit mandate to, you know, the state owned commercial banks to do this, you know, in some fashion or another and sort of play that linking role that we’ve been able to find that they play. And then also to potentially work with MDBs, you know, both the global MDBs and local ones and to fund things there, because that’s how these projects have actually been financed, you know, that they don’t necessarily have purely commercial risk and return profiles.
COBUS VAN STADEN: Yunnan, just kind of zooming out to a very, very kind of high level perspective, you know, you’ve been following these trends for a while. And so if you if you had to kind of explain to a lay audience where, like, where do you feel the Belt and Road Initiative is now? Like, where is it’s kind of standing in its development?
And considering the very large scale kind of disruptions and changes that the very rapid changes we’re seeing, particularly in development finance at the moment, where do you foresee it going? I mean, I know predictions are very difficult to make. But but, you know, kind of like in terms of like taking the pulse of the BRI, like what are some of your kind of high level takeaways about where the BRI is now?
YUNNAN CHEN: The BRI has always been this very kind of nebulous entity that encompasses many kinds of tentacles. So I’ll just comment solely on the development finance trends. But I think we’re moving away from that state driven model where it was very much policy banks monopolizing development finance, let’s say.
I think we’re we’re seeing the BRI diversifying in multiple ways, and first in the number of and the types of actors and institutions that are involved. So rather than your typical kind of EPC style infrastructure finance with a with a state enterprise, a policy bank and a loan, I think we’re seeing new actors coming into play, new entities playing a financing role that aren’t just policy banks, but also include state and commercial banks as well as enterprises themselves. And we’re seeing a diversification in the types of instruments and modalities that that will be available to finance these projects.
And that will include use of equity stakes and use of PPPs, as well as as more diverse relationships with local banks, with with with NDBs and other kinds of public development banks. And hopefully we’re moving in a direction towards a more disciplined, more risk disciplined Belgian Road initiative that that does try to balance some of these risk mitigation issues that we’ve talked about for better quality projects, as well as projects that that do deliver on development impact.
ERIC OLANDER: Very quickly before we go, and I know we’re running out of time here, but as part of these innovations that they’re doing with more partners, particularly outside of China, is there any more transparency in the process in Chinese lending and what they’re doing? Because if they are doing deals with standard chartered HSBC on the Singapore Stock Exchange, they have different disclosure requirements than they would if they were just operating within a wholly Chinese environment. Are you seeing any more or especially from from borrowers who, as Cobus pointed out, politically, this was a big problem in Kenya that Ruto made a promise that he was going to reveal the terms of the first standard gauge railway contract.
Never did, by the way. And just politically, it was too toxic for him to do that. But is there any move towards more visibility into the terms of these deals, given the fact that there’s more players?
And as you’re outlining.
YUNNAN CHEN: I mean, Till might have a better sense of this from his time in the private sector, but I think a lot of that is conditional on the on the kind of governance of the host country themselves. Right. If you’re in a.
ERIC OLANDER: The Chinese themselves are not being more transparent, then.
YUNNAN CHEN: I think it depends on the institution, if it’s the state and commercial banks and they are partnering with other state and commercial banks, or if they’re, you know, issuing a transaction through a stock exchange, then they have to abide by and they have to be compliant with the regulations of that jurisdiction. So so I think there is a benefit to some of these kind of commercial syndications in bringing everyone onto the same page and to the same standards when it comes to this kind of transparency, disclosure, as well as as well as ESG management. But I would also say that, you know, when it comes to contracts and disclosure of these contracts, really the host country laws that the governance and whether or not they have regulations in place for the disclosure of these contracts is essential.
ERIC OLANDER: Teal, what’s your final thought on that?
TEAL EMERY: Just on that. I mean, I think that there’s there’s a lot of room for for much more open data generally. I mean, I think for syndicated loans in particular, it is going to depend on a lot of specifics.
