Why Chinese Banks are reluctant to lend
OpenLife Nigeria has reliably gathered that due to the effects of the pandemic and potential restructuring Chinese Banks are reluctant to lend to contractors handling different projects in Africa.
Expectedly, Chinese contractors 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.
Sources in the export finance sector say 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.
China has emerged as the major bilateral lender in Sub-Saharan Africa over the last two decades.
China Exim and state-owned banks have extended credit, usually backed by Sinosure, for infrastructure and other projects across the continent.
But total lending by Chinese banks in Africa peaked in 2016 at US$28.3bn, falling to US$7bn in 2019, according to data from the China Africa Research Institute (CARI) at the John Hopkins School of Advanced International Studies.
Several countries were forced to seek repayment deferrals and debt restructuring from China and other lenders during the Covid-19 pandemic.
“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, says Kanyi Lui, a partner in Beijing with law firm Pinsent Masons.
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,” he stated.
ECAs that have been approached to support deals involving Chinese engineering, procurement and construction (EPC) contractors include Germany’s KfW Ipex-Bank, Sweden’s EKN and UK Export Finance (UKEF).
Sources say several deals involving Chinese contractors and European banks and ECAs are in advanced stages.
UKEF has recently fielded several requests involving Chinese EPCs, mainly regarding infrastructure and renewable energy projects, according to a spokesperson, but no financing has yet been agreed.
“In the past, UKEF was rarely approached by Chinese EPCs due to the fact that Sinosure supported almost all Chinese EPC projects worldwide unconditionally,” the spokesperson says.
UKEF can provide financing in Chinese renminbi and is trying to raise its profile among businesses in China that are generally not familiar with UK suppliers.
Lui says the UK agency “has been pushing quite strongly to grow its influence and slice of the market in China”.
In recent weeks, Sweden’s EKN was also approached for the first time to support projects being developed by Chinese EPCs.
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.
“According to them, they turned to us because the African countries [which are hosting the projects] are not interested in Chinese financing,” Aglert said.
“We have an approval process for EPC contractors, and there’s no specific requirement for which country they come from. They have to have financial muscle, they have to be experienced, etc.”
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 the Nigerian government said it was in talks with Standard Chartered over arranging loans for rail projects potentially costing up to US$14bn, an about-face on its earlier plans to secure Chinese funding.
“We’ve moved away from China in some of our projects,” Bloomberg quoted Nigerian transport minister Rotimi Amaechi as saying.
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.
In a March analysis, CARI researchers Kevin Acker and Deborah Brautigam concluded that “rather than continuing to blindly dump finance into countries with debt issues, Chinese financiers have shifted away from these countries – albeit belatedly in some cases, such as Zambia – and towards borrowers with stronger economies and debt management”.
Sinosure and China Exim could not be reached for comment.