Partners or Predators? China in Africa

Publication: China Brief Volume: 8 Issue: 2

The conventional wisdom is that China presents Africa with major threats and opportunities, and that there is growing tension between the United States and China over the latter’s evolving African interests. On paper, at least, the nascent interest of China in Africa looks to the latter’s advantage. China’s trade with Africa has dramatically increased from $11 billion in 2000 to $56 billion in 2006, making it the continent’s third largest trade partner behind the United States and France. Beijing also has an African trade target of $100 billion by 2010 [1]. Africa is a new continental market for lesser-priced Chinese exports, while it is a major source of raw materials, especially oil. China has rapidly become the most assertive investor nation in Africa. Over 800 Chinese state-owned enterprises are today active on the continent, while Angola has now become China’s largest supplier of oil. Chinese firms have already invested more than $6 billion in Africa in 900 projects—notably in the oil sector [2]. This, however, still represents only 3 percent of Chinese overseas foreign direct investment (FDI) stock, illustrating the potential for future growth [3].

Reflecting this growing level of engagement, President Hu Jintao visited 17 African states during 2006-07—more than any other head of state. The November 2006 Africa summit in Beijing was the largest diplomatic gathering ever in China. China has diplomatic relations with 48 of Africa’s 53 states—Gambia, Malawi, Burkina Faso, Swaziland and Sao Tome apart. At the Beijing summit, the hosts pledged to double African aid and to offer $5 billion in loans and credits by 2009, while it has granted government scholarships to almost 20,000 people from 50 African countries and sent some 16,000 medical professionals to 47 African countries. Beijing has also remitted a combined 10.9 billion yuan ($1.42 billion) in debt owed by African countries and on top of that, more than 10 billion yuan in debt cuts is under way [4]. In May 2007, it was announced that China is to ramp up infrastructure and trade financing to Africa to $20 billion over the next three years via its Exim Bank (Reuters, June 1, 2007). As one recent indicator of the scale and type of Chinese involvement in Africa, in September 2007, China announced that it would lend the Democratic Republic of Congo $5 billion to modernize its infrastructure and mining sector. Under a draft accord, Beijing earmarked the funds for major road and rail construction projects and for rehabilitation of Congo’s mining sector, while the repayment terms proposed included mining concessions and toll revenue deals to be given to Chinese companies (International Herald Tribune, September 21, 2007).

An August 2006 high-level meeting of African, U.S. and Chinese specialists held at Tswalu in the Kalahari found that there is no strategic conflict between the United States and China, though this situation is dynamic and could change. In addition, the prospects for such conflict may heighten due to the pursuit of China’s African commercial interests almost exclusively through state-owned firms.

Strategic Competition or Co-operation?

There is less clarity, however, on whether there is conflict between African interests on the one hand, and those of China and United States on the other.

African countries face a conundrum with regard to China’s changing relationship with the continent. African domestic industries, in textiles and other areas, risk being swamped by cheaper Chinese products. Such concerns are raised by the investment trends of China—as well as the United States—in Africa, which have tended to be in the oil sector. This type of investment traditionally has not benefited African citizens for a range of reasons, including the nature of governance in those countries and macro-economic effects such as the overvaluation of currencies. Oil booms have generally enriched African elites and not their populations [5].

These concerns relate to Africa’s emergence as a commodity superpower in a commodity super-cycle. Currently the United States imports two-thirds of its oil needs, 15 percent of which comes from Africa. This figure could increase to 25 percent by 2015 (BBC, September 13, 2002). Africa produced 6.8 million barrels of oil per day in 1979. In 2005, this increased to over 9.8 million bpd. The second-largest global energy importer behind the United States, China currently imports over six million bpd (International Herald Tribune, November 13, 2005). This figure is expected to double in the next 15 years. With only half of its energy needs now supplied by domestic sources, China is aggressively pursuing fresh oil interests in Africa, notably in the Sudan, which comprises one-tenth of all Chinese oil imports. Today the China National Petroleum Corporation (CNPC) is the largest investor in the Sudan.

China also agreed to a $3 billion credit line for the Angolan government in 2004, subsequently increased to as much as $11 billion (The Brunei Times, October 30, 2007). In 2006 China made a $2.3 billion investment in Nigeria’s oil industry, paying 45 percent for a stake in a local field (Associated Press, January 9, 2006).

In Southern Africa, Angola is at the center of the oil boom, with its output increasing from 722,000 barrels a day in 2001 to 930,000 in 2003 (BBC, September 13, 2002). By 2020, it is expected to reach 3.3 million barrels a day. Nigeria’s output is predicted to double to 4.4 million barrels a day by 2020 (BBC, September 13, 2002). Today’s minor oil producers—such as Equatorial Guinea, Chad and the Sudan—could more than triple their output given this demand. Today’s dozen African oil producers could include five more in the next few years—Tanzania, Kenya, Uganda, Mozambique and Madagascar—if current exploration efforts prove fertile.

