China and Africa: Part II

On my trip to Kenya and Tanzania in 2009, I heard about the substantial infrastructure investments that the Chinese government was making in the two countries, and I saw firsthand the Chinese construction crews and equipment at work. I also spoke with hotel operators in Nairobi and Zanzibar who told me about their shopping trips to Guangzhou to outfit their hotels. Even though I was outside China, it seemed like China was everywhere.

When I returned to Beijing, the question that I struggled with, and the question that I had to answer for Paul Tierney’s Columbia Business School class, was: “What exactly is China’s strategy for Africa?” Is it merely an extension of “China Inc.,” or is it more complicated than that? In other words, “How could I make some sense about what China is doing in Africa?”

After digging into the information in preparation for the Columbia lecture, I came away with two clear conclusions. The first is that China is using the same tools in Africa that have been used to develop the Chinese economy. As a country that has only recently gone through the economic development process, China knows what it takes to develop a modern economy and how best to go about it. China is now making good use of that experience in Africa. The second is that China’s activities in Africa reflect the industrial structure of China itself. In other words, both of the industrial models — the “Government Led Model” and the “Free Market Model” —that are at work in China are at work on the African continent.

The Chinese government and Chinese businessmen, of course, have many reasons to be interested in Africa and its development. China needs a steady source of raw materials to fuel its rapid industrialization, and Africa is a cheap, untapped source of many of the natural resources required. China would like to deploy at least some of its $2.7 trillion of foreign currency reserves in emerging markets like Africa in order to lessen its dependence on Western economies and to enhance its leadership position in the global economy. As China’s manufacturers move up the value chain, the less developed countries of Africa represent an ideal place to relocate the production of lower value added goods. And finally, with a GDP of $2.2 trillion in 2009, and a cost perspective similar to the one that exists in China, the African continent represents a natural export market for Chinese products.

The relationship between the People’s Republic of China and Africa has evolved as China passed through its three stages of development. During the Maoist era from 1949 to 1978, the relationship was more political in nature as China fostered diplomatic relationships through foreign aid and assisting independence movements. During the economic reform period that began in 1978, trade between China and Africa grew tremendously, increasing by 700 percent during the decade of the 1990’s. After China joined the World Trade Organization in 2001, trade continued to grow to the point where China is now Africa’s largest trading partner with over $100 billion in two-way trade in 2008. In recent years, direct investment by China in Africa has also increased considerably.

How is China making investments and financing the development of Africa?

Resource-Backed Loans: One of the difficulties faced by any emerging market is gaining access to hard currency. China faced this problem in the 1970s and 1980s, a need that Japan filled with resource-backed loans. These loans enabled China to build much-needed infrastructure and promoted exports of Japanese equipment and technology in the process. China is now performing the same function in Africa. China’s Export-Import Bank, for example, has provided $13.1 billion in loans to Africa that are backed by natural resources.

Government Led Industries: In the power, railway, and other government-led industries, the same large, centrally-owned and controlled state-owned enterprises that dominate these industries in China are now extending their reach into Africa. In addition to the low-cost loans that the Chinese government provides to African countries, the push into Africa by China’s large SOEs is being supported by favorable financing from China’s state-owned banks.

Free Market Industries: Quite apart from the role that the Chinese government and its large SOEs are playing in the development of Africa, private companies and entrepreneurs are also doing their part. Over 2,180 Chinese companies have invested in 7,800 projects in Africa. The Chinese Ministry of Commerce reports that over 70% of the enterprises investing in Africa are private. State-controlled banks have also made low-cost funds available to private Chinese companies that invest abroad.

Special Economic Zones: When China began its economic development, it used Special Economic Zones near Hong Kong and Taiwan to experiment with capitalism and to bring foreign investment into the country. China is using this same tool in Africa, with seven such zones in the works: two in Nigeria, and others in Egypt, Ethiopia, Mauritius, Zambia, and Algeria. The $5 billion China-Africa Development fund, which serves as a venture capital fund for Africa, has taken equity in three of the planned zones. China is also assisting African entrepreneurs set up business in these zones with a $1 billion fund for small and medium enterprises.

With its multi-pronged approach, China is helping to make the economic development of one African country after another a reality.

This post builds upon two previous MTD articles: China and Africa and Two Industry Models In China. Please refer to each for background.

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