The global financial crisis is accelerating Chinas
investment in Africa. Up 81% during the first half of 2009
compared to last year, Chinese financial institutions are
investing capital on the continent in a counter-cyclical
manner, financing Chinese firms that, in most cases, are
venturing abroad for the first time.
Over the past decade the economic destinies of the two
regions have become increasingly intertwined a trend
that could be called the new coupling. GDP growth
trends for China and Africa have tracked each other in almost
absolute parallel over this period.
Africas recent robust growth has been driven by
Chinas demand for commodities; China is very likely to be
ranked as Africas single largest trading partner this
year. Even in commercially diversified South Africa, China was
its largest trading partner over the first half of 2009.
But with the rapid drop off in Chinese growth following last
years global crisis, Africas GDP growth outlook has
followed suit. While Africas growth is largely
underpinned by Chinese demand, Chinas growth prospects
will increasingly become dependent upon Africas ability
to supply the resources. This dynamic explains the roll-out of
Chinese-funded infrastructure across the continent in a bid to
ease supply-side constraints.
The Chinese leadership has been vocal in pledging continued
support to Africa during the global financial crisis. During a
trip to Mauritius earlier this year, president Hu Jintao
reminded developed countries that they should assume
their responsibilities and obligations to Africa during
the global crisis. Chinas commerce-first approach towards
Africa is increasingly appealing to African states over the
traditional aid-led approach.
The current crisis has resulted in African policy-makers
openly spurning the so-called Washington Consensus
model of economic development. Instead, the Chinese
model, if one can be said to exist, is increasingly
attractive to African leaderships disillusioned with
traditional prescriptions for development. A Beijing
Consensus emerging in Africa? Perhaps.
China has a long and politically close relationship with
Africa, but this does not make business there any easier for
Chinas emerging multinationals. A number of African
investments have already failed, and more will undoubtedly do
so in future.
But Chinese firms have proved rapid learners in foreign
markets. Their ability to adapt to local African market
conditions and operate in often challenging political and
economic environments will determine whether Chinese investment
in Africa is truly long-term strategic, rather than merely
short-term mercantilist.China launched a new Africa policy a
decade ago when it started to conceptualize and plan the
establishment of the Forum of China-Africa Cooperation (FOCAC)
a multilateral forum through which Beijing implements
its foreign policy goals. Since its launch in October 2000,
China has set out three-year engagement plans that it has put
into practice in Africa. The next FOCAC summit takes place in
November in Egypt when Beijing will announce another series of
strategic initiatives toward the African continent. The focus
will be on the agricultural and infrastructure sectors.
A new model
Criticism is common of Chinese firms that often operate as
insulated actors in recipient African economies.
Construction firms that use only Chinese labour for their
contracts do so in the interest of rapid completion of their
projects. The desire to deliver the infrastructure on time
often takes precedence over local employment generation.
But research carried out by the Centre for Chinese Studies
shows that as Chinese construction firms time in their
host African economy increases, they begin to integrate
employing a local labour force and having a locally focused
supply chain. Chinese financial institutions are now the
largest financiers of infrastructure in Africa. The World Bank
estimates Chinese funding of roads, railways and power plants
in Africa at $7 billion in 2007. As OECD investors have
withdrawn capital from Africa over the past year, it is being
supplanted by Chinese investment in hard infrastructure. In the
first quarter this year, investment in Africa plummeted 67%
year-on-year. The Chinese package deal type
financing structures are very appealing to recipient African
economies. The finance, often linked to broader aid packages
and commodity purchases, allows Chinese construction firms to
enter and rapidly gain market traction in the state in
The state-driven nature of this finance, through the
so-called concessional finance model implemented by
Chinas Export-Import Bank, has attracted criticism from
western observers, including the IMF, in the case of the
Democratic Republic of Congo, where there is a fear that a
multi-billion dollar loan will exacerbate its debt burden.
The concern centres on the sovereign guarantee that
recipient African states provide for the concessional loan.
While controversial in some quarters, many cash strapped
African governments seeking investment in their infrastructure
sectors welcome China Exim Banks model.
The bulk of Chinas financial engagement of Africa is
through sovereign wealth. The state-supported nature of China
Exim Banks engagement in Africa may be distorting the
capital-raising market for large commodity finance projects on
the continent. Centred on off-take contracts, the long-term
strategy employed in constructing these deals and low cost of
capital provided to fund them, gives Chinese contractor firms
tapping into the credit facilities a competitive advantage in
The political construct of these Chinese policy bank deals
affords them a longer lead period to realize their investments.
A new risk model is being constructed that is calculated
differently to traditional (western) investors. The state-owned
structure of Chinese policy banks allows for an approach where
capital is invested in a manner suited to the needs of
Indeed, Chinas own phenomenal economic development
over the past three decades has been underwritten by a
state-owned banking sector. This has been coupled with the
creation of a vibrant private sector that now contributes
two-thirds of Chinas GDP. This is the model that Beijing
is pursuing in Africa sovereign allocation of capital
focusing on infrastructure and commodities (rather than the
tired aid model) that is intended to support long-term economic
Before the financial crisis, there was much debate about the
investment strategies and lack of transparency of sovereign
wealth funds (SWFs). The attempt to regulate SWF investments
has been a thinly disguised attempt to constrain Chinas
sovereign investments abroad, in particular into African
But the sovereign nature of Chinese capital deployment in
the global economy is allowing Chinese financial institutions
to invest in a counter-cyclical fashion. Western investors are
withholding credit while Chinese bankers are expanding their
loan portfolios in Africa. This is true of Chinese policy banks
as well as it is of its commercial lenders. The main actors are
China Exim Bank and China Development Bank through its recently
launched China-Africa Development Fund, a $5 billion fund for
Chinese firms to invest in Africa.
Yet beyond the impressive statistics and numbers from China
and Africas expanding commercial relationship, the
question remains whether it will be sustainable. This will
depend on the ability of Chinese firms to integrate their
business models into the local African environments in which
they are operating.
Chinese firms are used to dealing with tough and competitive
conditions but are far less adept at understanding local
cultural circumstances. Managing cultural difference is the
primary challenge of Chinese business moving to Africa.
Meanwhile African societies in general have a poor
understanding of China and the Chinese, so Africa needs to
build its knowledge, networks and influence in China.
Africa has not yet grasped the long-term strategic
implications of Chinas growing presence on the continent.
But whats clear is that Africa must pragmatically align
itself to China and its expanding global power.
Martyn Davies is CEO of Frontier Advisory (Pty)
Ltd and executive director of the Centre for Chinese