China has found a number of ways to gain influence through economic diplomacy. Foreign direct investment (FDI), in which Chinese firms finance projects overseas, involves a broad array of industries, from mining and manufacturing to the service sector. FDI can be a win-win situation for both investors and recipients, as emerging economies get the capital they need to grow and investors get a return on their risk. Since smaller Chinese firms and individuals act as investors, they are able to compete with European and American sources of funding to provide the most beneficial terms for countries that receive capital. As much as Chinese foreign direct investment could provide mutual gain, however, China contributes only 4% of total FDI in Africa, remaining far behind the European Union and the United States.
Instead of gaining influence through mutually beneficial foreign direct investment, China has offered Africa with a more one-sided relationship with the Beijing government. Angola and Nigeria, hit hard by low oil prices starting in 2014, saw this tactic firsthand. While FDI to the two oil-rich countries saw a sharp decline, China offered oil-backed loans to the Angolan and Nigerian governments. Although the loans were attractive at shoring up deficits in the near term, China’s terms demanded that Angola sell oil at a low price in order to pay back the loans on schedule. China received interest on the loans, while Angola suffered.
The US, UK, and France have a dark history of exploiting Africa for their own economic gain, and China cannot take the same route as it emerges as a global power. By issuing commodity-backed loans to countries that have few other places to turn for financing, China is able to set the terms and exert its political will at the expense of recipient nations. Foreign direct investment, with competition among investors that allows developing countries to negotiate, offers a route for China to grow economically, gain political credibility, and benefit African countries at the same time.