The Complicated World of Chinese Investment in Africa

By Anna B. Wroblewska AFKI Original Published: October 14, 2014, 4:16 am
www.chinaafricaproject.com

China is Africa’s largest trading partner, with nearly $200 billion in trade flows in 2013, and a major investor in the African landscape. Chinese direct investment reached $194 billion in 2013 and is growing at a rate of 114 percent per year.

As such a prominent participant in the African landscape, does China provide net benefits to its trading and investment partners?

A major area of influence is infrastructure. For example, a China-backed railroad in Kenya seeks to eventually link Mombasa with Nairobi and, further on, cities in South Sudan, the Democratic Republic of Congo, and Burundi. While there has been some criticism of the project, namely a concern about the lack of competing tenders, the potential benefits are enormous.

“Decent transportation infrastructure can only be of enormous benefit to economic growth in Africa, especially considering how appalling the current situation is,” says Christopher Gilmour, investment marketer and analyst with ABSA.

Another benefit is the sometimes breathtakingly cheap terms that such investments bring, especially when compared to commercial markets or institutions like the World Bank.

“I’ve seen in East Africa… the funding attached to [a given project] is 1 percent,” says an active African infrastructure investor who preferred not to be named. In contrast, “The Kenyan government, which has maybe the best rates in the region… at best they’ll pay 6.5 [percent]” on the sovereign debt market. 

Thus these types of Chinese financing deals provide “access to funding and it’s at very attractive terms.”

These structures far from uncommon. A study of the activities and perceptions of Chinese involvement in Africa by researchers Fei-Ling Wang and Esi A. Elliot emphasizes just how popular such arrangements are. “Interest-free or low interest government loans are common,” the authors write, “Such as the $2 billion credit line at 1.5 percent for 17 years to Angola for oil exploration and the $2 billion subsidized loans to Ghana for oil and gas projects in 2010.”

Billions more have been pledged for a variety of projects, but generosity goes beyond loans: Wang and Elliot note that Beijing also cancelled over $10 billion in government debt between 2000 and 2005.

One might think that this would make China the dominant force in large-scale African investment projects. However, “Some of the countries,” says the infrastructure investor, “Are a bit more careful and cautious in using [Chinese financing] because they don’t want to be on the wrong foot with the IFC and the World Bank, and they can see the wider benefit just to diversify their sources of funding.”

Part of the reason for this may be the non-pecuniary costs — sometimes significant — of cheap Chinese loans.

“Of course, there is no such thing as a free lunch,” says Gilmour. “The Chinese bring their own workers to construct these projects and expect to be given preference when it comes to being granted mining and other licenses in Africa. They also expect not to have hassles with regulations in the countries to which they provide infrastructure benefits.”

These costs add up, particularly with respect to rights for natural resource extraction projects. Fully 84 percent of China’s imports from Africa consist of oil, minerals, and timber from just eight countries. This underscores the significant benefits that could accrue to the Chinese from unrelated financing deals that offer preferential licensing terms for extractives.

Another issue has been building quality. “Sometimes the quality of the infrastructure is sub-par,” says the infrastructure investor. An example is a bridge in Ghana, which is “in even worse shape that the one built by the French before independence.”

Ghana declared independence from the United Kingdom in 1957.

Finally, the infrastructure investor notes that often, “The Chinese are bringing their own labor, they’re buying their own food… They don’t mix with the local population, which creates tension.”

Indeed, such tensions often work to undermine the myriad benefits of Chinese investment. Wang and Elliot write that “Almost everywhere in Africa we found eager appreciation of the inflow of China’s ‘easy’ money and praise for the infrastructure projects the Chinese have built, often as gifts… but much less so about the coming of the Chinese people who indeed in many ways seem to be effectively neutralizing Beijing’s massive and expensive charm diplomacy.”

This is in part due to a lack of coherence between official policy from Beijing and the actions of businesspeople and workers on the ground, as well as distrust between local Africans and Chinese émigrés.

While many surveyed Africans appreciated the apolitical terms under which African nations can conduct business with China, there are also “growing African complaints against the opportunistic, even predatory, behaviors by the Chinese in Africa — acts that resemble very much the old Western resource extractions that damage the local business environment, ruin social fabric, and undermine labor rights and employment opportunities.”

Even in Zimbabwe, which developed closer ties with China after its isolation from the West, a Chinese national must pay significantly more for a visa than visitors from the United States, United Kingdom, or European Union.

Thus it is, as ever, a complicated issue with costs and benefits and the potential for great understanding — or misunderstanding. But as relationships with China deepen across the continent, there are measures that can be taken to avoid some of the costs of doing business.

“Governments should be more aware that if there’s very soft funding, very cheap funding that looks attractive, there may be strings attached to that,” says the infrastructure investor.

“They are missing the long term view… [the reality that] very cheap infrastructure, which from a maintenance standpoint is going to be very expensive over the long-term. It’s a balancing act” between short term and long term costs, he says.

Finally, though, there are alternatives on the horizon for nations ambivalent about the cost of infrastructure development with the Chinese. This might be best represented by the new $100 billion BRICS development fund, a collaborative effort between Brazil, Russia, India, China, and South Africa. The fund is focused on infrastructure projects in developing countries and could provide a viable alternative to both the World Bank and direct Chinese investment alike.

As financing sources expand, so too, one hopes, will infrastructure development and investment.

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