Why is China so interested in Africa?

Context

Introduction

The COVID-19 pandemic has posed a great challenge for all nations and an ethical dilemma of whether saving lives or the economy. But for one country, in particular, opportunities have risen from the ashes to further its goal of global economic and political dominance. China, under the firm leadership of Xi Jinping, has been able to sustain itself against this one in a century kind of virus, growing 2.3% in 2020 and being the only country in the world that saw a growth in its GDP.

Rising tensions and social unrest in the US and in Europe due to lockdown measures, social activism, and the rise of far-right movements while dealing with a catastrophic pandemic has made the leaders of these countries look inwards rather than outwards to solve issues, making emerging countries vulnerable. This vulnerability of African countries, together with a lack of support from the US and EU, creates an opportunity for China to strengthen political ties and increase its political, economic, and technological dominance around the world.

Belt and Road Initiative

So that every reader is able to grasp the full situation, I will make a fast rundown of all things that have been happening in the world that led up to the launch of the digital yuan and how this will affect African nations. The first thing to consider is China’s Belt and Road Initiative (BRI) where it aims to revive the former silk road to connect as many as 71 nations in Europe, Africa, and Asia that account for half of the world’s population through sea and land routes. It is reported that the project can ramp up to a $1 Tn investment in the form of low-cost loans on infrastructure like ports and pipelines.

Still some concerns of “debt-trap diplomacy”, where poor undeveloped countries take massive loans and are essentially subject to the Chinese government demands after they have trouble to repay that debt. What is important to take from this project is that China is investing a lot in countries like Pakistan, Laos, Kyrgyzstan, Malaysia, Russia, Italy, Portugal, but also Sudan, Namibia, Nigeria, Mozambique, and many more African countries.

China’s Challenges

There are 2 main challenges that China is facing today: internally, the increase of power by big tech companies such as Alibaba and Tencent, and, externally, the surge in political pressure made by other leaders, recently led by America’s Donald Trump. Regarding the first, it has been obvious that China’s governmental authority is now trying to keep the private sector in check with the CCP’s objectives and any refusal or disagreements will be met with severe punishments, as we saw with the Ant Group IPO last year and the sudden disappearance (and reappearance) of Jack Ma, Alibaba’s founder, and former CEO. Trying to repress private entrepreneurship to the communist standards while advocating for innovation and freedom of opportunity to dethrone America’s capitalist and free markets advantage may be too many balls for the CCP to juggle at the same time.

Secondly, international pressure for global powerhouses such as the UK, Germany, Canada, Australia, France, and the US as the main issues have been the capture of national citizens, political prisoners, Xinjiang’s concentration camps, and Hong Kong’s “One Country, Two Systems” infringement. The US, with the support of other nations, could sanction China from using SWIFT, the inter-banking system used for international payments, and hinder much of their regional and inter-regional trade. This is why China is creating diplomatic relations with other emerging countries and protecting itself against a Western united front.

Chinese tech dominance in Africa

Since 2012 there have been accusations against Huawei about building “backdoors” in their device’s operating systems that could facilitate Chinese espionage. Countries such as the US, UK, Australia, Japan, and Taiwan have banned Huawei’s products from their territory. While this was a major blow for what would have been the biggest smartphone manufacturer in the world, Huawei and other Chinese manufacturers (such as ZTE and China Telecom) are growing and establishing themselves in the African continent.

In fact, “Made in China” technology now serves as the backbone of network infrastructure in several African countries. According to Gyude Moore: “50 percent of 3G systems used by African telcos were built by Huawei and another 20 percent to 30 percent were built by ZTE, while Huawei has built up 70 percent of 4G networks and is likely to build all 5G networks”. Not only that but most smartphone devices are also built by Chinese firms and that’s because, in these markets, price is extremely important due to the low wages of the majority of the population. Because they are backed by the Chinese government, Transsion’s phones are currently sold for as little as 20$, prices which other manufacturers like Samsung and Apple cannot really compete with.

In short, both the network and devices in Africa are mostly made by Chinese government-back firms. By doing this, the Chinese Communist Party will be able to create a “foreign” surveillance state with big data centers and smart cities feeding information back to them, while they also can nudge people to increasingly use Chinese applications instead of Western technology by offering them as native to their devices (like the Harmony operating system built by Huawei after the US ban), as also collude with national governments to keep the public opinion in check.

