China’s growing reach in Africa: are we seeing a fair trade?

His fleet, split into four, journeyed to Asia, Africa, Antarctica and the Americas. This was 70 years before Christopher Columbus ‘discovered’ America.

Zhu Di died in 1424 and was succeeded by his son, Zhu Gaozi who cancelled all further expeditions. The Mandarins had convinced Gaozi that exploring the world was exposing China’s culture to a savage world, while draining its coffers.

• Unfortunately, the meticulously documented discoveries of Chinese anthropologists, astronomers, cartographers and horticulturalists were destroyed, but this nugget of history was pieced together by Gavin Menzies in his outstanding book ‘1421’.

Now, after 500 years of self-imposed isolation, China has been making up for lost time by focusing its investment and trade activities on the African continent.

Investment

The case for investment in Africa is very clear. Overall, foreign-direct investment (FDI) to Africa rose by 11% to US$46bn in 2018.

This was supported by resource-seeking inflows, some diversified investments, and a recovery in FDI into South Africa.

After Oceania, Africa showed the second highest increase of FDI in 2018 (followed by the Middle East and Asia), while North America, South America, and Europe all recorded declines in FDI for 2018.

• North Africa attracted most of the FDI, followed by West, Central and East Africa.
• Southern Africa attracted the least FDI on a net basis after substantial disinvestment from Angola.

Future FDI flows to Africa are expected to remain positive.

This year, the United Nations Conference on Trade and Development (UNCTAD) is predicting 13% growth in FDI, driven by the acceleration of economic growth, progress towards implementation of the African Continental Free Trade Area Agreement, and large greenfield investments.

China is playing a major part in this investment climate, in what ‘The Economist’ is calling “The new scramble for Africa”.

Research by ‘Who Owns Whom’ has identified several Chinese companies engaged in major infrastructure investments in sub-Saharan Africa:

Some of these projects include:

• A US$20bn infrastructure loan to Guinea over 20 years in exchange for the development of bauxite, and alumina projects by China Henan International, and China Power Investment, respectively.
• A US$12bn investment by China Railway Construction to build a 1,402km railway line along the coast of Nigeria linking Lagos with Calabar.
• China Road and Bridge Corporation has signed a US$2.5bn agreement to purchase Liberia’s natural resources in exchange for building roads and electricity supply infrastructure.
• The Export-Import (Exim) Bank of China is funding 75% of Nigeria’s US$1.3bn, 700MW Zungeru Hydroelectric Scheme.
• China Harbour Engineering is building a US$600m greenfield port (Atuabo Freeport) which will open up Ghana’s oil and gas sector to regional offshore markets.
• Nigeria took a US$500m loan from China’s Exim bank to remodel its four international airports.

Trade

China’s economic interests in Africa have always been two-pronged: trade and investment. Since 2000, the volume of trade between China and Africa has increased 17-fold. Meanwhile, China’s investment in Africa has increased by more than 100-fold.

Africa’s trade with China grew exponentially after the first Forum on China-Africa Cooperation (FOCAC) in 2000.

From around 2013, Africa’s trade deficit with China increased sharply.

• In 2001, China made up 4% of all of Africa’s imports. That number grew to 16% by 2018, at a compound annual rate of 19%.
• In 2001, only 3% of Africa’s exports were destined for China. It rose to 15% by 2018, at the same compound annual rate of 19%.

The type of goods traded are worth a closer look. China’s exports to Africa include high value-added products, while it imports low value-added (commodity-based) goods from Africa.

However, South Africa’s bilateral trade with China makes for interesting reading. It highlights particular nuances that are true for many other African countries.

• The rise of China-South Africa bilateral trade has been significant. China became South Africa’s no.1 trade partner (imports & exports) in 2009, a position that it still holds today.
• The pace of the transformation has been astounding. In 1990, China was South Africa’s no.18 import partner, and only the 34th largest export destination for South African products.

Today, South Africa runs a massive trade deficit of US$8.5bn (2018) with China, with imports almost twice as high as exports. Also, similar to the rest of Africa, South Africa’s exports to China consist mainly of low value-added commodities, whilst its imports are mainly high-value added products.

China occupies a significant place in South Africa’s trade position (both in size and growth), and has a material impact on the economic health of the country.  An old saying goes: When America sneezes, the rest of the world catches a cold. Today, one can expect South Africa (and Africa) to get double pneumonia when the dragon sneezes.

The World Bank has calculated that a 1 percentage point reduction in China’s growth, results in a 0.37 percentage point decline in South Africa’s GDP over a 2-year horizon. Against this background, a lower growth forecast for China is not good news.

The dumping of Chinese products is also a concern for African markets. Chinese imports were highlighted as a material threat to a number of South African industries, according to reports by Who Owns Whom.

The Record of Understanding, signed with China in 2006, makes it difficult for South Africa to impose anti-dumping tariffs on Chinese imports.

In its 2018 annual report, Hulamin – a South African firm specialising in aluminium products – said imports of rolled and extruded aluminium products from China had increased by 10% and 5%, respectively.

• According to Bell Equipment CEO, Leon Goosen, “there is no protective barrier on imported construction equipment, such as those we manufacture locally, unlike the 20% levied on imported cars and on-road trucks. Our competitors’ machines come in free of duty”.

Forum on China–Africa Cooperation (FOCAC)

So, what is driving China-Africa’s growing trade and investment? The Forum on China-Africa Cooperation (FOCAC) has most definitely played a critical role since its formation in 2000. It’s not the only factor, but it continues to play a major part.

China pledged US$60bn to Africa in loans, export credits and grants at the 7th FOCAC summit in Beijing in September 2018, despite major concerns about Africa’s rising debt and the inability of some countries to repay its loans.  This follows a US$60bn pledge at the 2015 summit.

President Xi Jinping has proposed that China will implement 8 major initiatives: industrial development, infrastructure connectivity, trade facilitation, green development, capacity building, health care, people-to-people exchanges, peace and security.

He has promised that China won’t interfere in Africa’s internal affairs, impose its own will, attach political conditions to its African aid programmes, or act out of political self-interest when it comes to investment and financing in Africa.

Africa will need to keep China to its word.

Some mixed views

Chinese investments are undoubtedly advancing the continent’s industrial development, agricultural modernisation, and infrastructure improvements, while boosting connectivity and integration.

However, there are as many critics of China’s involvement in Africa.

They accuse Beijing of carrying out a neo-colonial project through its debt-trap diplomacy.

• China holds 72% of Kenya’s bilateral debt, and 77% of Djibouti’s debt, after completing large projects in both countries.
• Critics say China uses its own labour and material, rather than hiring local contractors and service providers. They also accuse China of delivering sub-standard work and repeated delays on projects.

There are many examples of failed Chinese projects in Africa, most notably the Sir Seretse Khama International Airport in Botswana.

• A Chinese firm started construction in 2008, but its contract was suspended in 2012 after failing to meet a 2010 deadline. The airport was meant to be completed in time for the 2010 Soccer World Cup in neighbouring South Africa.

Bottom Line: Africa needs China, and China needs Africa.  China’s investments, trade, foreign aid, loans and grants play a huge role in developing the continent. But in the longer-term, Africa must engage with China in a more integrated manner, pushing for a fairer and more balanced trade, and above all for more local value-addition.

 

Havenga is the director of Cathkin Consulting and McGregor the MD of Who Owns Whom