Understanding Chinese investment in Africa

Understanding Chinese investment in Africa – There have been a lot of mixed opinions about Chinese investment in Africa. While some praise it as being the reason Africa is seeing real growth, others curse it as being modern day colonialism. Yet no one can deny that it is playing a huge role in the continent today.

China – Africa’s largest trading partner

Last month Chinese President Hu Jintao opened the fifth China-Africa Cooperation Forum with the announcement that China will offer an additional US$20bn in loans to Africa over the next three years. This is double the amount that was offered at the 2009 forum.

In the past 10 years, Africa has seen a huge interest from Chinese investors who, in order to fuel their own growing economy and population, require access to the continent’s vast reserves of minerals and other resources.

The commodities boom has benefited resource-rich African countries. Daniel Tarling-Hunter, an economist at Euromonitor International, stated in a recent report that the Metals Index increased by 290% between June 2000 and February 2011.

“China’s demand for goods has been instrumental to these rising prices, the country imported more metalliferous ores and scrap metal in 2011 than the 10 largest importers behind it,” explained Tarling-Hunter. “Raw material-rich African countries such as Nigeria, Zambia and South Africa have benefited from this demand, supporting a real GDP growth rate in sub-Saharan Africa of 75.2% between 2001 and 2011.”

Tarling-Hunter also pointed out that Africa, the Middle East and Australasia are the only regions in the world that China runs a trade deficit with – worth over $59bn in 2011 – as China’s imports of raw materials exceed that of their exports to those regions.

China has also invested in energy security in order to support its long term growth. As oil is a major import for China, it has been investing in refinery projects across the African continent. Algeria, Sudan, Chad, Niger and Nigeria all have oil refinery projects funded by Chinese firms, with the Nigerian project worth $23bn alone, as indicated by Tarling-Hunter.

But Chinese investment is not limited to raw materials, with the country investing in various infrastructure projects around the continent, as well as in the African consumer. Between 2006 and 2011 sub-Saharan Africa saw a 19.3% increase in consumer expenditure in real terms. This has a lot to do with the growing African population, which exceeded one billion in 2010 and is expected to grow to 1.6 billion by 2030. In line with this is the rapidly growing middle class.

Heloise Smith, executive vice president of business development at Standard Bank, said in a recent KPMG panel conversation focused on transacting in Africa that the growing African population – that is increasingly affluent – is driving some of the trends seen in Africa, including investment in the fast-moving consumer goods (FMCG) sector.

“There is a lot of debate as to how you define the African middle class and you can debate about what the definition is, but the fact is its growing and it is increasingly urbanising which makes it possible for the FMCG and other service providers to get economies of scale because you are increasingly going to have cities in excess of 10 million people on this continent over the next few decades,” said Smith.

China has embraced opportunities in the FMCG sector. According to Tarling-Hunter, low cost electronics are in demand in Africa, with the telecommunications market doing particularly well. “Lower costs of production and more aggressive investment strategies have allowed Chinese firms to flourish against western competition,” he said. “Huawei, a Chinese telecommunications firm, has invested $1.5bn in Africa since it entered the market in 1998, with its low cost smartphone offerings gaining market share on the continent.”

Chinese investment: a blessing or curse?

So why is there this murmur of distrust concerning all this investment coming in from China? There are a few major criticisms, the most popular being that China’s involvement in Africa is new colonialism. It is a concern that China’s infusion of funds could leave Africa in considerable debt, or reliant on Chinese investment in order to maintain their economies. This would impact the economic and political independence of African countries.

Another concern is that most Chinese investment comes from state-backed organisations, although investment from China’s private sector is increasing. Investment projects in raw materials and energy are dominated by Chinese state-funded initiatives, usually in the form of sovereign wealth funds and largely aimed at energy and resource security, according to Tarling-Hunter.

“The state-backed sectors have in some cases been criticised for a colonialist bent,” added Tarling-Hunter. “Although this accusation is perhaps overly-dramatic, there is no doubt that China’s investment in Africa has taken a long term perspective.”

Other critics are concerned about the work conduct by Chinese corporations or that African governments will enter into corrupt – or uninformed – contracts with Chinese investors. For example, How we made it in Africa reported last month that a ‘ghost town’ – comprising 750 eight-storey apartment buildings, a dozen schools, and more than 100 retail units – was built in Angola by the China International Trust and Investment Corporation (CITIC). The $3.5bn development was supposed to house half a million people but remains empty as it is out of the affordability range of the vast majority of Angolans.

However, not everyone views Chinese investment in Africa as negative, but rather as a mutual business relationship where everyone wins. China needs resources and their willingness to invest early in African markets could arguably be seen as a means of establishing a long term business relationship. Africa needs investment, particularly in infrastructure, and China is providing this.

China is investing in markets which many developed countries historically would not consider because they found them too risky.

“The general approach China has taken with investment and trade has meant investment in unstable countries,” explained Tarling-Hunter. “China has partnered with Zimbabwe, providing a $10bn loan in 2011 in return for mining rights in the country, again to ensure China’s raw material security.”

While China may only be investing to secure long term access to Africa’s oil and precious resources, Africa has the resources available but needs the investment. If investment deals are transparent and properly directed by African leaders, China and Africa can have a mutually beneficial business relationship.

“I think even businesses and other companies active on the continent are starting to see the Chinese as partners, and investing in the infrastructure that is so critical to do along the whole resource boom, but also to enable … the growth which is everywhere forecasted for the continent,” commented Standard Bank’s Heloise Smith.