By Hannah Edinger and Simon Schaefer
China is Africa's most important trading partner. The People's Republic is not only concerned with access to resources, but also with seeking new markets for its products. China's foray on the continent is generally regarded positively by Africans; however, the West is viewing these activities with suspicion.
On 19-20 July 2012, leaders from China and 50 African countries convened at the Forum on China-Africa Cooperation (FOCAC) Ministerial Meeting in Beijing, where China doubled its financial commitments to expand its strategic partnership with the continent. Hosted every three years, either in China or Africa, this meeting was the fifth since the launch of the FOCAC platform, which serves as a mechanism of China's foreign policy in Africa. At the most recent meeting, Beijing stressed the importance of building a quality relationship that is sustainable going forward. Announcements of soft loans worth USD 20 billion were committed to African countries until 2015, financing projects in infrastructure, manufacturing, agriculture and SME development. The extension of preferential loans points towards the continuity of China's approach to assisting the continent financially and fostering a greater commercial interconnectedness between African countries and China, but just as much, contributing to addressing structural disadvantages of the continent, in order to unlock the economic potential of key economies.
Except for four small countries (Burkina Faso, Gambia, Sao Tome and Principe, Swaziland) that do not accept the "One China" policy, the continent is seen as a strategic partner in China's "Go Global" strategy. Within a decade, China has become the single largest trade partner, a top investor and key financier of the continent. Africa's merchandise trade with China in 2012 stood at USD 212 billion, a 20-fold increase from values in 2000.
China's global expansion
Political rhetoric aside, China has moved away from ideological interests of the 1960s and 1970s to a relationship of commercial viability at the turn of the century. This international expansion program has been a result of the ruling Politburo's "Go Global" strategy of the late 1990s to pursue strategic assets and brands abroad in order to fuel China's growing economy. Chinese firms have been on the acquisition trail, seeking out investment opportunities as wide as M&As, portfolio buy-ins and large-scale infrastructure for resource deals, in global destinations in order to bolster their international exposure, diversify profits as well as access management and technology know-how. Supporting this further is the fact that the renminbi is on an appreciating run. The outlook for a stronger Chinese currency makes foreign investments and acquisitions of strategic assets, such as energy and mineral resource assets, more attractive for Chinese capital.
Commodities high up on China's shopping list
Chinese companies have been on a global shopping spree-not only in Africa, but also in other parts of the world. While Chinese firms predominantly acquired European and American firms with mature technologies-such as struggling Swedish car maker Volvo, American aviation company Hawker Beech- craft or German special-purpose machine manufacturer Putzmeister-China's shopping list in Africa includes mostly mineral resources and commodity companies.
Double-digit growth rates over the last three decades, rising income levels, rapid urbanization and fast industrialization has escalated Beijing's demand for resources. China is currently the second largest consumer of oil, after the US and the top consumer globally of commodities such as coal, copper, ironer, nickel and zinc. In recent years, mega-investments in the continent's commodity sector to the value of several billions of dollars have been concluded or announced. These deals include, for example, Jinchuan's purchase of 45% of South Africa's Wesizwe Platinum, Aluminum Corporation of China's (Chinalco) investment in the bauxite deposit of Simandou in Guinea as well as China Non-Ferrous Metal Mining Corporation's (CNMC) continuous investment in Zambia's copper sector.
China is building bridges and much more
Many African economies suffer from inadequate infrastructure. Insufficient supply of electricity and transport infrastructure hamper and increase the price of transport of people, raw materials and goods and by doing so undermine the viability of industrial and mining projects. Given China's strategic interests in Africa's commodities, the People's Republic has become increasingly engaged in the infrastructure developments in countries such as Angola, the Democratic Republic of the Congo, Ghana, Nigeria and Zimbabwe. Chinese construction firms have been involved in the refurbishment and construction of roads, railway lines, bridges, power stations, power lines, mobile networks, ports and airports.
Admittedly, the key objective of these infrastructure projects is often to ensure better access to commodity reserves; however, one should not discount or overlook the fact that these newly constructed infrastructure networks are not only used for the transport of commodities, but also benefit other economic actors by promoting private sector activities in the respective regions.
These large projects are often made possible by the extension of loans or financing packages with preferential interest rates, which are frequently provided without or with less strict conditions compared to Western finance. Key providers of these financing packages are the China EXIM Bank and the China Development Bank. In recent years, China has become the largest financer of infrastructure projects in Africa. These financing packages are at times linked to commodity off-take agreements, which serve as security for the deal. The initial USD 2 billion oil-backed infrastructure loan signed by China EXIM Bank with the Ministry of Finance in Angola in 2004 was a case in point. Since then, this model of financing has been loosely referred to as the "Angola Model".
