China’s African Adventure

Trade between Africa and China grew from $10.6 billion to $73.3 billion between 2000 and 2007, making China Africa’s third largest trading partner behind the EU and the US, while the Chinese FDI stock in Africa has grown from $49 million in 1990 to $2.6 billion in 2006. This had prompted some to claim that China has become the dominant influence in Africa; some have gone further to call it the “second scramble for Africa.” In a recent NBER Working Paper, Canadian economists, Besada, Wang and Whalley have sought to put these figures into perspective: China still accounts for only 1.4% of total FDI inflows to Africa; and only 8.6% of African exports and 9.6% of African imports. But these figures are rising fast. They also advance some important factors behind this growth, not limiting themselves to the argument that it is all about securing oil and mineral resources. And, according to these authors, what makes the Chinese adventure in Africa unique is the fact that it is mostly commercial (the Chinese precept of not mixing business with politics), leading to “large and largely untied development finance for Africa (in contrast to the present conditional OECD flows) which impacts directly and positively on living standards.” Here are highlights of the paper:

What lies behind these developments?

Clearly China’s size and rapid GDP growth are clearly central, and to some degree these developments in Africa simply reflect a rapidly growing Chinese engagement globally rather than just in Africa. Chinese enterprises are now active in Latin Africa and in Europe, particularly in Ireland, Bulgaria and Romania.

(1) Clearly China’s concern to achieve more security of supply for resources (and especially oil and gas), rather than relying on global markets.

(2) Another is the search for new avenues to deploy large foreign exchange reserves, and the sense in China of potential political opposition in North America (but also in Europe) to proposed reserve financed buyouts, for example the Union Oil Company of California (UNOCAL) in the US three years ago.

(3) The strong commitment at the upper echelons of government in China to speed the growth and development of countries now poorer than China is also important. The approach is to set on one side human rights and governance concerns which have restrained OECD flows in the past and directly use commercial arrangements to fuel growth and development in Africa; in effect, filling the partial void now left in Africa by the OECD. The recent extensive spread of elected governments in Africa and infrastructure improvements further fuels these factors.

(4) This growth also reflects China’s trade policies. In an effort to promote trade with the continent, China removed tariffs on 196 imports from 28 least developed Africa countries in 2005. While by the end of 2006, duty-free imports from Africa were put at $350 million, covering sesame, copper products, sheepskins, cocoa and other products, in July 2007, China expanded the coverage of African exports exempt from tariffs to 454 items.

And Chinese investors are taking risks too:

Chinese investments can be found in a wide variety of sectors, including so-called fragile states and projects that western investors have seemingly deemed too risky. In Mozambique, for example, Chinese companies have recently invested in a large new shopping center and an industrial warehouse in the capital, Maputo. They have also financed a Soya processing plant, reportedly worth $10 million and in a facility processing prawns worth an estimated $12 million. In Zambia, China has invested
nearly $160 million in the mining sector. In the Democratic Republic of the Congo (DRC), a country with prior civil conflicts and political instability, China has investments in cobalt and copper. In Sierra Leone, another country emerging from a devastating civil war, China is now developing a luxury hotel and making other investments – going where others would seemingly fear to tread. In Uganda, a Chinese pharmaceutical firm is producing a new anti-malaria drug, and bidding on contracts to supply treated bed nets.

Chinese firms have been actively involved in the reconstruction of roads around Mozambique, where approximately two-thirds of the country’s 600 km of roads have been reconstructed by Chinese multinationals. On the border between Mozambique and Tanzania, Chinese firms have also won a tender to rebuild a large bridge carrying cross border trade between the two countries. They have also recently won tenders to repair water treatment plants in Beira and Quelimane reportedly worth $15 million and in Maputo worth more than $30 million. In Zimbabwe, China is investing in minerals, roads and farming.

But the Chinese growing presence in Africa is not without problems:

China’s growing presence is also co-mingled with responses to attempts to discipline corrupt practices at home and this amount to exported corruption. Stories of Chinese enterprises approaching African governments offering reserve financed low interest loan infrastructure projects on conditions that contracts are awarded to specified Chinese enterprises tend to underscore such concerns, and emphasize the incentive to conduct business lax accounting standard jurisdictions in Africa. Another is claims by local unions of low wage employment of local workers on the continent by Chinese enterprises, and even displacement of local labor by arriving Chinese labor.

But, on the balance, “China in Africa is seemingly a highly positive story for Africa and also offers an even more promising future for the continent.“