Thorough Analysis of China's $60 Billion Pledge and its Costs to African Countries

The lack of transparency in China’s involvement in Africa makes it hard to comprehensively see whether past FOCAC pledges from China actualized to real projects. African governments should conduct feasibility studies on economic benefits of projects.

China recently pledged $60 billion in investment and loans to African countries during this week’s fifth FOCAC summit that was held in Beijing. But all this at what cost? What’s the catch? Africa needs to realize that it is just a tiny piece in China’s puzzle towards achieving global dominance and disrupting the current status quo that is dominated by the United States and its western allies.

Let’s start off by understanding China’s Belt and Road initiative that several African countries are part of, together with other 65+ countries across the world.

The Belt and Road Initiative is the most ambitious and expensive infrastructure program in modern history. It is a trillion dollar project in form of loans and investment for projects across 65+ countries in South East Asia, Middle East, Europe, Africa, and South America. China is investing in this project to strengthen its infrastructure, trade, and investment with 65+ countries that collectively account for 30% of global GDP, 62% of the population, and 75% of known global energy reserves.

The Chinese economy is transitioning from a manufacturing to an innovative, service-oriented economy, which is more sustainable. To achieve double-digit GDP growth for close to three decades, China executed policies that focused on the expansion of Chinese manufacturing capabilities making it the “world’s factory”. China is currently facing a problem of overcapacity, where it has structurally over-invested and subsequently dragged on its productivity growth. China can, however, not afford a stagnant or declining economic growth.

China political stability is strongly dependent on sustainable and significant economic growth. The China Communist Party (CCP) has been able to govern a country with such a large population, among other complex issues because it has enabled the continued growth of the Chinese economy. A prolonged stagnation or falling economic growth would weaken the legitimization of CCP’s regime and create domestic instability in the country. Additionally, CCP propaganda has increasingly become an effective weapon for stable governance. President Xi is popular across China for his Belt and Road Initiative, which has been pursued by his party as a “priority” and one that is set to serve as a “new platform for international cooperation” that promotes shared development.

Under the Belt and Road Initiative, China is solving for its overcapacity problem, increasing its companies revenues, and deploying capital to build and control strategically-located infrastructure it needs along its trade routes.

Africa is currently facing an infrastructure funding gap of $130 — $170 billion annually and is also expected to face additional costs due to climate change of $20 — $30 billion per year. This is a goldmine for Chinese state-owned companies (SEOs), which can build and fund these infrastructure projects and as a result generate more profits. Chinese firms signed 1,922 new engineering contracts in 61 B&R countries, with a total contract value of $47.79 billion. The combined revenue of Chinese companies from contracted engineering projects in countries along the B&R increased 17.8% in the first half of the year. As a result, Chinese companies are dramatically moving up global rankings with 107 Chinese firms (75 state-owned) listed on Fortune’s Global 500 countries’ largest companies by revenue in 2017 up from only 10 firms (9 state-owned) in 2000.

Chinese SEOs engagement in the Belt and Road initiative is not only for profit generation but a strategy to create one of the most extensive maritime networks in the world. This involves acquiring strategically-located port assets in countries in the Indian Ocean, the Middle East and Africa, the Mediterranean and northern Europe, and Latin America. China’s involvement in Djibouti is a perfect example of how China is doing this. Djibouti is a small country in Africa, strategically located at the intersection of the Red Sea and the Gulf of Aden in the Horn of Africa. It also regards itself as a critical entry point into African markets — where 85% of cargo traffic in Djibouti is either going to or coming from Ethiopia, with the small country handling more than 90% of its neighbor’s larger trade.

How important is Djibouti, really? Djibouti occupies a strategic location adjacent to the Bab el Mandab Strait, where 12.5–20% of global trade passes every year — making it the world’s critical corridor for international shipping. With the growing Chinese investment and loans, China owned 75% of Djibouti’s external debt.

Djibouti is slowly becoming the world’s key military base where it is currently hosting its former colonial power — France, China, the United States, Japan’s only foreign military base, Italy, while troops from Germany and Spain are hosted by the French. Located between Somalia, Eritrea, and Yemen, Djibouti occupies a strategic location adjacent to the Bab el Mandab Strait, which is a critical corridor for international shipping. It’s geographic location and stability in a volatile region have made it an important playground for world powers who are either carrying out surveillance and counterterrorism strikers or deterring the threat of piracy to international shipping lines.

China’s involvement in Djibouti has been in building a military base just miles from a critical U.S. military base, the Doraleh Multipurpose Port, Africa’s largest free trade zone and high-speed rail that connects Ethiopia to Djibouti. The high-speed rail that was built to connect Ethiopia to Djibouti is part of a trans-African rail project that will be crossing the African continent from the Red Sea to the Atlantic Ocean. Djibouti International Free Trade Zone (DIFTZ) will be managed by Djibouti along with three other Chinese companies: China Merchants Group, Dalian Port Authority, and IZP.