Tuesday, August 29, 2017

Guest Post: The Welcome Party: Cross-Strait Relations and Chinese Loans in Africa

This guest post is by Yunnan Chen, PhD candidate at Johns Hopkins SAIS, and Jyhjong Hwang, the Senior Research Assistant at the China-Africa Research Initiative at Johns Hopkins SAIS.

Do African countries that switch diplomatic relations from Taiwan to Beijing get a boost in Chinese finance?  CARI’s loan database shows that checkbook diplomacy does not always pay off immediately and does not guarantee a continuous flow of financing indefinitely. 
On December 20 2016, Portuguese-speaking islands of São Tomé and Principe recognised the People’s Republic of China, switching its allegiance away from the Republic of China, Taiwan, with which it had maintained diplomatic relations since 1997. In this it follows a number of recent converts: Malawi, which switched from Taiwan to China in 2008, and The Gambia, which broke diplomatic ties with Taiwan in 2013. This leaves the small club of African countries maintaining relations with Taiwan even smaller: only Burkina Faso and Swaziland continue to recognise Taiwan over China.

In the case of Malawi, after recognising Beijing in 2008, our data shows that the country received a significant number of subsidized loans in the following years. This included a $90 million concessional loan for the Bingu International Conference Centre in 2009, a $79 million concessional loan for the Malawi Science and Technology University in Thyolo in 2011, and another $70 million concessional loan for the Bingu National Stadium in 2012. However, no new loans have been confirmed since 2012.

Presumably, São Tomé and The Gambia hoped to reap similar benefits by re-establishing ties with mainland China, at least in the first few years. However, their change of heart had no immediate payoff. The Gambia switched diplomatic recognition from Taiwan to the P.R. China in 2013, but this gesture was not reciprocated by China for three years. Beijing was in no rush to build diplomatic relations with The Gambia, giving more importance to preserving the “diplomatic truce” it held at the time with Taiwan under former KMT President Ma Ying-Jeou.[1] Only in March of 2016 did China finally establish formal diplomatic relations with the West African state, and not coincidentally a few months after Tsai Ing-wen, of the pro-independence DPP was elected as president of Taiwan.

The re-establishment of ties in 2016 can be read as a rebuke across the strait, but it also coincides with the ascent of the new Gambian President Adama Barrow—the first peaceful handover of power since independence, bringing the prospect of greater political stability. On April 25th, 2017, Gambia’s National Water and Electricity Company (NAWEC) signed a project agreement on a prospective power project with Sinohydro worth US$165 million. While details surrounding the project’s financing are as yet unreleased (and the agreement may only be an MOU), it indicates a possible new wave of interest and investment from China.[2]

For São Tomé, there have also been some teasing prospects of new investments in recent years: the IMF notes that in 2015, the President of the Council of Ministers and Parliamentary Affairs signed an MOU with the China Harbour Engineering Company (CHEC) for the construction of a new deep-water port costing US$800 million, which would be financed through a Public-Private Partnership model.[3] However, this project still remains unconfirmed, and while a memorandum of understanding (MOU) has been signed, this does not constitute commitment of financing, or any guarantee of the project’s implementation. Other “Chinese” investments on the island, such as a project for 100 housing units and an administrative centre have been constructed by Chinese contractors, though these projects have not received official finance.[4]

More recently, São Tomé’s Prime Minister Patrice Trovoada undertook a six-day visit to China on April 12th, 2017. Chinese official news outlet China Daily reported that President Xi Jinping was “willing to help São Tomé and Principe improve its development plans, boost cooperation in tourism, fishery and agriculture, and support the country's infrastructure construction, use of human resources and security capacity building.”[5] The Taiwan-owned World Journal reported that, as of early 2017, China has sent expert teams in agriculture, electricity, medical, and anti-malaria to São Tomé.[6] Aside from these initial gestures, Beijing has made no concrete, official financial commitments as yet in response to either São Tomé or the Gambia’s diplomatic reversal. Given the small size of the two countries’ economies, it is highly unlikely their respective government budgets would be able to finance a US$800m deep-water port of US$165m power plant without external financing.[7] As such, our CARI loans database team continues to monitor these developments.

[1] "China’s Gambia gambit and what it means for Taiwan". Richard C. Bush, Brookings Institute, March 22, 2017. https://www.brookings.edu/blog/order-from-chaos/2016/03/22/chinas-gambia-gambit-and-what-it-means-for-taiwan/

[2] " NAWEC signs $165M electricity project with China". The Point, April 25 2017. http://thepoint.gm/africa/gambia/article/nawec-signs-165m-electricity-project-with-china

[3] Staff report for the 2016 article IV consultation, first review under the extended credit facility, and request for waiver for nonobservance of performance criterion and modification of performance criteria—press release; staff report; and statement by the executive director for the democratic Republic of São Tomé and Príncipe. International Monetary Fund, IMF Country Report No. 16/174, June 2016. https://www.imf.org/external/pubs/ft/scr/2016/cr16174.pdf

[4] The housing project is expected to be financed by the contracted Chinese company Guangxi Hydroelectric Construction Bureau through a build-own-operate-transfer (BOOT) arrangement, and the administrative centre is rumoured to have received financing from the private investment company China Investment Fund, though the deal is very opaque and still being investigated by CARI.

[5] "President Xi meets leader of Sao Tome and Principe". April 14, 2017. China Daily. http://www.chinadaily.com.cn/china/2017-04/14/content_28935907.htm

[6] "After breakup with Taiwan, Sao Tome president receives big gifts during visit [甩台灣後聖多美總理訪京收大禮]. World Journal, April 14, 2017. http://www.worldjournal.com/4924459/article-%E7%94%A9%E5%8F%B0%E7%81%A3%E5%BE%8C%E8%81%96%E5%A4%9A%E7%BE%8E%E7%B8%BD%E7%90%86%E8%A8%AA%E4%BA%AC%E6%94%B6%E5%A4%A7%E7%A6%AE/

[7] According to data from the IMF and World Bank, the GDP of São Tomé and the Gambia were respectively under US$500m and US$ 800m