From Politics to Business: How a State-led Fund is Investing in Africa? The Case of the China-Africa Development Fund

Since 2009, China has been Africa’s largest trading partner for ten consecutive years. Today, the continent is also China’s second largest market for overseas project contracting and fourth largest outward investment destination. China’s expansion in Africa also fits into Chinese leader Xi Jinping’s development framework, the Belt and Road Initiative. China’s political and economic engagement in Africa has been widely discussed in media and scholarship, presented as one element of China’s ‘global rise’, a vision of Beijing-driven neo-colonialism or neo-imperialism, a promotion of an alternative/non-Western development models in the process of decolonization and/or a new dimension of multilateralism of South-South Cooperation. Most academic and public attention has focused on infrastructure projects and China’s two development banks, the China Development Bank and the Export-Import Bank of China, despite the emergence of other sources of Chinese finance, especially a range of bilateral and multilateral funds. 

In a new working paper, Hangwei Li uses project data, media reports and interviews to first present the funding mechanism and explores the logic behind how and why certain development projects have been financed, with a focus on the China-Africa Development Fund (CAD Fund), an equity investment fund focusing on investment in Africa. She then highlights the prospects and the challenges that exist in a state-led fund. Finally, Li contributes to the understanding of how a state-led fund uses a market approach and equity investment to serve China’s interests in Africa.

Li argues the CAD Fund is neither entirely state-led nor fully market-led in its motivation, incentives and daily operations. Nevertheless, the primary driver of CAD Fund’s investments is the combination of state interest and market forces, rather than the development of Africa. Moreover, with its more diversified and relatively flexible investment approaches, the Fund, along with other government-led funds, such as Silk and Road Fund, China-Latin America and Caribbean Industrial Investment and Cooperation Fund, has the potential of creating a revolution on the ground by filling the gap between official grants and loans under the traditional model, with the possibility to transform the shape of global development finance.

Main findings:

• Due to the nature and organizational structure of the Fund, which has to serve China’s political, economic and diplomatic interests in Africa, the CAD Fund investment activities are driven by more than purely profit maximization.
  • Although state-actors play an important role in the CAD Fund, many decisions concerning project funding are market-driven and mostly motivated by commercial interests. In other words, the Fund has relative autonomy to make its decisions in its daily operations. 
• Li argues the CAD Fund is taking an evolving pragmatic investment approach, enabling it to invest in a large number of projects in a limited time, and pay more attention to risk management and long-term sustainability. 
• The CAD Fund plays a crucial role in facilitating Chinese enterprises investing in Africa, especially as companies face bottlenecks for sustainable development domestically. The CAD Fund has demonstrated China’s interest in identifying its financial contribution as development finance, rather than development assistance. 
• Li posits state-owned/state-led funds such as the CAD Fund have the potential to significantly “reshape global development finance,” originally established under the Bretton Woods system in 1944.

In hopes of improving mutual gains for the CAD Fund, its Chinese partners and African countries, Li suggests several possible recommendations for Chinese and African stakeholders. For the CAD Fund and Chinese investors, Li suggests increasing transparency to build trust, stepping up environmental and social safeguards, including African stakeholders in decision-making processes and building a collaborative research partnership between the CAD Fund research team and international scholars. 

Li recommends African governments pursue a proactive, strategic and long-term approach to develop their economies and to work with China and guarantee capacity building of its public and regulatory agencies for negotiation, implementation, law enforcement and technical know-how. She also suggests African stakeholders seek more investment partners and invest more in market-seeking foreign direct investment (FDI) rather than resource-seeking FDI. Finally, African countries should also seek to strengthen their role in monitoring the development impact of the CAD Fund and better leverage the Fund’s expertise and operational experiences, as well as examine the potential role of other regional stakeholders and collaboration between local enterprises and the Fund.