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China’s Cautious $60 Billion For Africa

Chinese President Xi Jinping speaking at Forum on China-Africa Cooperation in Johannesburg, South Africa, Dec. 4, 2015. Photo credit: Xinhua/Lan Hongguang.

The Africa growth story may be overhyped — rising worries about debt and public finances in many African countries in the face of low global prices for natural resources are making the continent’s growth prospects less rosy — but that is not stopping Beijing pledging billions more dollars in development aid.

President Xi Jinping announced at the triennial Forum on China-Africa Cooperation (Focac) in South Africa that a larger-than-expected $60 billion worth of assistance and loans would be made available to Sub-Saharan African nations over an unspecified period. We shall return later to whether that is a lot or a little.

The newly pledged money is a mix of:

  • free aid and interest-free loans ($5 billion),
  • preferential loans and export credits ($35 billion);
  • additional capital for the China-Africa Development Fund ($5 billion);
  • additional capital for the Special Loan for the Development of African Small- and Medium-sized Enterprises ($5 billion); and
  • initial capital for a China-Africa production capacity cooperation fund ($10 billion).

The funding is probably a mix of old and new promises. Some will underwrite expanding trade. As of October, Africa’s exports to China, dominated by oil and minerals (85%), had slumped in value by 32% year-on-year, though they are virtually unchanged in volume.

Angola, South Africa, the Democratic Republic of Congo, Equatorial Guinea and Zambia — natural resources-rich all — are China’s main trading partners in Africa. Together, they account for more than 70% of all that China buys from Africa.

The slump in export values together with the steady rise in exports from China to Africa has turned Africa’s overall trade surplus with China into deficit for the first time since the early 2000s.

Stock of /China foreign direct investment in Africa, 2005-14. $ bn

The inflow of Chinese direct foreign investment to Africa fell by 40% in the first half of the year from the same period a year earlier, after having shrunk 5% last year over 2013.  Nonetheless, much of the newly pledged money will end up funding much-needed infrastructure projects that will also provide lucrative contracts for China’s road, rail, port, power-station and dam builders.

China’s investment in Africa has hitherto focused on natural resources and to a lesser extent farmland. The global slump in commodity prices, driven in part by China’s own slumping demand as its  economy slows, means that Chinese investors are looking to put their money elsewhere, at least for as long as it takes for this turn of the commodity cycle to pass.

Contrary to popular perception, most of the more than 2,300 Chinese companies doing business in Africa are privately owned, though the big state-owned ones dominate the big-ticket investment flows. China is still the largest lending country to infrastructure projects in Africa but in 2014 it accounted for only 4% of total commitments, compared with about 50% the previous year, a reflection of both the slowing economy at home and a more realistic eye being taken to the potential return on investments being made, as Chinese investors are also doing in Latin America.

All of which provides some background to whether $60 billion is a lot or a little — to which the answer is it is difficult to say.

Untangling the true level of Chinese investment in Africa is tricky. Official statistics put the stock of Chinese foreign direct investment in Africa at $32.4 billion as of last year (up from $1.6 billion in 2005). If all of the Xi’s pledged $60 billion went into FDI, it would triple the stock, which sounds impressive, but if that took, say, five years to happen, the rate of annual growth would decline by a quarter.

However, as noted above, not all the $60 billion will take the form of FDI — and FDI is a rough and ready reckoner of true investment levels anyway (for any country, not particularly China, which uses the standard OECD/IMF definitions of FDI). The numbers won’t include loan financing of capital investments, any investment that comes via third countries, usually tax havens and acquisitions of non-African companies that have assets in Africa. They will also undercount smaller investments, which tends to mean mom-and-pop scale retailing and manufacturing businesses (who also tend to get missed from the count of Chinese businesses in Africa).

Comparative annual inward flows of China FDI to Africa, 2005-14, $bn

Independent tracking under the aegis of the American Enterprise Institute and the Heritage Foundation that aims to get round this undercounting puts the flow of new Chinese FDI into Sub-Saharan Africa in 2013 at $15.25 billion against the official number of $3.37 billion, although we caution that that is commitments rather than actual flows. Between 2005 and now, the AEI estimates, Chinese firms have signed $197.2 billion in investments and contracts since 2005.

Sixty billion dollars would be a substantial but not transformative addition to that. We also note that Xi’s figure includes aid, about which China is far more secretive than FDI.

China is clearly not backing off its interest in Africa; a first military base on the continent, in Djibouti, is in prospect as sign of the magnitude of both of its national interests and assets in the content. But Xi’s latest assistance package indicates that Beijing is also maintaining a realistic view of what it can get for its money.

Update: According to a Foreign Ministry spokeswoman, China has helped Africa build 5,675 kilometers of railway, 4,507 kilometers of highway, 18 bridges, 12 ports, 14 airports and terminals, 64 power stations, 76 sports facilities, 68 hospitals, over 200 schools and 23 agricultural demonstration centers.

