Chinese contractors in Africa turn to Europe for financing

China holds 21% of African debt With $3.4bn debt, Nigeria leaves China to Standard Chartered for $14bn rail project credit New Chinese EPCs approach stem from Sinosure hitting self-imposed limitations on country exposure

CHINESE CON TRACTORS DEVELOPING projects in Africa have recently begun seeking out financing from European banks and export credit agencies (ECAs), a departure from their typical sourcing of finance from China, according to a report by the Global Trade Review (GTR).

GTR cited sources in the export finance sector as saying there are various reasons for the trend, including Chinese official lenders and insurers, such as the Export-Import Bank of China (China Exim) and the China Export & Credit Insurance Corporation (Sinosure), hitting exposure limits in some heavily indebted countries, cheaper offerings from international banks and a desire by some governments to diversify funding sources.

ECAs that have been approached to support deals involv

ing Chinese engineering, procurement and construction (EPC) contractors include Germany’s KfW Ipex-Bank, Sweden’s EKN and UK Export Finance (UKEF). Several deals involving Chinese contractors and European banks and ECAs are in advanced stages.

Faruq Muhammad, global head of structured export finance at Standard Chartered, says the approaches from Chinese EPCs are new and mainly stem from Sinosure hitting self-imposed limitations on country exposure.

China is Africa’s largest bilateral creditor, holding at least 21 percent of African debt — with payments to China accounting for nearly 30 percent of the continent’s 2021 debt service.

With $25 billion Angola, Southern Africa’s oil-rich country, alone accounts for almost a third of African debt to China. Ethiopia comes in distant second with $13.5 billion, Zambia owes $7.4 billion, the Republic of Congo $7.3 billion, and Sudan $6.4 billion.

Nigeria owes China $3.402 billion as of March 31, this year, according to the Nigerian Debt Management Office (DMO). The amount covers 11 loan facilities from the China Exim Bank since 2010. In total, Nigeria has agreed $5.6 billion in loans with China. But as of March 2020, Beijing had disbursed $3.3 billion.

According to a report by the Institute of International Finance in January 2021, China’s outstanding debt claims on the rest of the world increased from about $1.6 trillion in 2006 to more than $5.6 trillion as of mid-2020, making China one of the biggest creditors to low-income countries.

Over the last two decades, China has emerged as the major bilateral lender in sub-Saharan Africa. Usually backed by Sinosure, China Exim and state-owned banks, banks have extended credit for infrastructure and other projects across the continent.

In 2016, total lending by Chinese banks in Africa peaked at $28.3 billion, falling to $7 billion in 2019, according to data from the China Africa Research Institute (CARI) at the John Hopkins School of Advanced International Studies.

Several African countries were forced to seek repayment deferrals and debt restructuring from China and other lenders during the Covid-19 pandemic.

According to Kanyi Lui, a partner in Beijing with law firm Pinsent Masons, Chinese banks are currently reluctant to lend due to effects of the pandemic and potential restructuring negotiations. So, borrowers have been either turning to the foreign banks, in particular European banks, or financing things themselves through seller’s credit.

Perhaps so. Nigeria has been looking to a Eurobond issuance of $6.2 billion by October this year for which the federal government has appointed transaction advisers set for part-funding of its estimated N5.2 trillion deficit in the 2021 budget.

Lui, who specialises in project finance, says quantitative easing has made financing cheaper outside China. “As a result, you’re seeing some very competitive pricing overseas, particularly from some European banks,” GTR quoted him as saying.

Marie Aglert, director and head of department for large corporates at EKN, says there have been approaches from two international banks to support Chinese EPC projects in Nigeria and Tanzania. In addition to Nigeria and Tanzania, Angola and Ghana are among the countries in which sources say European financing is being sought by Chinese EPCs.

In June this year, the Nigerian government said it was in talks with Standard Chartered over arranging loans for rail projects potentially costing up to $14 billion, an about-face on its earlier plans to secure Chinese funding.

Rotimi Amaechi, Nigerian transport minister, had told Bloomberg at the time that, “We’ve moved away from China in some of our projects.”

Gaining ECA support

To gain backing from foreign ECAs, Chinese contractors have to adjust their supply chains to include suppliers from companies that the other agencies support. ECA involvement is likely to be easier to obtain from those which have less strict local content requirements and are actively courting the sector. Sweden’s EKN, for example, requires only 30 percent of content to be sourced from Swedish firms. It has also embarked on a marketing campaign promoting its products to international banks.

According to Lui, new relationships may also take time to develop for the Chinese EPCs. In a written analysis last December, Lui stated that: “Given the different organisational culture, working assumptions and practices, it remains to be seen whether Chinese contractors will be able to quickly find a way to effectively partner with these lenders.”