Highs and lows

Editor's note: China-Africa cooperation contributes to the building of a multipolar world, promotes a more equitable and fairer international order and helps shape a world where different civilizations coexist peacefully. Recently, scholars from the Institute of World Economics and Politics and the National Institute for Global Strategy at the Chinese Academy of Social Sciences paid a research visit to Africa. It is hoped that through their dialogues with their African counterparts, the development of China-Africa relations can be promoted.

New opportunities and challenges coexist for high-quality development of China-Africa investment and financing cooperation

The year 2023 marks the 10th anniversary of the Belt and Road Initiative. Over the past 10 years, China-Africa investment and financing cooperation has achieved fruitful results and ushered in new opportunities.

First, China and Africa's economies are highly complementary, and the two sides will continue to deepen cooperation in strong traditional industries and expand opportunities in new emerging sectors.

China's investment and financing in Africa covers almost all economic sectors. Building on traditional areas of strength, including transportation infrastructure, power and energy, China and Africa are advancing cooperation in new areas such as agriculture, mining, manufacturing, the digital economy and green energy.

Take the digital economy for example. China, an e-commerce giant, can provide Africa with experience and technical support in such areas as e-commerce cooperation, digital infrastructure, and mobile payments. By the end of 2021, China had constructed over half of Africa's wireless sites and high-speed mobile broadband networks, serving over 900 million people in Africa. In South Africa, China and Africa have jointly established a public "cloud "serving the entire African region, and the first commercial 5G stand-alone network.

Second, innovative development and cooperation models have been proposed and executed. One example of such a model is to integrate the development of economic zones, free trade areas and iconic infrastructure projects. Lekki Free Trade Area, Nigeria's gateway to the west Atlantic, integrates the construction of Lekki port, the execution of free trade agreement between China and Africa and the development of adjacent economic zone. The project started with the infrastructure construction of the Lekki Port. Development gradually expanded to the nearby Lagos Free Trade Zone and further to connect with other special economic zones. The project has done a great job in boosting the economy of Nigeria, having a positive impact on West Africa and connecting the continent with other parts of the world. For Chinese firms, such a model is also attractive, since it emulates China's development experience in the past decades and provides them with an accommodative local environment for business and production.

Third, the mechanism of financial cooperation between China and Africa is becoming more diverse, as collaboration in macro-policy and between commercial institutions deepens.

At the macro-policy level, China has signed bilateral currency swap agreements with South Africa, Morocco, Egypt and Nigeria. It has also signed memorandums of understanding on financial regulation cooperation with seven African countries. The Cross-Border Interbank Payment System of the renminbi has been extended to cover 19 African countries. China has also provided funding to multilateral development financial institutions such as the African Development Bank and the Africa Development Fund.

The number of cross-border financial institutions between China and Africa continues to increase with diverse cooperation models. As of 2022, Chinese financial institutions had established 15 branches in Africa, while 10 African banks had set up 10 branches in China. The number of equity acquisitions and joint ventures is also on the rise. For example, the Industrial and Commercial Bank of China acquired a 20 percent stake in the Standard Bank of South Africa in 2008; the Agricultural Bank of China and the government of the Republic of Congo jointly established the Sino-Congolese Bank in 2018. In addition, UnionPay International, Ant Group's Alipay, and Tencent's WeChat Pay have entered the African market, with market share expected to increase.

Despite the abundant opportunities, investment and financing cooperation between China and Africa also faces numerous challenges. On the one hand, Africa suffers from a widening financing gap as global liquidity tightens. Since 2021, central banks in the United States and Europe have significantly raised interest rates, with the US federal funds rate having reached 5 percent in May 2023. As a result, some African countries have to face steep rises in financing costs in international markets.

On the other hand, under the pressure of currency depreciation and capital outflows, Africa's debt problem has further deteriorated, making it difficult to secure future financing. According to the International Monetary Fund's Debt Sustainability Analysis, the number of African countries in debt distress has grown substantially. Seven countries — Chad, the Democratic Republic of the Congo, Mozambique, Sao Tome and Principe, Somalia, Sudan and Zimbabwe — are already in debt distress, while another 16 African countries are at high risk.

Moving forward, China and Africa can collaborate in the following three areas in order to achieve high-quality development of investment and financing cooperation.

First, deepen capital market cooperation. It is suggested to diversify the currency portfolio, by encouraging the use of currencies such as the renminbi in sovereign borrowing and trade settlement. This can help better cope with the risks of currency depreciation of African countries against the US dollar, as well as financing rate hikes, as a result of the tightening monetary policies of the US and Europe.

Second, explore innovative debt resolution instruments, such as "debt-for-climate "swaps. The "debt-for-climate" or "debt-for-nature "swaps may offer a win-win solution for debtors, creditors and donors in meeting national development objectives of African countries in line with the Sustainable Development Goals of the United Nations. This is a special type of financial instrument that provides debt restructuring and relief for debtor countries in return for debtors devotion and investment to achieve sustainable development goals such as climate mitigation, environmental protection, nature reservation and etc. These solutions can more effectively leverage resources from multilateral institutions and the private sector.

Third, both China and Africa should focus on the progressive adjustment and optimization of sovereign borrowing strategies. It is important to avoid a sudden drop in funding, enhance the efficiency of fund utilization, and promote the concentration of resources in key countries and priority industries.

The author is an associate researcher of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and the National Institute for Global Strategy. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn.