The New Presence of China in Africa

Front matter

Meine Pieter van Dijk (ed.)

The New Presence of China in Africa en

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Part I OvERVIEW OF THE ISSUES AND CHINAS SUCCESS

I Introduction: objectives of and instruments for

China's new presence in Africa

China is fast becoming a major player in Sub-Saharan Africa (Jacoby, 2007: 34). In 2008 it replaced the European Union (EU) and the United States (US) as Africa's major trading partner. However, we are not just talking about trade; Chinas Foreign Direct Investment (FDI) and development aid are also increasing rapidly; and aid, investments and trade mutually reinforce each other in the case of China (Asche and Schüller, 2008).' This combined use of aid, investments and trade requires political coordination and China has developed a strategy and different policies with respect to Africa, which includes migration to Africa and buying or leasing land for agricultural purposes (Chinese Government, 2008).

There are few systematic overviews of China's involvement in Africa (for example, Alden et al., eds, 2008; Asche and Schüller, 2008; Broadman, 2006; and Manji and Marks, 2007). The picture can be drawn on the basis of different sources such as trade statistics from the World Trade Organization (WTO), the World Bank (2009) and the International Monetary Fund (www.imf.org), statistics on international investments (UNCTAD, 2007) and indicators of development cooperation (OECD, 2009). These data need to be complemented by case studies and recent case studies are now available and will be used (for example, Kragelund, 2007; Large, 2007; Marysse and Geenen, 2009; and Tegegne, 2006). This allows us to ask a series of questions.

This introductory chapter presents the background of China's involvement in Africa. China was present in Africa already in the 1950s and the 1960s. At that time the Chinese leaders supported movements for independence and anticolonial activities. In the post-colonial era Chairman Mao Zedong supported socialist regimes in particular. The support for the destruction and now for the reconstruction of the Beguela railroad in Angola is an example of long-term Chinese support to Africa.” The construction of the TAZARA (Tanzania Zambia Railway Authority) railway line took place in the 1960s. It runs from the Zambian copper mines to the Tanzanian capital and main port Dar-es-Salaam. It was

IO MEINE PIETER VAN DIJK built by the Chinese because no other donor was willing to provide the necessary support to the socialist government of Tanzania.

After the end of the cold war in 1989 the Western nations and the former Soviet Union no longer had to compete for the favors of African governments. In fact the presence in Africa of Russians and Eastern Europeans vanished and new actors came to the scene, among them China, a country that is now very visibly present. It must be said that currently Russia, India and Japan are also all trying again to increase their presence in Africa (Winters and Yusuf, eds, 2007)

Currently the focus of China's presence is much more on trade and investments. Examples are the Chinese involvement in the oil sector in Angola, Nigeria and Sudan (since 1995) and its activities in the mining sector in Congo and Zimbabwe (copper, cobalt, platinum, etc.). China is also looking for cheap food and Chinese State Farms have invested in the agricultural sector in several African countries, including Senegal and Zambia.

To explain their current presence in Africa, the Chinese government likes to refer to this earlier presence in Africa. This common history often facilitated the negotiations to get a foot in the door in the 1990s. China still has a lot of goodwill in numerous African countries because of its involvement in the past. However, the nature of their presence has changed a lot in these last 50 years, as will be shown in this book. Africa has also changed. According to OECD (2008) the economic growth in this continent was at a record high of 5.5 percent per year in 2007. It increased steadily between 2000 and 2009. It was expected that this growth would continue, in particular in the mineral-exporting countries. Some of the experts expect a number of these African countries to become middle-income countries in the next ten years. However, as some of the following chapters will discuss, the global financial crisis of 2008 will also have an impact on African trade and growth.

After making an effort to measure China's presence in Africa, we will go deeper into the underlying policies and development model. What are the objectives behind this new presence of China in Africa and what can we say about the earlier presence in the 1960s and 1970s? The model underlying China's presence will be coined “the Beijing consensus” (Rano, 2004) and will be compared with the so-called “Washington consensus” (Williamson, 2002).* Different actors will be distinguished and their motives to act will be listed. In particular, the strategy of the Chinese government with respect to Africa will be analyzed by looking at the main instruments used. The instruments analyzed in Part II of the book are development aid, investments and trade policies, including different types of loans and debt relief. In this introductory chapter we will first give an overview of the major actors and go deeper into the objectives of the Chinese government. In this chapter we will also provide an overview of Chinese aid to, trade with, and huge investments in Africa.