The benefit Africa generates from such investment depends more on what they themselves do than what China and the United States can do for Africa. Good governance is a prerequisite for the higher-order investments in Africa that its citizens consider essential, such as beneficiation of natural resources. It is of course crucial that Chinese and U.S. economic activities not implicitly or unconsciously undermine good governance. One of the best guarantees that a venture will promote African interests is the length of its engagement: A company that builds factories and mine shafts has a greater stake in stability and responsible government than does the short-term speculator [6].

In addition, low human capacity, poor infrastructure and Africa’s small market size—Africa has an economy the same size as the state of Ohio—reduces its attractiveness for foreign investors. More importantly, however, such investors will follow the lead of their local African counterparts. The fact that Africans themselves are seen to be significant divestors in their own countries—around 40 percent of African capital has fled the continent—gives foreign investors scant confidence and comfort [6].

Contrary to the general assertion that there is a contradiction between China’s Africa activities and improved standards of African governance and democracy, good governance is also in China’s best interest as it was the easiest means to ensure that investor interests could be safeguarded—a realization that Western countries had long since arrived at in Africa. Similarly, democracies have consistently performed better economically than autocracies—outside of East Asia about 50 percent faster growth from 1960-2003—hence their promotion would be in the investor’s enlightened self-interest. Moreover, support for autocratic governments by external powers was likely to pit them against African citizens who had consistently fought for such rights.

Given the combination of high domestic investment (45 percent) and savings (50 percent) rates, China is likely to be able to sustain its current high growth phase and appetite for raw materials for the next two decades. This highlights the need for an Africa-China-U.S. “win-win-win” strategy [7].

Conclusion: A Win-Win-Win Strategy?

China’s rise poses a tremendous challenge for African development. Given China’s industrial pre-eminence, African development is unlikely to come from high-volume manufacturing. Asian countries will probably dominate industries like cheap clothing or footwear for a generation or more, thereby inhibiting most African countries from climbing the traditional first step of the industrialization ladder. A combination of natural resource exploitation, agricultural self-sufficiency and high-value agro-exports, and the expansion of its unique range of service industries including tourism, would seem to be the most likely and rewarding growth path for many African states. This makes it imperative that more value from commodity investments in Africa stays on the continent.

Three issues stand out whereby China, Africa and the United States could together promote Africa’s development.

First is the need to raise the levels of transparency and corporate governance in Africa. Here African governments need to improve their legal and regulatory environments. U.S. and Chinese firms—and governments—have a role to play in ensuring that the terms and conditions of deals are transparent so as to minimize opportunities for corruption, patronage and rent-seeking. There is a need to develop and transparently apply continent-wide principles of corporate good behavior.

Second, both Chinese and U.S. aid money should be strategically targeted at projects that will stimulate growth by reducing the costs of doing business. In many countries, this will mean infrastructure investments in electricity, broadband internet, roads, and ports. It may also mean funding for legal and administrative reform, or the hiring of foreign expertise including commercial judges.

Third, while they should ensure the conditions for business are increasingly easy and competitive through better policy and fewer bureaucratic encumbrances, African governments should seek to make technology transfer and value addition a condition in their contract and concession negotiations with foreign firms. This will help to ensure more value stays in Africa, creating employment and delivering development.

Notes

* The Brenthurst Foundation in Johannesburg which, along with the New York-based Council on Foreign Relations, the Leon H Sullivan Foundation and the Chinese Academy for Social Science (CASS), hosted the three meetings in the Africa-China-U.S. Trilateral Dialogue in South Africa, Beijing and Washington D.C. in August 2006, and February and September 2007 respectively.

1. See Martyn Davies, SA Exporter, Business Day, December 2006. Print version.

2. See Sudha Ramachandran, “India pushes people power in Africa,” Asia Times, July 13, 2007, sourced at http://www.atimes.com/atimes/South_Asia/IG13Df03.html

3. At present, most Chinese investment is directed at Asia (53 percent) and Latin American (37 percent).

4. These figures were cited during the African Development Bank meetings held in May 2007 unusually in Shanghai. See http://www.blackwell-synergy.com/doi/abs/10.1111/j.1467-6346.2007.00908.x?cookieSet=1&journalCode=arbe;also http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=55896&nav02=43782&nav01=43092

5. Just as China did in the 1970s and 1980s when it negotiated access to China with foreign companies, African governments should—without overplaying their hand—seek to make technology transfer and value addition a condition in their contract and concession negotiations with foreign firms.

6. See Paul Collier, Anke Hoeffler and Catherine A Pattillo, “Flight capital as a portfolio choice,” World Bank Policy Research Working Paper No 2066, February 1999, sourced at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=569197.

7. These areas were promoted by the African delegation at the aforementioned trilateral meeting in Washington. See also Lopo do Nascimento, William Lyakurwa, Patrick Mazimhaka, Greg Mills, Joe Mollo, Sydney Mufamadi, Michael Spicer, “Business Principles for a Strong Africa,” Brenthurst Discussion Paper 6/2007, September 2007.