China Expands Investments Across Africa
Decades ago, China saw economic partnerships with African nations as a means of securing political support. As China’s economy has evolved towards export manufacture, its interests shifted to gaining access to Africa’s bountiful natural resources. Today, in China’s diversifying economy, state-owned and private companies are seeking new opportunities across the African continent. The Cipher Brief asked David Dollar, a senior fellow at the Brookings Institute’s John L. Thornton China Center to bring us up to date on the Chinese surge into Africa.
The Cipher Brief: China has been investing heavily in Africa for quite some time. What are the most recent trends and where are they heading?
David Dollar: The big ramp-up in China’s engagement with Africa started about 15 years ago with direct investments in energy and metals. The biggest destinations have been South Africa, DR Congo, and Nigeria. A number of years later, the Chinese [increased their] lending to fund infrastructure: the largest borrowers have been Angola, Ethiopia, Sudan, DR Congo, and Kenya. In the last couple of years, the resource investments have fallen off, in response to a worldwide glut and sharp price declines. An interesting recent development is that more private Chinese firms are investing in Africa, particularly in services and manufacturing. The private firms tend to go where economies are performing well, in East Africa and South Africa. As of 2012 China was providing about $3 billion per year in direct investment across the African continent and about $6 billion in lending for infrastructure. The latter figure has probably increased since then. The amounts are large relative to other financial sources for African nations, but not of the over-whelming magnitude sometimes conveyed in press reports.
TCB: Does the Chinese government have an over-arching strategy for expanding economic relations with African nations?
DD: The initial “going out” policy of the Chinese government in the mid-2000s was aimed very much at addressing the country’s natural resource scarcity. State-owned enterprises in natural resource sectors invested everywhere supply could be found. More recently, the strategy has shifted. China has over-invested at home and created excess capacity in housing, heavy industry, and infrastructure. Its appetite for natural resources has diminished, and its large construction sector faces a shortage of work. In this environment it is natural for all different types of firms to look abroad for new opportunities. It makes sense to use the policy banks to fund other countries’ infrastructure projects that can be carried out by Chinese construction companies. There is much more of this Chinese activity in nearby Asian countries than there is in Africa. But still, the exodus of capital from China is large enough to provide benefits to Africa as well. While these developments are primarily economic, they also have strategic implications, as China becomes the main trading partner and financier of most African countries. China likes to have a lot of friends in the United Nations, and Africa is divided into many countries. China’s navy will gradually go global, and it will need friendly ports.
TCB: How is Chinese investment and economic activity in Africa organized, and what are the drivers?
DD: There are three distinct drivers of Chinese engagement in Africa. First, direct investments in energy and metals are carried out by big state enterprises. They are in a global search for supply and are interested in Africa primarily for commercial reasons. Second, China’s big policy banks, the China Development Bank and China EXIM, use public resources as a foundation for lending to governments to fund infrastructure, especially transport and power. The general impetus is economic: China has over-invested at home and needs to invest abroad now to employ construction companies and to deploy the country’s savings. China is targeting Africa for reasons that are partly political. China wants to build its strategic alliances and soft power. Its top leaders have made very ambitious pledges of support that the policy banks now need to carry out. The third driver, the Chinese private sector, will probably be the most important in the long run. Chinese entrepreneurs see Africa as a growing market.
TCB: Why is Africa an attractive place for China to do business? What does it offer over other markets?
DD: Africa is very complementary to China in two ways: Africa is resource-rich whereas China is resource-poor on a per capita basis; and Africa is young and growing whereas China’s work-age population has peaked and started to decline. There are fewer good investment opportunities in aging, slowing China; and more and more good investment opportunities in Africa. China’s initial economic interest in Africa was based primarily on the first factor: investing in natural resource extraction to feed China’s industrial machine. But now there is a glut of new supply of energy and metals coming on line globally, and China’s growth pattern has changed. Industrial growth has slowed very dramatically, reducing China’s appetite for energy and metals. At the same time diminishing investment opportunities at home are encouraging Chinese firms to invest abroad. The recent trend is for less investment in resources and more investment in manufacturing and services. This is especially true for private firms, which make up the bulk of the Chinese economy.
TCB: China has a mixed record of creating deals that mutually benefit its trading partners. What are the circumstances that bring about deals beneficial to the host countries, and when are these deals weighted heavily in China’s favor?
DD: African countries vary considerably in the quality of governance, things like protection of property rights and the rule of law, and accountability of governments to their people. China is investing everywhere, in good and bad governance environments alike. In the better governance environments, Chinese investment is bringing benefits. Uganda, for example, is using the infrastructure financing for much-needed improvements in roads and power. About one-third of the foreign investment in manufacturing in recent years has come from China. In poor governance countries, on the other hand, investments are not turning out so well. In DR Congo, Sudan, and Angola, infrastructure projects are hard to implement, and there is not much benefit in terms of economic growth. The risk in these countries is that the government will be saddled with debt but will get no valuable assets in exchange. It is hard to prove, but corruption is also more likely in the poor governance environments, further reducing potential returns. The lesson for African countries is that you want government and civil society to have strong oversight of infrastructure and mining projects . China may take a lesson as well, that lending to countries with poor governance leads eventually to debt write-downs and losses for China.