Chinese contractors not only benefit from the support of Chinese financial institutions, but they have also become the single largest winners of public works projects across Africa financed by multilateral institutions such as the World Bank. Competitive bidding and significant experience gained on the continent has helped Chinese construction companies to win deals.
Africa: China's manufacturing hub of the future?
A further interesting aspect is China's drive to open up new markets for its consumer goods. "China towns" and markets selling mostly cheap Chinese goods for everyday consumption are a common sight in every African city. The import of these goods is often seen negatively for the development of a local manufacturing industry. Apart from simple everyday consumer goods, of late there has been a surge of imports from the Middle Kingdom of automobiles and electronic equipment as well as construction equipment for Chinese funded and executed construction projects.
With rising labor costs in China and a realignment of the domestic industry towards more sophisticated production following the new credo of "designed and developed in China" more and more Chinese manufacturing plants have been relocated to low cost countries. The World Bank estimates that about 85 million Chinese low-end manufacturing jobs will offshore from China over the next three to five years due to rising labor costs. This development reveals opportunities for African countries to position themselves as attractive manufacturing alternatives to countries such as Vietnam and Cambodia. Special economic zones which have been developed over the last five years with Chinese help in countries such as Egypt, Ethiopia, Mauritius, Nigeria and Zambia may herald the off shoring to African economies.
China's competitive advantage in Africa
China's seemingly unstoppable foray in Africa raises questions such as why China is so successful in Africa and what makes China more competitive than other countries.
Part of the answer is the role that state-owned enterprises (SOEs) play. SOEs are well-known for their cost competitiveness and their state-capitalist investment philosophy. However, the largest competitive advantage stems from the generous support of Chinese state-owned banks and the cross-sector collaboration of Chinese firms. Thanks to favorable finance arrangements, Chinese construction companies have been able to develop infrastructure projects that are regarded economically unviable by other-mostly western-firms. An example of this state-backed financing is the acquisition of South African mining house Metorex by Jin-chuan Group for USD 1.32 billion in 2011-outbidding the offer of Brazilian Vale by more than 20%.
Another important component of China's recipe for success has been Beijing's policy of non-interference. In contrast to fears that construction projects that are carried out by western firms may be used to influence inter-African affairs, African governments welcome and appreciate Beijing's non-interference approach.
This coalition investment-type approach and state support-a collaborative state-business approach to foreign policy-has been a key competitive advantage of "China Inc." on the continent and has set Chinese players apart from, for example "India Inc." in Africa. Engagements encompass Chinese state-owned players across a number of industries that are, in turn, politically directed to jointly engage in an African project, usually tied to energy or other extractive resource acquisitions where substantial infrastructure and other supporting construction are needed. This spans companies from the banking, construction, engineering and mining sectors, amongst others, that collectively engage in a turnkey project. Over the years, this interaction has set the playing field for greater engagement not only at the government to government level, but also for greater private sector business and value chains. It has also resulted in regular crowding out of western multinationals by Chinese competition-a combination of low cost, fast and efficient delivery. Western companies are losing market shares in Africa to this well-orchestrated Chinese competition.
A casual affair or a relationship for the future?
Rightfully so, the relationship between China and Africa has received a lot of media and research coverage. The western media often highlights cases of environmental destruction, exploitation of African workers, oppressive contracts, reckless profit seeking, fuelling of corruption and colonial tendency. However, a closer look reveals that these stories are often isolated cases hyped by sensationalist journalism and that the relationship actually holds a number of benefits for African economies.
While during the financial crisis of 2008/2009 a number of European and American investors withdrew from Africa and did not fulfill their investment promises, Chinese investors tried to honor and even further expand their promises. Thanks to rising commodity demand in China, African producers were able to cushion the impact of plummeting demand from crisis-ridden Europe and the United States. Its support for Africa in these economically difficult times earned China a reputation as an "all-weather friend" that is not just chasing a quick buck. Like many other investors, Chinese investors initially struggled to understand and deal with local customs, linguistic and cultural characteristics and often had to pay dearly for that; however, many of these Chinese firms have been quick to adapt to local conditions. They are now paying more attention to the way they are perceived in Africa and how they deal with environmental and labor issues. China is well-aware, that its economic future is closely linked to building a mutually beneficial relationship with Africa.
It is about time that African states realize the important role they play in the global economy and start playing their cards for their own benefit.
