Investment priorities and trends have changed as China’s economy and those of its African partners continue to develop. Chinese firms see an opportunity for lucrative, large-scale construction projects, while African governments see Chinese banks – with less stringent borrowing requirements than those of Western banks or multilateral development banks – as a source of capital for these projects. While these deals have not always gone smoothly, African governments have grown more savvy, and Chinese firms have grown to offer more diverse services in the face of competition. The Cipher Brief spoke to Aubrey Hruby, a nonresident senior fellow at the Atlantic Council’s Africa Center, about the evolving relationship between Chinese firms and African governments.
The Cipher Brief: China has been investing in Africa for some time. What can you tell us about some of the most recent trends in terms of where they’re investing and what sorts of industries they’re investing in?
Aubrey Hruby: I often like to draw a distinction between investment and capital flows, because what is for sure is that capital flows from China have increased dramatically. But when we say investment, sometimes that connotes foreign direct investment, a la Proctor & Gamble building a giant diaper factory in Nigeria. Now, that’s not necessarily comparing apples to apples, because Chinese capital flows have been highly concentrated in, for example, the infrastructure sector. The way the capital flows is often from China Export-Import Bank or the China Africa Fund to formally state owned enterprises that then build infrastructure on a build-own-transfer scheme, so they never become operators in terms of owning it or operating it over time. They just transfer it to the government. Because of that structure, there’s a lot of confusion around whether this is actual investment or if it can be compared to what European or U.S. companies do in terms of greenfield FDI regularly across the region. When you think of it in terms of capital flows and the value of capital flows, then China becomes a large player in the Africa space.
Additionally, there is no doubt that the Chinese-African trade relationship has dramatically increased. It went from basically around $1 billion in the early 1990s to $10 billion in the 2000s to about $200 billion in around 2013 to 2015. You can see an exponential jump in the trade relationships, and China is many African countries’ largest trading partner. So it is very true to talk about Chinese dominance from a trading perspective, it’s the largest player, but when you start to talk about it from an investment angle, you need to dive deeper into what investment means.
To your question about trends, I think you’re seeing a trend of smaller Chinese entities getting involved in Africa. Those aren’t the state-sponsored ones, but SMEs that are in the services space or retail or grocery stores, restaurants, that kind of thing, and they’ve followed on the back of those larger investments.
TCB: There are a huge variety of Chinese interests involved here, but from the Chinese government’s perspective, is there any greater strategy for what their economic interests are? Is there a unified plan?
AH: One of the myths around Chinese capital flows and Chinese commercial engagement in Africa is that there is some sort of incredibly well-designed master plan, and all the countries are divvied up in some smoke-filled room in Beijing. It’s not like that. There is real competition among state-owned enterprises for projects across the continent. Sometimes sister companies compete fiercely with sister companies. Sometimes the parent company is competing with one of the subsidiaries for projects because, remember, one of the ways that China continued its construction boom was just to continue building infrastructure, but outside of China.
I will say that there is a strategic view within the Chinese foreign policy-making apparatus that African countries have importance because they compose the largest voting bloc in the UN, the World Trade Organization, the World Health Organization, basically every UN agency, and they tend to vote as a unit, so it’s like getting one giant swing vote that accounts for 54 countries. There’s a recognition that there is strategic value in engaging with the governments, but in terms of how the projects are selected and which companies get them, it’s not following a master plan. It’s following which companies can get the African governments to suggest their projects to Chinese ExIm Bank.
TCB: Why is Africa an attractive place for China to do business, and what does it offer over other markets worldwide?
AH: I think as I said earlier, part of the motivation is that Chinese construction firms need to continue doing construction projects, and large infrastructure projects, like building rail and roads. Are they likely to do that in Western Europe? No. They need to go to places that are underdeveloped from an infrastructure perspective. So, I don’t think that that’s surprising, and it tracks with the Chinese coming out. They have the term “the going out strategy.” It’s just part of a greater strategy of China going out into the world, and Chinese companies looking for opportunity abroad.
The other thing I would say is if you look at countries, there’s not that correlation to rule of law. China has a noninterference policy, meaning they don’t interfere with the affairs of any of their partner countries, and they like to highlight that compared to what could be construed as a paternalistic approach from Western countries.
TCB: Looking at Chinese firms operating in different countries, there’s a mixed record of what benefits African countries get out of these arrangements. What would you say some of the circumstances are where its mutually beneficial versus where the African country or firm might come off worse for the relationship?
AH: In a lot of cases, the financing necessary for these large infrastructure projects, runs upwards of $10 billion. There aren’t a lot of funding mechanisms that can take on that kind of project. In some cases, the African government, when it comes to infrastructure, doesn’t have a lot of choices. But African governments have come a long way in their negotiating strategies with the Chinese. For example, those early stories of the Chinese bringing prison labor to build different projects, I don’t think any of that is true these days. Almost all of the projects that I have seen firsthand and know about may have Chinese foremen on the job, but they certainly have local workers building things. So it’s not a case of all Chinese labor.
Countries have gotten better at negotiating, and certain countries are doing different things with the Chinese. The Ethiopians, for example, have a major Chinese shoe factory that is exporting over a million dollars of shoes a month using Ethiopian leather and labor. So that’s a complete supply chain, and they’re creating thousands of jobs in Ethiopia. That’s not just an infrastructure case, it’s an export-led growth story.
I would summarize by saying countries are getting better at negotiating, and it also depends on the sector and how much the country benefits. When new roads are built and new rail is built, whether it’s local entrepreneurs or companies like Coca-Cola, they all benefit from cheaper transport costs.
The projects that are questionable are ones like a stadium out in the middle of nowhere. There are rumors of those, but I haven’t seen too many with my own eyes. There’s the question of whether the large infrastructure projects that the Chinese companies build have the right standards or quality, and I think that’s an outstanding question. Sometimes you have to wait a year or two to see. There is a view across the continent that the Chinese-made things are lower quality.
Countries that do it well do oversight, because at the end of the day, the Chinese company is the contractor to the African government, so they will make it as well as their oversight demands. They will stay on cost and cost the project correctly if there is capacity and oversight on the side of the African government to assess costs. I think it’s critical that everyone remember that a lot of these guys are not investors, they’re contractors. If African stakeholders are not happy with how they’re doing things, either by the type of labor they use or the quality, or any of that, then that’s partly the African governments’ fault, because they are their contractors.
