China and Africa

Paul Tierney, a good friend of mine and a legendary figure in private equity circles, asked me to speak about China’s activities in Africa to a class he is teaching at Columbia Business School. During the 1980s, Paul and his colleagues at Coniston Partners gained notoriety for several high profile leveraged buy-outs that they completed, and Paul has for many years been an active investor in emerging markets, particularly South America and Africa.

For the past 10 years, Paul has been teaching Emerging Markets Finance at Columbia as an Adjunct Professor. Given China’s role as the world’s largest emerging market, I have been a guest lecturer each year, speaking to the class about China. This year, however, Paul decided to focus the class on Africa, and with China becoming such a strong force on the continent, he thought the class might appreciate hearing about Africa and its development— from the China perspective.

Paul’s request presented a bit of a challenge since I am by no means an expert on Africa, but it was a welcome one nonetheless. Africa has always intrigued me, and I’ve been looking for excuses to learn more about it. That was the reason I jumped at the opportunity in January, 2009 to visit Kenya and Tanzania as a guest of the Nairobi and Dar Es Salaam chapters of the Young Presidents Organization.

What I saw on the week-long trip demonstrated how actively involved China is with Africa. I wrote about my findings in China and East Africa, but that trip only increased my desire to learn more. Teaching the class at Columbia created a strong incentive to do so, and this year I had the benefit of having Jeff Perkowski, my nephew who is a senior at University of Virginia, in Beijing on an internship. In September, Jeff and I tackled the job of understanding China’s activities in Africa. Before telling you what we found, I’ll first review what I learned in 2009.

China has had a long relationship with both Kenya and Tanzania. China was one of the first countries to recognize Kenya, establishing diplomatic relations with the country only two days after the Republic of Kenya was formed on December 12, 1963. China’s diplomatic relations with Tanzania, as it is known today, date to April 1964, when the country was formed through the unification of the archipelago of Zanzibar with what is now the mainland of Tanzania.

While Kenya has had a long history as a democracy and a capitalist economy, Tanzania’s experience with capitalism is more recent. Tanzania’s post-War history is as a socialist country, aligned with “Communist China.” With its economy in disarray in the mid 1980s, however, the Tanzanian government accepted loans from the International Monetary Fund and agreed to a structural adjustment of its economy, which essentially amounted to a large-scale liquidation of the public sector and deregulation of its financial and agricultural industries.

Of the two countries, Kenya is considerably more developed than Tanzania. It has a population of approximately 39 million people; an estimated GDP in 2009 of $36.5 billion; and a per capita income of $936. Businessmen in Kenya refer to the country as the “window” to East Africa and contend that the rest of East Africa follows Kenya’s lead. With a slightly larger population of 43.7 million, Tanzania’s estimated GDP in 2009 was only $22.3 billion, and its per capita income $510.

China’s overall trade with Africa has boomed in recent years, topping $100 billion in 2008. However, imports from Africa, which totaled $56 billion in 2008, are dominated by oil and mineral shipments from Angola, Sudan, Nigeria, Zambia, the Democratic Republic of the Congo and its smaller neighbor, the Republic of the Congo. China’s exports to African states were $50.8 billion in 2008.

China’s trade with Kenya may date back 600 years according to some, and the East African country is now buying approximately $630 million worth of goods from China each year. However, Kenya’s trade with China is unbalanced as it is exporting only $18 million each year to its old trading partner. Although relatively small compared to other African countries, Tanzania’s trade with China is a much more important part of its overall economy. Trade between Tanzania and China now totals $800 million, with approximately $200 million represented by goods exported to China.

The most visible link with China for both Tanzania and Kenya is in infrastructure development, where it seems that Chinese construction companies are building all of the new roads and major buildings in the two countries. China helped build the Tanzania-Zambia railway in the 1970s, and it built Nairobi’s stadium in the 1980s. More recently, China built a 60,000-seat national sports stadium worth more than $40 million in Dar Es Salaam, which President Hu Jintao handed over to Tanzania in 2009.

When I was in Nairobi, I saw countless local road crews, supervised by Chinese foremen, fixing and expanding the roads. Chinese construction firms have also won the contract to refurbish the Nairobi airport and to build a series of ring roads around the city, not unlike Beijing’s ring-road system.

In addition to their management and construction expertise, Chinese construction companies are also bringing Chinese equipment to East Africa. As I traveled through the two countries, signs of China could be seen everywhere–from FAW and Foton dealerships, to China Heavy Duty Trucks and Sanyi and Xugong construction and road-building equipment. Beyond trucks and construction equipment, there is a keen interest in importing Chinese cars. Chinese companies have a great potential to export to countries like Kenya and Tanzania where the per capita incomes, operating conditions and emission standards are closer to those in China than they are to those in more developed countries.

One area where Kenya may play a greater role in the future is in the production and transportation of oil. On his 2006 visit to Kenya, President Hu signed an oil exploration contract with Kenya that allows CNOOC, China’s state-controlled offshore oil and gas company, to prospect for oil in the country. Kenya is just beginning to drill its first exploratory wells on the borders of Sudan and Somalia and in coastal waters. In addition to producing oil, Kenya may also prove to be a natural location for a pipeline to transport oil from southern Sudan to the coast.

More about China’s activities in Africa in subsequent posts.

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