You know, I think that the folks that aid data probably have a very good idea of exactly how to find these. And, you know, but but some of them, you know, they’re going to be co-financed by by a lot of lenders sometimes, you know, it could be 20, 30 lenders on certain loans, you know, and that therefore they’re not quite as liquid and transparent as bonds, you know, where oftentimes you can find the prospectuses and in the public domain. But a lot of them, there will be information, say, on Bloomberg or Refinitiv or other sort of financial data sources, you know, so it’s not simply like, OK, we signed a loan and there’s a privacy clause in it.
I think we’re a little bit past that for this.
ERIC OLANDER: OK, well, the the paper is greener on the other side, mapping China’s overseas co-financing and financial innovation. It is an absolute must read if you’re interested in how the Chinese are lending today. Very different, as we’ve heard, than what they’ve done in the past, say, 10 years ago with the Belt and Road.
Absolutely essential if you want to understand the new deal in Kenya for phase three of the Standard Gauge Railway. And for those of you not in Africa, this is a trend that is happening around the world. It was written by Yunnan Chen, who is a research fellow at ODI Global and an old friend of ours here on the show.
And Teal Emery, a new friend of ours, who’s an independent consultant and founder of Teal Insights and also an adjunct lecturer at Johns Hopkins SAIS. Congratulations to the both of you on an excellent paper that’s really going to make a really important contribution to the understanding of this critical issue. Yunnan, Teal, really appreciate your time today.
Thank you very much.
YUNNAN CHEN: Thank you so much.
ERIC OLANDER: This report, and again, I’m dissing the title because I don’t think the title does it justice. It’s such an important report. And again, this is a kind of report that I wish everybody would read if you’re interested to understand what the Chinese are doing.
One of the occupational hazards of what you and I do by focusing so much of our lives looking at what the Chinese do in China and overseas is we have to deal with just idiotic, moronic, just stupid narratives every day, not only coming out of the US, Africa, Latin America, here in Asia and elsewhere. And these reports are the kinds of reports that you can hold up and to say, stop, stop, stop, stop, stop. You know, look at what the data says.
Look at what researchers. I mean, someone like Yunnan and Teal have been doing this business for a very long time. They know what they’re talking about.
And you can tell in this report. And I think, again, this is, again, Teal referenced aid data. Many of their reports are these benchmark baseline reports that really set the standard for our understanding of these critical issues, particularly because we don’t have a lot of this kind of research coming out of Africa itself, which is unfortunate.
We’d like to see more coming out of Africa itself, but it just isn’t. So this is really important.
COBUS VAN STADEN: Yeah, it’s also super important, I think, if one wants to just see how the Belt and Road initiative is changing and more broadly, how China is pivoting its international engagement, its international financing engagement in this decade. You know, we had these kind of moments, these big kind of like headline moments of, you know, something like the Standard Gauge, where we’re setting a lot of narratives, then the Covid crisis setting another set of narratives about China kind of, you know, pulling back and closing off. And then once you move past that historical moment, then there’s a lot of vagueness and you don’t really know what’s going on.
You don’t really see summations of what kind of trends are. It’s just like general announcements of things, you know. And so this it’s a really kind of helpful for me.
It’s been a very helpful kind of report in terms of like just giving me like a kind of a lay of the land, you know, in terms of where we are now.
ERIC OLANDER: But that’s why this Kenya Standard Gauge railway deal is so important is because it gives us visibility into what these deals look like in practice. So we have this report. Great that two of the smartest scholars out there map this all out.
But what does it look like in real life? And this this deal is it and just go into chat GPT. And I just did that, by the way.
And I looked, I said, who are the financing partners for phase three of the Standard Gauge railway in Kenya? There’s a lot of media coverage about it, but it will literally and it sources it back to different sources, map it out. Key financing partners, one through four.
You can actually see the breakdown of what Yunnan and Teal are talking about just in this deal alone. Want to be very, very clear here, though, and emphasize that this is nothing exceptional or unique to Africa. This is going on in many parts of the world.
And also just to point out that while what Yunnan and Teal are saying is very important, the old days of big multibillion dollar loans for big infrastructure are not over. So Xi Jinping came to Hanoi in Vietnam a couple of weeks ago, and they are going to do an eight billion dollar railway between southern China and on the port of Haiphong in Vietnam. So the Chinese are still in the business of these multibillion dollar loans, not in Africa, OK, to be sure, but certainly in their neighborhood diplomacy priorities here in Southeast Asia and in Central Asia.