OBJECTIVES OF AND INSTRUMENTS FOR CHINA'S PRESENCE II J

The Chinese actors

The main Chinese actors are listed in Table 1.1, where we also provide an impression of their motives for being active in Sub-Saharan Africa.

Table 1.1 Main Chinese actors active in Africa

Main actors Main motive

The Chinese government Tries to implement the government's strategy with respect to Africa and it coordinates the activities of different actors

State-owned enterprises Go to Africa as part of the official Go out policy (to be discussed below) to assure the supply of raw materials

Private Chinese companies Go to Africa because they see opportunities there and fear cut-throat competition in the Chinese market

The Chinese Embassy in the Informs Chinese firms in the country concerned and country concerned coordinates activities of different actors Chinese people Have different interests, but are driven by strong economic motives to go and work in Africa

Originally, mainly Chinese state-owned companies entered into joint ventures with Sub-Saharan Africa state-owned companies to secure the supply of commodities from Sub-Saharan Africa. Currently, it is not only the large state-owned enterprises that invest in Africa. Recently Chinese private companies have also become active in Africa. Furthermore, smaller and privately owned Chinese companies are active in this market and sometimes individuals move to Africa and start a business, or do so after their work for a Chinese state-owned enterprise has come to an end.

Eight different objectives behind China's presence

China's strategy with respect to Africa is based on at least eight different objectives and results in specific policies:

1. Assure the supply of raw materials for China, including agricultural products 2. Create a market for Chinese products and services

3. Obtain land for agricultural purposes

4. Channel migration of Chinese people to Africa

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Gain diplomatic support from African countries Present an alternative to the Western development model Provide an alternative to Western development cooperation oN ay

. Emphasize China's status as a superpower

We want to find out how China is achieving these objectives, to what extent the Chinese government has a strategy leading to its increasing presence in Africa and how we should look at this new phenomenon. The first two objectives mentioned for China's involvement in Africa were assuring the supply of the necessary raw materials and selling its products in Africa. China is not only selling cheap labour-intensive products like textiles and shoes, but also more sophisticated products such as different consumer electronic devices and mobile telephones. China has been very successful in this respect, as will be seen by some of the trade indicators presented below.

China is using product differentiation to promote its exports. It exports products to Africa especially for low-income consumers. Not only the quality of the product, but the price is also adjusted to the market. Chinese shoes, which would fetch fifteen Euros in Europe, can be bought (albeit of slightly different quality) for five Euros on the streets of Addis Ababa in Ethiopia. On top of that the Chinese companies use different marketing channels. The Chinese have developed a network of small Chinese traders, which assures sales in regions where other salesmen don't come anymore. This helps them to capture these African markets for consumer products.

Concerning the third objective, China has also decided to expand its presence abroad by buying and leasing land, as will be discussed in Chapter 6 in the case of Zambia and in Chapter 8 in more general terms. Subsequently, Chinese people are sent to till the land (objective 4). This implies that these farmers and all the other Chinese that have moved to Africa have to be protected, a huge responsibility ina continent with more than 50 countries and almost a million Chinese people.

Another important objective for China's presence in Africa is to gain political influence (objective 5). Examples will be given below. To outweigh the influence of the US and the EU, China is playing the card of being a successful developing country itself, but following a very different development model (objective 6) than the model pushed by Western donors, the World Bank and the International Monetary Fund (IMF), known as the “Washington consensus’. The theory behind the two models will be discussed below.

China wants to provide developing countries with development assistance in a different way (objective 7) and it considers stability of the political system as more important than good governance. Stability is important for China itself and it requires continuing economic growth and assuring a constant supply of

OBJECTIVES OF AND INSTRUMENTS FOR CHINA'S PRESENCE I3 raw materials for the rapidly growing Chinese industry and hence the Chinese government wants stability in Africa as well. It also means that other objectives, like respecting human rights and protecting the environment, are considered less important for the moment in both China and Africa.

