China's Africa goals more than just natural resources

Nov 2, 2009

Barely a month goes by without some new energy or mineral deal being struck between China and an African nation. These deals have transfixed the West, but China gets far more from the relationship than raw resources.

Africa offers China two important things - a chance to earn the global respect it believes it deserves in recognition of its growing economic clout, and friends who do not judge it, or who at least have little reason to directly fear China's rise.

Communist China's friendly relations with Africa go back decades, to when Beijing backed newly independent states as well as liberation movements. The continent's backing was vital in getting China into the United Nations in 1971.

"You could argue that the contemporary driver is economic, but they've always had a political interest in Africa, from the mid-1950s onward," said Chris Alden, an Africa expert at the London School of Economics.

"As China becomes a more active player in multilateral affairs, it recognises it needs partners, and Africa in many ways is a very suitable partner."

In 2006, President Hu Jintao promised a leap in investment, trade and aid at Beijing's first summit with African leaders.

At the G20 summit of big developed and developing economies last November, he raised Africa's needs during the global economic turmoil.

When Chinese Premier Wen Jiabao visits Egypt for the second Africa-China summit from Nov. 8-9, analysts and diplomats expect him to match the $5 billion in loans and credit offered then by Hu, or even exceed it.

Africa's GDP is about $1,2 trillion, roughly one quarter the size of China's $4,4 trillion economy.

"While savouring the fruits of its own growth, China has never forgotten its obligations to the African brothers," the official Xinhua news agency said in a recent commentary.

Hu's commitment to Africa appears to reflect his belief that the continent offers a friendly stage to show the wider world that China's growth and international policies are a global good.

"They would like to demonstrate that their benign intentions are best represented in places like Africa," said Alden.

Africa also offers China important diplomatic support that it invariably does not get from the United States, Europe or even other countries in Asia, especially when it comes to contentious issues like United Nations' votes over human rights.

"We need the vote from African countries whenever we are facing voting events, like the Shanghai Expo, Olympic Games, Human Rights, et cetera," said He Wenping at China's Institute of West African and African Studies.

Tempting markets

Of course, none of this is to say business deals and investments in mines and oil fields are not important.

Trade between China and African countries has surged by an average annual 30% for much of the past decade, driven by China's appetite for oil and minerals, and its sales of clothes, cars, telecommunications and other goods to African markets.

Yet the investments go beyond simply buying up natural resources. China's largest bank, ICBC, owns 20% of South Africa's Standard Bank.

Shenzhen-based Huawei Technologies, China's biggest telecoms equipment maker, is pushing south from its established stamping ground in North Africa. Peer ZTE Corp. is another Chinese player growing in importance in Africa.

"Not everything is driven by politics - it's driven by business," said Martyn Davies, executive director of Stellenbosch University's Centre for Chinese Studies in South Africa.

"All the companies that are investing in Africa are making a lot of money."

With developed markets either saturated or entry requirements too high, Chinese firms see Africa as a great untapped market, added Duncan Innes-Ker, Beijing-based China analyst at the Economist Intelligence Unit.

"When it comes to other parts of the world, it is true that the requirements that come along with investment, like labour and environment standards, essentially negate the main advantage China has, which is a lot of cheap money and an ability to do things very well at the moderate cost end of the scale," he said.

"A lot of it comes down to where Chinese firms have their comparative advantage, and these are fast-growing markets," Innes-Ker added. "Chinese companies are well placed to exploit that, as unlike a lot of Western companies they're used to operating in a market where you have to be flexible."

China's expansion in Africa will change our world

Apr 19, 2009

" Africa's growth is underpinned by Chinese demand, and China's growth will become more dependent upon Africa's resources " Jacob Zuma

THE global financial crisis will accelerate China's investment in Africa. Chinese financial institutions are now investing capital on the continent in a counter-cyclical manner, financing Chinese companies that, in most cases, are venturing abroad for the first time.

China has a long and politically close relationship with Africa, but this does not mean it makes business on the continent any easier for China's emerging multinationals.

A number of China Inc investments on the continent have failed and more will fail in future. But Chinese firms have proved to be rapid learners in foreign markets.

The ability of Chinese firms to adapt to African market conditions and operate in sometimes challenging political and economic environments will determine the staying power of Chinese investment in Africa.