Cryptocurrencies and money

Technology is indispensable these days. To stop using 21st-century gadgets and inventions would be impossible as we grow dependent on the personal computer to work, mobile phones to order an Uber, and the internet for every kind of entertainment. Despite all these constant innovations in so many areas of our life, what we believe to be the form of a currency has remained relatively stable for the last few hundreds of years (typically in the form of a note bill and coins), yet the definition has had a slight but significant change from a gold standard to fiat currency (fiduciary currency).

In 1944, the Bretton Woods System was signed by 44 countries to ensure the stabilization of currency exchanges and to foment global trade. The agreement enforced the convertibility of U.S. dollars to gold, ensuring that every dollar circulating was backed by a certain ounce of gold stored in the bank, in other words, the American dollar was pegged (constant exchange rate) to gold and other currencies such as the pound and the yen were pegged to USD. The problem occurred when people noticed that there might have been more dollars circulating than gold reserves in the bank, creating a run-on gold reserve when President Nixon devaluated the dollar against gold. By 1973, the Bretton Woods System had collapsed leading the way to fiat currency.

Fiat currency means that the money we use has no intrinsic value, we validate its value by trusting that our government and financial institutions will act responsibly and in society’s wellbeing in mind. Lately, that trust has been fading away with large amounts of new currency being put into circulation and the preservation of the political elite status quo, undermining public confidence in the democratic system all around the world, but specially in the U.S.A.

It was only after the 2008 financial crisis that a completely decentralized and independent currency was formed, named Bitcoin. It has seen spectacular rise through the years, but, more importantly, Bitcoin (or any other cryptocurrencies that follows the same principle) may revolutionize both the definition of money to a decentralized digitally scarce resource and the form of highly complex mathematic algorithms in the blockchain.

In summary:

• China is pursuing the Belt and Road Initiative (BRI) with high investments in Asian and African countries.
• The rise of big tech with Alibaba and Tencent in the “Sleeping Giant” and the increase of foreign political pressure are the main issues for Xi to deal with.
• Although being banned in some countries, Huawei and other Chinese tech are spreading like a virus through Africa.
• A new era of distrust in central institutions may be coming, leading way for decentralized cryptocurrencies rather than the fiat currency we use today.

What is happening?

For some time, China has been researching how to empower cryptocurrency technology to the advantage of the Communist party. Currently, their technology is much farther ahead of any other countries or group of countries such as the U.S., EU and Japan. The main evidence of that technological superiority is that China is already making trials of the digital yuan in 4 major Chinese cities, while European and American leaders are still debating whether to pursue it or not. In other words, while the West keeps going back and forth with the crypto space, China has already plans to fully develop its own cryptocurrency and issue it to the public by 2022’s Winter Olympics.

Like Bitcoin, the Digital Currency Electronic Payment (DCEP), more commonly known as the digital yuan or e-RMB, operates with a blockchain ledger where every transaction is traceable to the origin. A differentiation point is that unlike Bitcoin, and other major cryptocurrencies, it is centralized by the control of the Chinese government. An important feature of the e-RMB is the “controllable anonymity” where the government is able to recognize every individual present (the seller and the buyer) in the transaction “written” in the digital ledger.

Some are saying that this technology is the last piece of the puzzle for complete surveillance of its people. As of now, throughout China, there is facial recognition installed in surveillance cameras all over major cities and social media apps like WeChat are being constantly watched for any “disruptive” speech. But the digital yuan adds another layer of control to the Chinese people. Using its social scoring system, the government is able to restrict what any wrongdoer citizen can buy or sell. It can restrict the purchase of leisure items, but it can also go much further and restrict the purchase of first necessity goods.

But the DCEP is also a way to tackle the two big challenges that China faces:

1.       By taking control of the financial transactions inside the country, China is keeping in check big tech companies that have expanded to the fintech industry. The tension between these two groups has risen in the last months with the Ant Group IPO being canceled due to regulatory concerns and the disappearance of Jack Ma. A considerable portion of Tencent and Alibaba’s revenues are now made through direct lending to consumers and instant payments in their platforms, something that the central government was not too happy about since they did not have regulatory approval to enter in financial transactions (since they were not a financial institution approved by the CCP).

2.       This allows China to create a new channel to process international payments, escaping the SWIFT system controlled by the West and where the US can ban or restrict China’s use due to sanctions, arms embargos, and money laundering regulations. But now, the digital yuan changes the game and allows to bypass through it, as long as the other party accepts it.

But for the other party to accept it, it needs to quantify the possible retribution from Western countries and, thus, the inherent implicit and explicit costs of transacting with China. That is why China is building a network of diplomacy through Africa. In the book “Shaping the Future of Power”, Lina Benabdallah explains how the Chinese way of building diplomacy which differs from the Western way. Recall the Marshall Plan, the American program with the objective to rebuild Europe through infrastructures. This move had the ultimate goal of stopping the communist ideals to spread around Europe and build diplomacy and relations.

This framework of building infrastructure was used on many other occasions by Western countries, but the Chinese took the approach of building person-to-person connections between their people and other countries by subsidizing student exchange programs, training boot camps, military exercises, and official visits of high-level military leaders, but, while this also happens with the United States, this strategy is the backbone of their diplomacy relations. Building fruitful alliances in emerging nations, like African countries, is the new strategy to counter the increasing foreign political pressure.

Africa: In great need of a helping hand

The COVID-19 pandemic has worsened the problems that were already present in the African country. Many countries now are close to a sovereign debt default and poverty. Debt-to-GDP has risen considerably and the epidemic has already taken its first victim: Zambia officially defaulted on November 13th, failing to pay interests on its $12 billion direct external debt, of which $3.4 billion are from China. The disproportional amount of debt owed to China is not uncommon within the Sub-Saharan nations and some are calling this kind of “debt-trap diplomacy” (built before the “personal relations” diplomacy strategy explained before) a new age of economic and financial colonialism in the region. The BRI project allowed a lot of countries to accept large sums of loans by the Chinese government to build the infrastructure necessary to foment trade.

China is working with African nations to lower the burden of their debt, but, if you have already guessed by now, nothing the CCP does is purely altruistic. As COVID-19 spreads through the country without any control, vaccine shots from the big three pharmaceuticals (Moderna, Pfizer, and AstraZeneca) have been dangerously few to African nations as the West focus on protecting its own population. But, while the US and the EU are dealing with their own internal problems, China has promised to supply Africa with its own vaccines and this “generosity” may be the game-changer moment in Sino-African relations. 

The pandemic raised a perfect opportunity for China to establish its influence in Africa and pull the rug out of the American and European’s feet.

Future implications

Given everything that was said, how does the digital yuan relate to the Belt and Road Initiative and the Chinese tech dominance in Africa? The primary objective of all this is political and economic dominance over the world. The digital yuan serves the purpose of further controlling its population, but also to control its international financial transactions, stopping the use of Western controlled institutions such as SWIFT.

The goal is also to overthrow the dominance of the US dollar as the global reserve currency, since they would imply lower interest rates in the Chinese economy, sprouting even more investment and growth. The way this can happen is through the Belt and Road Initiative where countries increase their trade volume with the Asian country and by issuing yuan-nominated debt instead of dollar-nominated, eliminating the dollar as the intermediary currency in the region.

The benefits of having the first digital government-backed currency will play in China’s favor. One of the advantages of the DCEP is that it does not need to be connected to the internet to work (although it is still unclear how it will work) which may a deciding feature to get the African region, where currency and monetary standards vary from mile to mile, to adopt the e-RMB as a common currency to foment trade and regional growth, much like the Euro in the EU. In a region plagued by chronic inflation and poverty, which leader would deny a helping hand that would greatly benefit its people's lives?

The digital wallet for DCEP has already been implemented into the new Huawei P40 and this is only the beginning. In a few years, a great portion of common African citizens may be using the digital yuan since it will eventually become a native application on every Chinese-built phone. In fact, China is racing to establish the technological standards in Africa by building 5G infrastructures and having a dominant position in the smartphone market. This could give rise to the technological “iron curtain”, the Microsoft-Amazon system against the Huawei-Alibaba one.

The point is: China is playing a global strategic game and making big moves around the world while we are focused on dealing with the COVID-19 pandemic. The media and the public are not paying attention to what is happening around the globe and are distracted by the new daily coronavirus cases. This global virus may be the catalyst China needed to assert its position as the global leader and to accomplish its final goal.