Finally, China is concerned with Western, and in particular American, hegemony in the world and one of its objectives is to become a political world power itself (objective 8), extending its influence to other parts of the world, like Latin America and Africa.

Different ways to measure the presence of China in Africa

There are different ways to measure the presence of China in Africa. These will

now be discussed briefly. Its presence can be measured in terms of:

1. The number of Chinese people living and working in Africa

2. The goods and services rendered to African countries

3. Chinese aid going to Africa: grants, soft loans and debt relief

4. The role of Chinese foreign direct investment in Africa

5. Other financial flows between China and Africa: normal loans and export credit facilities

1 The number of Chinese people living and working in Africa

There are no data on the exact number of Chinese people currently working in Africa. However, figures are sometimes mentioned for individual countries.’ Zambia, with a population of twelve million inhabitants, counts at the moment 30,000 Chinese inhabitants in the capital and up to 80,000 in the country in 2006, compared with 300 in 1992 (Asche and Schüller, 2008: 30). South Africa would count 200,000 Chinese, many of whom have entered the country illegally (Pretoria News, 24 August, 2007). If these figures are treated as representative, the total number for recent Chinese settlers in Africa (for 53 countries) would be about 1.5 million, which seems like a very high figure. The figure of 750,000 to one million Chinese living in Africa is mentioned regularly, and Asche and Schüller (2008: 30) provide details for a total of 929,000 Chinese people in fifteen African countries, if the average figure in their table is used, which seems to be a realistic estimate. The presence of so many Chinese people in Africa is not always without problems. Recently the Chinese withdrew 400 Chinese workers from Equatorial Guinea because of protests against its activities there.

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2. The goods and services rendered to African countries

African countries export a range of products, in particular many natural resources. China, for example, buys wood in Congo Brazzaville and iron ore in South Africa. China is a center of manufacturing activities, which require these raw materials, and it wants to export an important part of its production to other countries, being part of all kinds of global value chains (Schmitz and Messner, eds, 2008).

Broadman (2006) suggests, however, that both China and India’s south-south commerce with Africa is about far more than natural resources. He is optimistic that this opens the way for Africa to become a processor of commodities and a competitive supplier of goods and services to these countries. This would be a major departure from Africa's long-established relations with the North. However, countries like Tanzania find it difficult to compete in an international or global context, while their markets are flooded with cheap Chinese products (see Box 1.1). It is also difficult for Tanzania to compete with the other countries in the region, for example South Africa, which is considered to have a very advanced economy.

Box 1.1 An example of global competition: tailors and waste in Tanzania

Informal tailors no longer compete with modern textile and garment industries in Tanzania. They have to produce at lower prices than Chinese textile and garment industries and have to come up with more attractive products than the second-hand clothing from Europe, which is available almost everywhere nowadays.

Scrap metal has already become valuable in Tanzania for exports, and the hope is that people will recover plastic in the future. Currently most of the plastic bottles are compressed and exported to China! Hence, it is important that there will be a plastic recycling plant in Tanzania soon.

Source: Van Dijk (2008)

China's trade with Africa has risen more than tenfold in a decade to 55 billion US$ in 2006 (Financial Times, 17 May, 2007) and reached roo billion in 2008. The composition is somewhat one sided. Mainly raw materials go to China and industrial products are coming back. China is the most important trade partner for Africa, bigger than the EU and the United States. Trade statistics show trade between China and Africa has increased fourfold in the first five years of this century (Internationale Samenwerking, September 2006: 38). African exports to China increased from some three billion US$ in 2000 to nineteen billion US$ in 2005 and 26.7 billion in 2006. Jacoby (2007: 34) notes a 30 percent annual

OBJECTIVES OF AND INSTRUMENTS FOR CHINA'S PRESENCE I5 growth since 2000 and points to the fact that this is now one-fifth of Africa's export. Most of these exports are fuels and raw materials. Imports from China are mainly manufactured products. Imports increased in value terms from 3.5 billion US$ in 2000 to over thirteen billion US$ in 2005 and 28.8 billion in 2006, about 15 percent of total Sub-Saharan African imports. China's trade policy with respect to Africa will be discussed in Chapter 5. Chinese construction firms are also very active in Africa. Their market share is currently more than 50 percent of all construction activities according to the OECD (Financial Times, 17 May, 2007).

