The China-Africa Development Fund (CADF), a state-linked equity investment fund for the African content backed by China Development Bank (CDB), has failed to secure any new investments so far this year as the onset of the Covid-19 pandemic scuppered its plans, a corruption scandal rocked its parent and China's trade with Africa slowed.

The $10 billion fund, which is based in Beijing, was formed by China Development Bank in June 2007 to invest into African companies, as part of government-led efforts to invest more across the continent to improve economic ties between the two regions. The development bank supplied all of its funding and most of the fund's senior management are seconded from the development bank or shared with it, the executive said.

CADF has a total 170 employees, 90 of whom are based outside China. However, it has struggled with the pandemic's impact on travel and due diligence, which has limited its processes, a senior financial executive who works for the fund but declined to be named, told AsianInvestor.

The investment vehicle is China's first equity fund focusing on investment in Africa, targeting sectors such as infrastructure and mineral projects. “So far, the fund had used up the first ($5 billion) batch [of investment] and doesn’t have fund raising plans in the near term,” said the executive.

CDB has committed the other $5 billion in capital, but the fund has yet to invest it. 

“Due to the pandemic, most of the projects had been delayed or halted this year,” the executive added. “The investment team has been stuck by the lockdown and travel ban.”

Such a lack of activity is far from normal. In the 13 years since it was formed it has invested into about 100 projects, said the executive – equivalent to about seven a year. The executive noted that the impact of Covid-19 has been a particular problem for the fund’s Africa focus, given that the continent typically involves many political risks even without a global pandemic.

Cornelia Tremann,
The China Africa Advisory

While the pandemic has had a relatively light touch across much of the continent in terms of casualties, its economic impact has affected many countries. South Africa’s GDP, for example, is forecast to contract by 7.1% over the whole of 2020. And on November 13 Zambia opted to bow out of a $42.5 million Eurobond repayment, becoming the first African nation to default on its debt under coronavirus, according to a CNBC report.

Meanwhile, China's investment funds have begun taking a more strategic approach to investing in Africa, added Cornelia Tremann, an analyst and consultant for The China Africa Advisory based in Gabon.

"China is increasingly and more critically assessing the relevance and profitability of the projects it is investing in. This was already happening before Covid-19," she told AsianInvestor.

She noted that African industries that source inputs from China, including construction, mining, electronic components, non-electrical machinery and machine tools, metal products, organic chemicals, fertilizers, and pharmaceutical ingredients, have all suffered from the impact of Covid-19.

"It's not surprising that funding for it has dried up. Coronavirus-related project, contractual, and construction delays have manifested themselves throughout the African continent," she said.  

CDB and CADF did not reply emailed questions on latest investment strategies and developments requested by AsianInvestor.

CORRUPTION SLOWDOWN 

CADF’s plans have also been affected by a corruption scandal that has rocked CDB. 

In February this year, China’s Supreme People's Procuratorate arrested Hu Huaibang, ex-chairman of the development bank, for suspected bribe-taking. Hu was also former secretary of the CDB committee of the Communist Party of China, according to Xinhua News. That has put the dampeners on strategic and investment decisions at the fund.

“CDB has been undergoing internal censorship and management screening as a result of Hu's arrest, which also caused the delay in investment to some extent,” said the executive.

Until this year the fund had boasted a decent track record of investment. The executive said CADF has posted an annualised 7% return on equity (ROE) over the past three years and aims to maintain a similar return level in the future.  This compared to a 2.1% year to date average return among 25 Africa-focus equity funds as of October this year, according to Citywire data.
 
“In the past, if we can secure a decent investment, the highest single project return can reach as high as 30%, but it’s too hard to [secure projects offering such potential returns] for now given the uncertainties globally,” he said.  

The fund has invested in projects include but not limited to a mining project in Zambia, a mining project in Ethiopia and an agriculture project in Tanzania last year, all via equity investments. The executive declined to comment on whether these investments are typically strategic or simply minority equity stakes.

“This year, we didn’t secure any investment, which is a significant decline compared with previous years,” the executive said.

CHINESE TRADE LINKS

The more considered approach to African investment follows years of investment outreach by Beijing.

in addition to the CDB-overseen fund, a China-Africa Fund for Industrial Cooperation (Cafic), announced by President Xi in December 2015 with an initial cash injection of $10 billion. It has not announced any new investments on its website this year either.

China’s creation of investment funds for Africa and other regions has dovetailed with its multi-year Belt and Road Initiative (BRI). 

Lilian Li,
Moody's Investors Service

Lilian Li, senior credit officer at Moody's Investors Service, told AsianInvestor the Chinese government has been developing and improving BRI project screening and monitoring processes with an aim to mitigate the financial risks of investment. She believes the government will continue with such efforts. 

"At the same time, China will continue to leverage multilateral frameworks and the recent signed agreement of the Regional Comprehensive Economic Partnership (RCEP), to facilitate BRI projects," she said.

Over the past decade, Chinese financing to capital-scarce emerging and economies had grown a great deal, in line with its strategic objectives and the BRI initiative, according to a Allianz report published in November.

The Allianz report noted that China has granted a lot of commercial loans to countries with high default or sovereign risks, which may increase their repayment difficulties and debt re-negotiations.

This has led to some claims that China has engaged in so-called 'debt-trap diplomacy', in which it lends a lot of money to countries that cannot afford to repay it, in order to gain diplomatic and business concessions.

Tremann feels such claims are overstated. "In most African countries, the debt trap diplomacy narrative and US-China tensions do not garner much attention. I certainly don't believe that China is purposely burdening certain countries in Africa with excessive debt in order to control strategic locations for the BRI," she said. 

She added that she was optimistic that China would invest more back into Africa as the pandemic recedes.

"Post-pandemic, we can expect to see the CADF becoming increasingly relevant as China continues its shift towards a more diversified, private sector-led (to the extent that that is possible with China) engagement with African countries."