China and Africa: trade relationship evolves.
By: Weichao Xia
Tags: Future, Africa, Strategy, Trade, China

FOCAC 2018

Along with its economic presence, China has rapidly expanded its environmental footprint in Africa. An important objective of China’s Africa strategy is to extract natural resources that have so far not been accessible. Such resources are often located in fragile ecosystems and countries with weak governance systems. As a long-term partner in Africa’s development, China has an interest in addressing the environmental impacts of its projects. The Chinese government has issued guidelines on the impacts of overseas investments, but will need to strengthen them further.

China’s Africa strategy:

China and Africa have rapidly expanded their political and economic relations since the turn of the century. China — ‘the world’s factory’ — is trying to secure access to resources in Africa that it lacks at home. In addition, Africa offers a welcome market for Chinese companies that face stiff competition at home. The Chinese state supports the investment in African resources and the creation of jobs that can ameliorate the country’s permanent unemployment crisis. Africa has for a long time been a primary source of natural resources for the European and American markets. China’s strategy is to access resources that have so far not been exploited because they were considered insignificant in size, geographically too remote or politically risky by Western companies. This strategy requires massive investments in mines, oil exploration and auxiliary infrastructure such as pipelines, roads, railways, power plants and power transmission lines. Sudan is a typical example of China’s integrated investment strategy.

The China National Petroleum Corporation (CNPC) entered Sudan in 1995 and expanded its exploration after Western competitors withdrew because of public outrage over their complicity in the country’s civil war. In 2005 Sudan provided 5% of China’s oil imports, and China is the largest importer of Sudanese oil; In support of this role, China invested in a pipeline, an oil refinery, a railroad, and several thermal and hydroelectric power plants such as the Merowe Dam (see below). China is implementing similar investment packages in Angola, Congo Brazzaville, Ethiopia, Gabon and Zambia

Merowe Dam in northern Sudan.

The Merowe Dam in Sudan:

With a price tag of US$2 billion and an output of 1,250 megawatts, the Merowe Dam will more than double Sudan’s power generation capacity. Dam construction started in 2004 and is scheduled to be completed in mid-2008. The project’s electricity will mainly serve the cities of Khartoum, Port Sudan and Dongola. In the late 1990s the Sudanese authorities approached Canada, China, Malaysia, and European and Arab countries in the search for funding for the dam, but without success. Sudan was in arrears with its debt service to the World Bank and the IMF; And COFACE, the official export credit agency of France, refused support because of the project’s environmental and social impacts. China did not share the scruples of Western financiers, and China Exim Bank agreed to fund the Merowe Dam in 2002. With support of US$520 million, the Bank is the main foreign financier of the project. Other funders include the Arab Fund for Economic and Social Development and the development funds of several Arab governments. The dam is being built by the China International Water and Electric Corporation and the China National Water Resources and Hydropower Engineering Corporation. Sudanese, German, French and Swiss companies are also involved in the project.

China’s economic expansion in Africa is carried forward by thousands of individual entrepreneurs; a small number of large, stateowned enterprises; and a host of companies owned by provincial and municipal authorities. While small private enterprises dominate investment in commerce and manufacturing, state-owned enterprises typically invest in extractive and infrastructure projects. In integrated investment packages, government institutions and state-owned companies work closely together. The Chinese government’s active involvement in resource extraction is not fundamentally different from the financial, political and military support granted to oil and mining operations by the US, French or South African governments. The Chinese government does not directly interfere in the investment decision of the enterprises it owns, but offers support and incentives in the form of finance and diplomatic support. While small enterprises finance their investments through family ties and informal capital markets, the Export-Import Bank of China (China Exim Bank) is a key source of finance for the Africa projects of state-owned enterprises.

The role of China Exim Bank:

China Exim Bank was established in 1994 to promote Chinese exports, and reports directly to the State Council. Various parts of its activities are overseen by the Ministries of Finance and Commerce, the People’s Bank of China and the China Bank Regulatory Commission. The Bank of China has to approve China Exim Bank’s credit plans, and the State Council approves buyers’ credits of more than US$100 million. The Bank is more than the administrative arm of China’s export promotion, however, and enjoys ‘relative autonomy in its project evaluation and approval process’. Over the medium term, the government plans to turn China Exim Bank into a commercial institution. China Exim Bank provides export credits to Chinese companies and foreign clients, lends on foreign government loans for projects in China, offers foreign exchange guarantees and administers the Chinese government’s concessional loans to foreign governments. The Bank even finances Chinese imports in order to reduce the country’s trade surplus. China Exim Bank pursues a ‘two-big strategy’ of focusing on big companies and big-ticket projects. The Bank extends 90% of its export credits to state-owned enterprises and to large projects (of more than RMB 100 million each). As part of China’s ‘go global’ strategy, China Exim Bank offers strategic overseas investors an interest discount.