China has built up an important foreign currency surplus because it exports more than it imports. It earned almost 2,000 billion US$ in reserves by the end of 2008. That money needs to be used and will be used also in Africa to create Chinese jobs and to see to it that the Chinese economy is not hindered by a shortage of raw materials or a lack of markets. China presents itself as a developing country that has not come to exploit Africa, but rather wants to create win-win situations, while following a different approach than the European model.

3 Chinese aid going to Africa: grants, soft loans and debt relief

China is an important source of aid, soft loans and cheap products for Africa; Chapter 3 provides the details. This development assistance certainly helps to build the necessary infrastructure in Africa, although the quality of the infrastructure may be low and the operation and maintenance are not always organized. Infrastructure is a necessary condition for successful economic development, particularly in a continent which is very densely populated. Aid can flow in the form of grants (section 3.1) or interest-free and preferential loans (with a subsidized rate of interest; 3.2), or as debt relief (3.3).

3.1. GRANTS

Recently Chinese aid going to Africa has increased substantially, China has set up a five billion US$ development fund for Africa. The Africa aid package will be tied to Chinese projects, however (Financial Times, 26 June, 2007).’ Aid will be discussed in detail in Chapter 3. Existing loans and credit lines were estimated to total about nineteen billion US$ in 2006. The countries that receive most of this money are Angola, Equatorial Guinea, Gabon, Republic of Congo and Nigeria (Jacoby, 2007: 34). One notes that these are all oil-producing or other commodities-exporting countries. OECD (2009: 140) puts total Chinese aid at 1 to 1.5 billion US$ in 2006.

3.2. INTEREST-FREE LOANS AND PREFERENTIAL LOANS (WITH A SUBSIDIZED RATE OF INTEREST)

In 2005, China announced in the General Assembly of the UN that it would mobilize an additional ten billion US¢ in three years for concessional loans. In December 2006 in Beijing, during the conference of heads of states from Africa, China announced it would probably be Africa’s biggest donor by 2010 (La lettre des économistes No. 15, January 2007).

The loans given are conditional in the sense of being tied to Chinese companies, which are obliged to use Chinese products for the projects. Jacoby (2007: 35) notes that repayment of the loans has also sometimes been tied to the export of local commodities. He gives the example of Angola, where Chinese loans are tied to the supply of oil. However, China puts no macroeconomic conditions on its preferential loans, in a part of the world where many countries have just overcome the debt crisis with the help of the Bretton Woods institutions. In this way China does not support the Washington consensus achieved by the World Bank, IMF and a number of donors, and may undermine their efforts. The two Bretton Woods organizations have raised concerns that China's unrestricted lending undermines years of painstaking efforts to arrange conditional debt relief (International Herald Tribune, 3 November, 2006). The Chinese approach goes against the good governance philosophy, which Western donors pushed in the 1990s and which stresses democracy, accountability and the need to find a consensus to avoid conflicts.

3.3. DEBT RELIEF

The International Monetary Fund has not yet been restructured in a way that eliminates the possibility that the Fund will have to bail out private banks again in case of an international financial crisis. Instead of going bust, the debts of African countries are usually rescheduled over a longer period, during which they find it difficult to obtain new loans. There is, however, an important development with China coming on the scene as a major lender to developing countries. The country does not work in accordance with the way the other international lenders operate in Africa. Some Western interests say the generosity of the Chinese aid programs, its low-interest loans, debt relief and other gifts, undermine their efforts to foster good governance in Africa (International Herald Tribune, 3 November, 2006). The Financial Times (23 April, 2007) warns that some African leaders can try to use Chinese loans to avoid the conditionalities of the World Bank and the IMF, or to avoid having to hold elections. Also, the donor-constructed notion of accountability could be threatened.