We’re still going to see some of these big state backed loans that we saw in the 2015, 2016 era. So not a universal statement just to talk about small is beautiful.
COBUS VAN STADEN: And in fact, it’s important to like this. This this report is very helpful in unpacking, again, you know, kind of a set of narratives that are emerging around the concept of small and beautiful and also around the concept of greening the BRI. The thing that one has to keep in mind, I tend to think of the BRI as a story.
It’s you know, it’s it’s a kind of an overarching kind of narrative structure that then that they can use to then pack in a lot of other like somewhat disparate kind of different kinds of engagements. And so it’s really helpful to once you have the story of like, oh, we were heading towards a green BRI to actually then see, wait a minute, like what does that actually look like? How much how green is that?
Like, you know, kind of where is the financing going and so on? This is like it’s that’s much harder to do. And then I think it’s very helpful in this respect.
ERIC OLANDER: Just circling back very quickly to Kenya, you know, we’ve talked a lot about how there’s some big China literacy gaps in many African capitals. But again, over and over again, we hear in Kenya that that is not the case. And Thiel confirmed that again in his dealings with Kenyan finance officials and and Kenyan bankers.
It would be nice to see if there was a vehicle or mechanism, some kind of forum that knowledge could be shared from the Kenyan government in their successful experience with the Chinese to work with the Zambians and South Africans and others who may not have that insight. And again, that’s what’s missing in this discourse. And when we talk all this talk about pan-Africanism and we talk all about, you know, this greater unified role, William Ruto himself, by the way, has been one talking about a more unified African position with China.
Remember, he said instead of sending every African head of state to FOCAC, it should be a delegation from the AU or a group of leaders that go, for example. Well, if they’re going to go, they’re going to have to knowledge share. And so I really hope that the Kenyan government is going to undertake some voluntary outreach to say, this is what we did.
This is how we did it. This is why it worked. This is what you should do so that there can be some learnings.
I doubt that’s going to happen. I’m just very cynical that there is that kind of cross-pollination across African capitals on dealing with a country like China. But it’s what I think should happen.
COBUS VAN STADEN: Well, you know, I was I was recently in Nairobi and I spoke to some some Kenyan government officials, and I think I was specifically talking to them about green energy projects. And there they mentioned that they’re already working with officials from other countries. So that wasn’t particularly on China-related knowledge sharing.
But of course, China is a big player. No, I’m not saying that there’s no knowledge sharing in Africa. I’m talking specifically on China, though.
Yes. I think particularly Kenya’s input would be very helpful because they have such a kind of deep experience, you know, and they’ve learned through hard experience, you know, about both the good and the bad of dealing with different Chinese entities. So I agree with you.
I think it’d be very helpful. I think, you know, Kenya is very well positioned to do that. And I think I think there’s probably already a little bit of it happening.
And I think much more is needed.
ERIC OLANDER: We didn’t get a chance to talk about this at the top of the show, but and I wanted to bring it up at the top of the show. But this was an important week in the global south. There was a BRICS foreign minister meeting that took place in Rio de Janeiro this week.
And the BRICS group came out forcefully against the United States, the tariffs and the Trump policies on trade. And they really are turning into this this bulwark of countries that are going to protect a multilateral system. They made demands for greater representation at the multilateral institutions.
They made demands for greater representation on the Security Council. And it just got me wondering in the context of Africa and Kenya and what we were talking about today, if we’re going to see more alignment between African countries and the BRICS, as well as with China, where they see their future much more with China than they do with the United States, given the direction that the United States is going in. When you looked at what the BRICS were saying this week, thinking about the fact that of any international organization, Africa is more represented in the BRICS than pretty much anywhere else.
What was your takeaway from some of the rhetoric that you heard coming out of Rio?
COBUS VAN STADEN: That was that was also my like what I was thinking is, you know, I think increasingly African representation BRICS has increased, you know, over, you know, with with the new members. And I think, you know, I think a lot of a lot of African countries, additional African countries are interested in joining. I saw I saw an announcement recently that Senegal is in conversation with with BRICS about possibly joining.