China launched a "new" Africa policy exactly one decade ago when it started to conceptualise and plan the establishment of the Forum of China-Africa Cooperation (FOCAC) - a multilateral forum within which it would plan and implement its foreign policy goals towards the broader continent. Since its launch in October 2000, China has carefully set out three-year engagement strategies that it has implemented towards Africa. The next FOCAC summit will take place at the end of this year in Egypt, when Beijing announces another series of strategic initiatives for the continent.

As Western capital is now leaving emerging markets, including Africa, it is being supplanted by Chinese investment in hard infrastructure.

In line with China's new foreign commercial policy towards Africa, a large amount of money is being allocated to the roll-out of infrastructure by Chinese construction firms.

The finance, often linked to broader aid packages and commodity purchases, enables these firms to enter and rapidly gain market traction in the African state in question.

The state-driven nature of this finance, through the so-called concessional finance model that is implemented by China's Export-Import Bank, has attracted criticism from a number of Western observers - including the IMF in the case of the DRC - where there is a fear that a loan agreement will further increase that country's debt burden.

While it is perhaps controversial in some quarters, China EXIM Bank's model is certainly changing the terms of engagement for foreign investors in Africa.

The bulk of China's financial engagement of Africa is from sovereign wealth. The state-supported nature of China EXIM Bank's engagement in Africa may be distorting the capital-raising market for large commodity finance projects on the continent. The political construct of these Chinese policy bank deals affords them a longer lead period to realise their investments.

A new risk model is being constructed that is calculated differently to those of Western investors. It is more answerable to political stakeholders pursuing a national interest than it is to private shareholders.

The state-owned structure of Chinese policy banks allows for an approach where capital is arguably invested in a manner that is more suited to the needs of developing economies. Indeed, China's own phenomenal developmental success over the past three decades has been underwritten by a state-owned banking sector.

Western investors are withdrawing credit while Chinese bankers are expanding their loan portfolios in Africa. This is true of Chinese policy banks as well as of its commercial lenders. The main actors are China EXIM Bank and China Development Bank through its recently launched China-Africa Development Fund.

The CADFund is a $5-billion fund for Chinese firms to tap into for investing in Africa. It recently opened a representative office in Johannesburg. Key sectors that are being targeted include infrastructure, commodities, commercial agriculture and industrial parks, the latter referring to China's special economic zones that are being set up across the continent.

There are now four "official" zones that have been endorsed by the PRC government - in Mauritius, Egypt, Nigeria and Zambia. There are many more examples of the emergence of Chinese commercial clusters on the continent in at least eight other African economies. All of these zones are focused on beneficiation and local assembly manufacturing.

The paradox of this investment is that while the value-adding and job- creating investment will be welcomed, it will also negatively impact the nascent industries in the host African economy. Nevertheless, these are the new nodes of Chinese capital investment in Africa. It is important for the African private sector to recognise and act on this emerging trend.

China's commerce-first approach toward Africa is increasingly appealing to African states over the traditional aid-led approach. Its pervasive commercial engagement of Africa may be displacing traditional players and eroding their influence in the respective former colonies.

A trend of "new coupling" has emerged - coupled economic growth destinies of China and Africa. In fact, GDP growth trends of China and Africa have tracked each other in almost absolute parallel over the past decade. Africa's recent robust growth has been driven by China's demand for commodities to the point that China is now Africa's second largest single trading partner with trade value surpassing $100-billion.

With the rapid drop-off in China's growth in 2008, Africa's GDP growth outlook has followed China's dropping growth rates. While Africa's growth is largely underpinned by Chinese demand, China's growth prospects will become increasingly dependent upon Africa's ability to supply the resources. This linkage explains the roll-out of Chinese-funded infrastructure across the continent in an attempt to alleviate supply-side constraints. This is the new coupling where China and Africa's growth trajectories become intertwined.

Yet beyond the impressive statistics and numbers from the expanding China/Africa commercial relationship, the question remains as to whether it will be sustainable.

This will depend on the ability of Chinese firms to integrate their business models into the African environments in which they are operating.

Chinese firms are used to dealing with tough and competitive conditions, but are less adept at understanding local cultural circumstances. Managing cultural difference is the primary challenge of Chinese business moving to Africa. African societies also have a relatively low understanding of the Chinese.

It is imperative that Africa builds its knowledge, networks and influence in China. We as Africans haven't even begun to comprehend the long-term strategic implications of China's growing presence in Africa.

Dr Martyn Davies is CEO of China Frontier Advisory (Pty) Ltd; the Executive Director of the Centre for Chinese Studies at Stellenbosch University; and Programme Director, Asia Business Centre at the Gordon Institute of Business Science. mdavies@frontier-advisory.com