China has provided substantial debt relief already. Besides announcing it was going to double aid by 2009 (to about one billion US$), China has also cancelled one billion Euros of African debt and has announced it will cancel a further one billion Euros (Financial Times, 17 May, 2007). It took the Bretton Woods institutions more than two decades to restructure the debt of most African countries. However, currently countries like Ghana and Nigeria are coming back into the international market by issuing sovereign bonds again (Financial Times, 22 March, 2007). Markets seem to forget quickly and the number of parties involved in international finance has increased, making it easier to issue bonds internationally,

4. Chinese Foreign Direct Investment in Africa The role of the Chinese FDI in Africa is the subject of Chapter 4. Examples of planned Chinese investments in Africa are a commitment to invest 2.5 billion US$ in Egypt, together with the promise to increase trade from two to five billion US$ per year (Jeune Afrique, 24 March, 2007). Similar promises were made in other countries visited by Prime Minister Wen and President Hu during their missions to Africa in 2006.

Since the Chinese government initiated the “go global” strategy for Chinese enterprises in 1998, FDI has been increasing. China's “go out” policy is an important factor in explaining China's investments in Africa. The Chinese government also actively stimulated Chinese private entrepreneurs to start up businesses in Africa. By the end of 2006, China had invested more than ten billion US$ in Sub- Saharan Africa (UNCTAD, 2007). The investments focus on building the necessary infrastructure to explore oil or gas (Financial Times 6 February, 2007), but also serve to develop agricultural, telecommunication and manufacturing activities. In 1991 only 4 percent of the Chinese FDI went to Africa. That percentage has increased to 16 percent in 2001, but fluctuates strongly. Chinese FDI is the result of the rapid economic development in China, the important stock of foreign exchange or reserves China has obtained, and a reorientation of its strategy to invest in industries providing the raw materials for China's manufacturing sector.

It is estimated that only 3 percent of China's total outward FDI stock (or 2.19 billion US$) is spread over 500 FDI projects in 48 African countries. Most FDI in Africa went to Egypt, Nigeria, Sudan and Tunisia in 2006 and the first three are certainly very important for the Chinese. Figures by country will be given for several cases, but unfortunately they come from different sources, which may affect their accuracy and recent nature.

FDI flows to Africa in general have increased substantially since 2000, as shown in Table 1.2. The table gives an impression of the growing importance of capital flows to Asia, Eastern Europe and the Middle East, Latin America and Africa. Also, informal flows of money between and within countries have become more important. They are often not captured in the official statistics; it is also not incorporated in the International Institute of Finance (IIF) figures. Recently attention has also focused on the importance of these remittances for Africa.’ This is partially grant money for consumption purposes, but some of the money is also used for investments in development. These figures would have to be added to the figures provided in Table 1.2.

Table 1.2 Comparison of capital flows by region over time (USS billion)

Source: Van Loon and Van Dijk (1995) and more recent data IIF (2007)

More recent information from the IIF (www.iif.org) on the flows per region shows the distribution of the international capital flows to emerging economies over the four major regions, Latin America, Eastern Europe, Africa and the Middle East, and Asia and the Pacific. It shows a strong increase in the total flows and an unequal distribution of the growth over the four regions, with Africa and Latin America lagging behind the other two regions. In this period of sixteen years the flows to Asia and the Pacific increased by almost nine times, while the amount going to Africa and the Middle East went up fourfold. The most spectacular growth has been registered in Eastern Europe, however. FDI is considered a stable source of foreign finance since it has a long-term goal. It usually also brings technology and access to international markets.

Total FDI inflows in Africa were 30 billion US$ in 2006, twice the 2004 level (UNCTAD, 2007: xvii).® These investments mainly go to South Africa and often concern Africa's natural resources. In fact go percent of these FDIs are concentrated in ten countries, which shows the concentration of these flows. The importance of FDI from China is increasing rapidly.

Chinese FDI flows comprised 12.5 percent of total investments in Africa in 2005 and accumulated Chinese FDI comprised 10.5 percent of the total inflow in a country like Zambia (UNCTAD, 2007). In that country the stock of Chinese investments in 2005 was 316 million US$ and the flow 41 million US$. China's total capital outflow increased by 32 percent in 2006 and reached sixteen billion

OBJECTIVES OF AND INSTRUMENTS FOR CHINA'S PRESENCE I9

USs (UNCTAD, 2007: 44). Its outward FDI stock reached 73 billion US$ according to the same source. Although we don't know exactly how much of these investments went to Africa, UNCTAD (2007: 40) notes that China is the fourth largest Asian investor in Africa after Singapore, India and Malaysia.

