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 tells GTR.
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 which 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 tells GTR.
“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.
Uneven financing decline
Some ECAs in Europe have not seen an uptick in interest from Chinese contractors.
Thomas Hovard, chief commercial officer for EKF Danmarks Eksportkredit, the Danish ECA, says: “We don’t see an increase in those conversations [with Chinese contractors]. We don’t speak to them a lot, honestly, but when we do, I think the behaviour we see is what I would call typical for an ECA or for an EPC.
“We do see Chinese contractors using European banks and ECAs. We have seen that for many years. Often they start with their own ECA, but it’s not that unusual. Maybe other people have seen this to be more aggressive or more apparent at the moment, but we haven’t seen any change in behaviour.”
The recent downturn in Chinese project finance is not spread evenly across the continent. In East Africa, the share of projects financed by Chinese lenders fell from 20.9% to 13.6% between 2019 and 2020, according to a Deloitte report, published in March, which considers projects over US$50mn that have broken ground by June 1 of each year.
While the drop in volume is partly because some major projects have been completed, according to the report, rising foreign debt burdens in East Africa have also “triggered China to rethink African countries’ debt repayments in 2020, with some financing commitments reduced as a result, leading to projects being stalled”.
But financing remained significant in Southern Africa, where Chinese banks funded 19.6% of projects considered by the Deloitte analysis, although that was also a fall from the 28.3% funded in the previous 12 months.
“Arguably, there has also been increased scrutiny of China-funded infrastructure projects in the region, given a greater focus by African governments on financial sustainability. This too has contributed to a decline in China’s funding involvement in East African infrastructure projects,” the report says.
A tightening of Chinese export credit support appears largely confined to Africa for now. There is still appetite for project finance in Southeast Asia, another major recipient of Chinese credit.
Securing 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.
EKN, for example, requires only 30% of content to be sourced from Swedish firms. It has also embarked on a marketing campaign promoting its products to international banks, although it is not targeted specifically at China or any other country.
“Sinosure and Chinese lenders’ reluctance to lend at the moment has given a lot of other ECAs much more room to manoeuvre,” says Lui of Pinsent Masons. “So as they slow down and review their processes and loan portfolios, it gives the other ECAs a chance to make more investments and push ahead.”
But new relationships may also take time to develop. In a written analysis last December, Lui wrote of the emerging trend: “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.”