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China In Africa: A New Model For Development

We made reference earlier this week, if not by name, to what some call the “Beijing consensus”. This is a development model for Africa in which private-sector investment by Chinese companies, albeit often state-owned enterprises, takes the place of traditional government or multilateral agency aid. As private investors, the Chinese firms don’t need to interfere with the domestic governance of the African countries in which they are doing business. For its part, Beijing can operate though the internationally less restricted area of trade and bank financing instead of official aid, and is less constrained by any needs to impose conditionality on its assistance, such as requiring human rights improvements and labor or environmental safeguards.

A new report from the African Development Bank (AfDB) on China’s trade and investment in Africa acknowledges these changing winds. “The emergence of China and other new development partners  requires us to rethink, and in some cases, gradually adjust our approach. The African Development Bank Group stands ready to engage in this process and help to leverage the financial, technological, entrepreneurial, and knowledge resources from China to the benefit of the African economies.” Other development partners refers to China’s fellow Brics, India and Brazil, who are pursuing a similar approach.

One value of the report is to take an (exhaustive) inventory of China’s trade and investment in Africa. It is not as ubiquitous as popularly supposed:

China’s burgeoning trade and investment relationship with Africa does not benefit all sectors or countries equally. About 70 percent of Africa’s exports to China come from Angola, South Africa, Sudan, and the [DR C0ngo], and are heavily dominated by raw materials (e.g., oil, copper, cobalt, and cotton). And 60 percent of imports from China, largely manufactures, are destined to South Africa, Egypt, Nigeria, Algeria and Morocco. Most other African economies have only a limited trade relationship with China. Chinese outward FDI to Africa shows a similar pattern of concentration, with 50 percent flowing to the mining sectors of just a handful of resource-rich countries (Nigeria, South Africa and Sudan).

Africa accounts for only 4% of China’s trade. The EU and the US are still the largest trade and investment partners for many African economies.

The report notes the “significant benefits” that China is reaping from its relationship with Africa, “through access to raw materials, expanded markets for exports of manufactures, the establishment of investment relationships which could generate significant profits over time and diplomatic influence.” But it also sends a call to action to the recipient countries:

Leadership from African governments, particularly to strengthen domestic policies and governance and to harmonize regional policies so as to improve the continent’s bargaining position with China, are required to ensure that the China-Africa relationship contributes to sustainable growth and poverty reduction.

The AfDB’s to-do list for African nations is:

• Improve coordination between aid and investments from China and from traditional development partners.

• Enhance technology transfer and maximize the positive spillover effects from foreign investment through local labor and content requirements, as is done in several African countries.

• Achieve greater export diversification by identifying niche markets for African manufacturing products in China, and by expanding preferential trade access to Chinese markets.

• Build negotiation capacity, for example by obtaining specialized legal services, to ensure that large, complex commodity deals with China can be negotiated with favorable terms for the exporting African country.

• Build backward and forward linkages between the domestic economy and the Special Economic Zones supported by Chinese investment.

China’s to-do list from the AfDB:

• Prioritize the development challenges of Africa within the established Forum on China-Africa Cooperation (FOCAC) framework, including addressing issues such as food insecurity, climate change and adaptation technology and infrastructure.

• Integrate “best practices” of traditional development partners, notably through the China Development Assistance Committee (DAC) Group, which would share knowledge on development finance.

• Coordinate Chinese aid and investment flows more centrally instead of the current practice where over 20 Ministries, public banks and agencies provide support to Africa. A good example might be South Korea, which is also an emerging development partner, where aid is coordinated jointly by the Ministry of Foreign Affairs and Ministry of Strategy and Finance.

• Support additional investment in Africa in labor-intensive manufacturing industries. Currently, as wages are rising in China, labor intensive manufacturing is “relocating” to other Asian countries such as Cambodia and Vietnam.

• Coordinate with multilateral and bilateral institutions on debt sustainability analyses and debt relief.

• Untie aid gradually and open bids to international tender. This approach would enhance transparency, development effectiveness and ownership by the recipient African country.

• Enhance communication between management of Chinese-owned enterprises in Africa and African civil society organizations, including labour unions. Often these tensions reflect different traditions in Africa and China concerning engagement with civil society organizations, as well as cultural and linguistic differences. One way to improve African understanding of Chinese policies is to expand scholarship opportunities for Africans to study in China.

• Expand the implementation of the Equator Principals, a voluntary set of standards for determining, assessing and managing social and environmental risk in project financing, to Chinese investments. This approach could reduce tensions with local civil society groups as well as improve the sustainability of projects financed by China.

• Elevate China’s status in the Infrastructure Consortium for Africa (ICA) from an observer to full membership. This would enable better coordination between various infrastructure projects financed by China and traditional development partners.

Addressing all these points would help answer some basic questions on the Beijing consensus. Is it effective for promoting development? Does it provide job opportunities for Africans? Does it improve the quality of the business environment in Africa? Does it improve governance and lessen corruption? Does it promote African industrial diversification? Does it fill Africa’s infrastructure gap meaningfully? Does it alleviate or magnify African nations’ debt problems? Does it harm Africa’s environmental and social conditions? Does it mostly serve China’s national interests to Africa’s cost? And is it sufficiently transparent so those questions can be answered accurately.