The China Daily (23 April, 2008) notes that 1,400 Chinese companies employ about 11,000 local people in Africa and have “trained 54,000”. They would be active in 49 African countries. The article in The China Daily quotes the Chinese deputy director of the commerce ministry's foreign economic cooperation department as saying that Chinese investors should be aware of risks “such as problems brought about by a slowdown in the global economy, trade protectionism as well as security incidents involving Chinese businesses’.

5. Normal loans and export credit

The value of existing Chinese loans and credit lines to African countries is estimated to total about nineteen billion US$ in 2006. The loans given are conditional in the sense of being tied to Chinese companies, which are obliged to use

Chinese products for the projects.

Box 1.2 An example: Chinese presence in Zambia

China is already present and quite active in Zambia since its independence in 1964. There were only 300 Chinese living in Zambia in 1992. That number has increased to maybe 80,000 Chinese in 2006. There are currently some 200 Chinese enterprises active in Zambia, the largest number of them on two industrial zones created exclusively for the Chinese. Zambia is also the third country as far as Chinese investments in Africa is concerned. China only invested more in Sudan and Angola. In this case the investments concern mainly the mineral sector. China exports copper and cobalt from Zambia.

Chinese investments were 10.5 percent of all Foreign Direct Investments in Zambia in 2006. China was number eight in that country in investments in 2006. These investments are related to Zambia's mining sector, in particular copper mining investments (UNCTAD, 2007). President Hu Jintao visited Zambia in February 2007 to open the first Africa Economic and Trade Co-operation Zone. Chinese investments in Zambia could increase during the next three years to 800 million US$, according to the China Daily (2007).

A Chinese agribusiness group has invested heavily in Zambia, where they lease more than 3,000 hectares, producing chicken and pigs and with an annual turnover of three million USS (Internationale Samenwerking, September 2006: 37; also in Chapter 6).

Van Pinxteren (2007) attributes the anti-Chinese mood in Zambia to the way “China mistreats and exploits local workers in Zambia” (Financial Times, 8 February, 2007). When an opposition leader wanted to make this a theme of his campaign, the Chinese warned that they would leave Zambia if this man was elected president. Many Zambians considered the Chinese statement to be interference in local politics.

An analysis of the effects of Chinese investments in Zambia is given in a case study by Kragelund (2007; also Chapter 6). He studied the effects of Chinese investments in Zambia using an interesting classification of these investments. They can serve to build up local production capacity, or result in enterprises competing with local companies, or Chinese investments can play a role as a catalyst. In his opinion investments in the construction sector are competing, Local companies could have done the work, or international companies that employ many more local subcontractors and workers. Catalyzing is the role of Chinese investments in the copper sector in Zambia. That sector had been privatized in the 1980s and declined subsequently, It was revived in the 1990s, but China seems to be retrenching in 2009 (just like the Indian mining firm in Zambia) because copper prices have fallen strongly.

Finally Kragelund (2007) considers that the textile and garments industries are examples of building up local capacity. This industry is important for Zambia because about 18 percent of the national income is generated by its activities and about 140,000 farmers grow cotton, although currently of a very low quality. The Chinese are good for two-thirds of the textile and garments sector. There are some positive effects of these Chinese investments for Zambian farmers and local textile and garments companies in Zambia. However, after finishing the Multi-Fibre Agreement in January 2005, China started to export directly from China and the biggest Zambian textile factory is currently closed because of “restructuring’,

China's government strategy with respect to Africa

During the Forum on China-Africa Cooperation, a conference of heads of states from Africa in Beijing in November 2006, it became clear that China seeks deeper ties with Africa. The meeting was attended by 47 heads of state out of a total of 53 African countries that have diplomatic relations with China.’ It resulted in a plan pledging that China will double its aid to Africa and set up a China-Africa development fund to encourage Chinese companies to invest in Africa. The Forum on China-Africa Cooperation resulted in a Three-year Action Program." It promised, for example, to train 15,000 African professionals and to build 30 hospitals, 30 malaria treatment centres and roo rural schools! The document is full of phrases expressing China's good intentions in Africa, like: “peace and development remain the main themes of our times”.