African and Western reactions to China’s environmental footprint.

African governments of all political stripes have strongly welcomed China’s growing presence on the continent. They have not only expressed appreciation for the economic boost triggered by Chinese investment, but also for the pragmatic and speedy way in which China has delivered aid projects, often irrespective of concerns over corruption and environmental impacts. Summing up a widely held impression, in 2005 Sahr Johnny, Sierra Leone’s ambassador to China, summarised a meeting with Chinese investors as follows..

“The Chinese are doing more than the G8 to make poverty history. If a G8 country had wanted to rebuild the stadium, we’d still be holding meetings! The Chinese just come and do it. They don’t hold meetings about environmental impact assessment, human rights, bad governance and good governance. I’m not saying it’s right, just that Chinese investment is succeeding because they don’t set high benchmarks”.

Recently, Chinese President Xi Jinping pledged $60 billion in financing for projects in Africa in the form of assistance, investment and loans, as China furthers efforts to link the continent’s economic prospects to its own. Speaking to a gathering of African leaders in Beijing, Mr Xi said the figure includes $15 billion in grants, interest-free loans and concessional loans, $20 billion in credit lines, $10 billion for “development financing” and $5 billion to buy imports from Africa. In addition, he said China will encourage companies to invest at least $10 billion in Africa over the next three years. China’s outreach to Africa aims to build trade, investment and political ties with a continent often seen as overlooked by the US and other Western nations.

That has provided lucrative opportunities for Chinese businesses, while African nations are often happy to accept China’s offers that come without demands for safeguards against corruption, waste and environmental damage.

President Xi told African leaders that China’s investments on the continent have “no political strings attached” — Forum on China-Africa Cooperation (FOCAC 2018) —

China has denied engaging in “debt trap” diplomacy, and Mr Xi’s offer of more money comes after a pledge of another $60 billion at the previous summit in South Africa three years ago. Mr Xi earlier said the money came with “no political strings attached”. No details were given on specific projects, although Mr Xi said China was planning initiatives in eight areas, including providing $147 million in emergency food aid, sending 500 agricultural experts to Africa, and providing scholarships, vocational training and trade promotion opportunities.

In other words, China is giving more money to Africa via grants or interest-free loans, and less through interest-bearing credit lines. It’s no coincidence that this shift is occurring alongside global debates over the merits (and demerits) of Chinese debt, with some critics accusing Beijing of engineering “debt traps” for developing countries by offering loans that will be impossible to repay. In Africa in particular, China has been accused of both “debt trap” diplomacy and more general “neocolonialism” — both charges Chinese officials have vigorously refuted.

Xi also made sure to get in his own, implicit critique of Western-style aid, by pledging to follow “five nos” in China’s Africa policy:

No interference in African countries’ pursuit of development paths that fit their national conditions; no interference in African countries’ internal affairs; no imposition of our will on African countries; no attachment of political strings to assistance to Africa; and no seeking of selfish political gains in investment and financing cooperation with Africa.

Alongside the set of principles, Xi outlined eight initiatives to be implemented in the next three years, covering fields such as industrial promotion, infrastructure connectivity, trade facilitation, green development, capacity building, healthcare, people-to-people exchanges, and peace and security matters.

Source: Asia briefing Ltd.

The China-Africa relationship will get stronger. So long as Africa’s development requires huge foreign investments, so long will China continue to be relevant. “Irrespective of the concerns being voiced in some circles in Africa, Chinese involvement is widely considered to be a positive-sum game.”

the meaningful South–South cooperation between China and the leading African countries is now at the stage where some of the more vexing sacrifices on each side are required, though unwanted by domestic regions or sectors that perceive a loss. If the benefits of ‘China helping Africa to compete globally, including with China,’ are to be achieved, some sacrifices are needed. At the same time, follow-through on commitments from both sides is required — including the less developed side. Such are the true tests of South–South cooperation in China–Africa relations.