These are all questions that traditional western approach to aid, let’s tag it the Washington consensus to be inclusive of institutions based there such as the World Bank, needs answer, too. The fact that it doesn’t pass all these tests with flying colors is why there is room for Beijing’s approach to find favor. What strikes this Bystander most, however, is that both the Beijing consensus and the Washington consensus aim to promote economic growth in their separate ways and mirror their domestic expectations of governance.  While developed economies would hold that economic development leads to democracy, China would hold that democracy retards economic development, at least for lesser developed economies, even if democracy would to a better job of encouraging development in more advanced economies, a transition that China itself is heading towards so uncomfortably.

In the meantime, there is no consensus on which consensus is right for Africa now, but the arrival of the Beijing version has at least got western donors reconsidering their aid and development models, and African nations benefiting from competing sources of development aid.

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Drought Diplomacy

A group of more than 40 officials from China, Africa and the U.N. have been in Beijing for three days discussing how to reduce the risks of drought. It has been technical stuff for policy makers on drought monitoring, water resource management and drought resilient farming, as well as dealing with the social and economic impacts of droughts. The meeting was part of Beijing’s overall dialogue with Africa, but these are all topics of obvious mutual interest, given the severe droughts that China has been experiencing such as the one continuing in the south and southwest of the country and the recurring ones on the North China Plain.

Africa’s droughts, like those in China, are expected to become more frequent and widespread as a result of climate change. The Horn of Africa is currently suffering the continent’s worst drought in 60 years, for which Beijing has promised $82 million in emergency grain and relief aid. Techniques and practices that China uses at home as well as farming methods such as film mulching to preserve for crops what water there is in arid areas are applicable in Africa (and vice versa).

Drought is one of the leading threats to Africa’s development as agriculture is the main means of livelihood for most of the continent’s vast rural population. Beijing is rarely rigid over what aid it will provide a country, and Chinese firms see investment opportunities in water management systems and export markets for technology they develop for home. More than 90% of Africa’s farmland relies solely on rainfall for irrigation.

The lack of water management systems in Africa means that drought also has a far more profound impact on food supplies there than it does in China, which is yet again forecasting a record grain harvest. However, this relatively greater vulnerability prompts a second-level concern among Africans, that China might divert grain and livestock production from the farmlands it owns in Africa to make up potential food shortfalls caused if not by its own droughts then by its growing food demands and changes in consumption patterns. That could put Africa’s ability to feed itself even further beyond it. Last year, African nations needed to import $34 billion worth of food to feed their growing cities. Apart from a potential need to increase the volume of its food imports, it also faces the risk that Chinese demand would drive up the cost of food on world commodities markets.

For the past two decades, Chinese companies have been buying African farmland, mostly but far from all, smallholdings and family farms. Chinese own farms in 18 of Africa’s 50 or so countries through at least 63 investments from Angola to Zimbabwe. There are at least 1,100 Chinese agricultural scientists and experts working in Africa, where China has at least 11 research stations, and at least 1 million farm laborers.  All those ‘at leasts’ are because the numbers are based on Chinese official estimates from 2009. They likely undercount the country’s current farming activity on the continent.

It is easy to scaremonger here and to be critical of China’s engagement with Africa. In fact, cheap credit, world-class infrastructure companies, political pragmatism and, as noted above, a willingness to build what is asked for make for a compelling case to many African leaders to accept Chinese aid and investment. That said, China has its national interests, as does any Western aid donor to Africa, even if it is likely to express those in different ways. There is also a lack of transparency which commingles China’s state aid, trade financing and private investment. Nor should the impact that Chinese aid and investment often has on local environmental, social and labor conditions be sugarcoated.

The result of the Beijing meeting will likely be the emergence of some consensus on priority areas for co-operation between China and Africa on drought alleviation, and more infrastructure contracts related to that for Chinese firms in Africa. No doubt critics will deride them as further Chinese colonization of Africa this time by way of “drought diplomacy,” but this is increasingly the modern face of development assistance, which looks a lot more like commercial investment.

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Another Earthquake Map And Summary Of Aid Donations

Another map of the affected area: this one from USAid, showing the how many people were exposed to shaking in each zone of intensity.

Reuters has a summary of foreign aid donations. Highlights

Hong Kong: $38 million from government, $4.3 million from The Hong Kong Jockey Club

Macau: $14.3 million from government

Taiwan: $6,450 from President-elect Ma Ying-jeou. $43 million from companies including Formosa Plastics and Hon Hai, and entrepreneurs. Government has offered to send a 58-person search and rescue team;

United States: $500,000 as an “initial contribution”

Japan: $4.8 million.

Russia: Sent in first batch of international aid to reach China; a transport plane carrying 30 tonnes of relief material arrived in Chengdu on Wednesday.

Extended list at Reuters.

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