And I think a lot of this this has been one of the one of the kind of fallouts, I think, of the Trump administration is the rollback of USAID, the rollback of medical, you know, kind of assistance to Africa has also meant a kind of a severing of the larger relationship. And, you know, so I think African countries are looking for other options. And and they are I think they feel themselves structurally excluded from global North forums.
I don’t think they expect much from Europe, for example, outside of set paradigms that Europe have defined for how they would prefer to deal with Africa. I don’t think Europe is throwing their Africa paradigms out the window. You know, I think I think they have certain things that they’re interested in dealing with Africa on and nothing much more.
And the Africans obviously has a much wider kind of palette of stuff that they that they want to deal with. And I think for a lot of them, I think BRICS seems like the only the only real kind of like space where their voice might be heard.
ERIC OLANDER: I think Europe is consumed with Ukraine, Russia and Trump. And there’s been nothing in the African policy space that I see that’s of any interest other than, again, what we continue to talk about, that migration is the big issue and ensuring that Africans stay on their side of the Mediterranean is the most important thing for Europe. And that’s the only thing that we see coming out of Europe today, as far as I can see.
I have a feeling I’m going to get some hate mail from, you know, various think tanks in Europe. We’re going to be like, no, what about this and that and this and that? But at the end of the day, Europe feels like it’s very much in retreat in Africa, particularly a country like France, which is their their their presence has just been battered, justifiably so, of course, in my view as well.
But yeah. So let’s leave our conversation there. Cobus, we’ll be back again next week.
Cobus is going to come back to us again on the Global South show. So I got a couple of e-mails this past week saying, where’s Cobus? You are missed by just travel.
Yeah, you’ve been on the road. And then we tried to include you. I explained to everybody that we tried to include you in our show when you were in Nairobi and Nairobi Internet did not cooperate.
So it’s not a conspiracy. And so we’ll be back again next week. But in the meantime, we’d love for you to check out all the great work that Cobus and Jeho and Johnny and the rest of the team are doing at the China Global South project.
Again, this is you know, I was talking to somebody, Cobus, the other day and I was saying, could you imagine if there was a new service focused on China that was agenda free, fact based, and it was done by people in the Global South with a non-Western approach? And they were like, that would be epic. And I was like, well, there is one.
It turns out there is one. And they were like, that’s what we’re missing. And I was like, well, have you seen what we do?
And they were blown away by it. But I mean, literally, when you describe it, it’s incredible. And I’m just so honored that, you know, we got some amazing feedback the other day that people at the Chinese Ministry of Defense are reading us.
I got feedback from the folks still in the State Department are reading us at Goldman Sachs. They read us, you know, Teal and Yunnan are subscribers. We just have this incredible reader community.
And if you want to be in the loop with what the Chinese Ministry of Defense, the State Department, Goldman Sachs, all these different folks, you know, in the academic community, diplomatic community, governments, about 25 governments around the world subscribe, then check out what we’re doing. It’s just, again, I am so proud of everything that this team is doing and how hard they’re working. And we just published a great new report on Central Asia.
We published an analysis of what Indonesia is doing at the BRICS. This is kind of research that either you have to pay 70 to 100 thousand dollars a year in subscriptions from companies like Eurasia Group, and it’s not even always that good, or two, you know, it’s just not available. And particularly from a point of view in the Global South.
So our Central Asia fellow, Yunus Sharifli, he’s in Turkey and he’s from Central Asia, you know, and the same for our team in Indonesia and COBUS in South Africa. So go to ChinaGlobalSouth.com slash subscribe. The subscription started just 19 dollars a month.
Again, that’s very reasonable given the quality of the research, the news that we’re updating every day. And if you are a student or a teacher, it’s half off. Email me eric at ChinaGlobalSouth.com and I’ll send you the links to get you our discounted subscription. So it’s a good buy. So anyway, OK, enough of the log rolling there. COBUS and I will be back again next week with another edition of the show.
Until then, for COBUS in South Africa, I’m Eric Olander. Thank you so much for listening.
