Chinese Companies Boosting African Investments

The record-setting deal has since been eclipsed, but Industrial & Commercial Bank of China's purchase of a 20% stake in South Africa's Standard Bank for $5.5 billion is still cause for celebration

It took less than three years after a chance encounter in Shanghai for China’s largest bank to make what was then the largest-ever foreign investment by a Chinese company.

Industrial and Commercial Bank of China (ICBC) has since been replaced at the top of that list by Aluminum Corp of China, which bought into mining giant Rio Tinto in January. But this won’t undermine the sense of occasion when shareholders in South Africa’s Standard Bank approve the sale of a 20% stake to the Chinese lender in early March. The price tag is US$5.5 billion.

The recent global share slump – which began after the deal was agreed on – is not ideal for ICBC. However, the true value and significance of its investment in a bank with a pan-African network will only be realized in the long term.

“There was unbelievable symbolism to me … that the biggest transaction ever done by a Chinese company at the time   should be in Africa. It says something about the geopolitical landscape,” said Standard Bank CEO Jacko Maree.

“It tells you that China is thinking differently about the world. It also tells you something about Africa: It’s not the sort of lost and dark continent that is often portrayed ... It is on the move in its own way, admittedly from a low base.”

The deal emerged as a result of the talks between Maree and ICBC chairman Jiang Jianqing. The two first met in 2005 when China hosted the annual meeting of the International Monetary Conference (IMC). They crossed paths again during the China-Africa Cooperation Summit in Beijing a year later and were united for a third time when South Africa hosted the IMC in 2007.

Over the course of two years, the focus of Jiang and Maree’s discussions expanded from cooperation to strategic relations. ICBC deciding to invest in Standard was the logical final step.

The deal was something of a departure for a country that, if the international media is to be believed, cares only about African oil and other natural resources.

Growing complexity

Exact numbers are difficult to determine, but the growth of two-way China-Africa trade is undeniable. Between 2001 and 2006 trade grew at an annual rate of about 40%. It would be easy to attribute the growth to Beijing’s need for natural resources but the reality is more complex. In that same 2001-2006 period, for example, Chinese exports to Africa quadrupled.

By 2010, China wants trade with the continent to top US$100 billion.

“We increasingly see more business going on between African countries and China,” Maree said. “Trade or investments often have a financing or advisory component and we try to tap into this.”

The deal with Standard Bank will give ICBC access to a networking 19 African countries, enabling it to help Chinese businesses take better advantage of opportunities in the continent. This is in keeping with ICBC’s goal of diversifying its revenue streams so a larger proportion of its income – 10%, up from the current 3% – comes from overseas operations. There will be a particular focus on emerging markets, and if there is one thing Africa has to offer it is emerging markets.

“China sees Africa very much as an investment in the future. It sees Africa industrializing, becoming more peaceful and stable and, over the next 50 years, following the same path as Asia,” said Dirk Kotze, general manager of The Beijing Axis, a consultancy that focuses on China-Africa related trade.

According to Kotze, African development may parallel that of post-Second World War Southeast Asia, when economic development began to thrive in a region still do tted with conflict.

“Before the current problems started, Kenya was growing at over 7% a year,” Kotze said. “Nigeria saw a peaceful transfer of power last year – that is extraordinary when you look at the country 10-15 years ago. Then there is the growth in Zambia and Mozambique, which was the world’s second poorest country in 1990.”

His list stretches on and on.

Policy papers and comments from Chinese think tanks make it clear that  China expects Africa to grow steadily during the first quarter of this century,  and that the time to lay down roots is now.

According to a report by Jian-Ye Wang, an economist with the  International Monetary Fund, “The government has been actively encouraging private firms, small and medium as well as large, to invest in Africa … Trade and other commercial activities have grown faster than aid flows. The private (more broadly, the corporate) sector, rather than government ministries, is increasingly the engine of economic exchange between China and Africa.”

Commodity focused

While the nature of this growth speaks volumes about China’s commitment to Africa, there can be little argument that large-scale investments have so far targeted one thing above all else: commodities.

In 1979, Africa produced about 6.8 million barrels of oil per day. In 2005, the number was 9.8 million. The continent holds 8% of the world’s oil reserves but, through 2010, West Africa may account for about 38% of global oil production.

Although China is the world’s second largest energy importer and its pursuit of oil receives a lot of attention, Beijing’s activity in Africa is relatively small compared to the international oil companies operating across the continent.

According to Wood Mackenzie, African national oil firms loom large, with investments worth US$279 billion as of March 2007. International oil companies followed with US$168 billion and Chinese firms trailed with US$13 billion.

The reality is that Chinese companies are latecomers. Shell first entered Nigeria in 1938 and enjoyed a monopoly there until the country won its independence in 1960. Viewed in this way, China’s energy deals with pariah states (like Sudan) become easier to understand – there was little left to choose from.

The vast majority of China’s oil production in Africa, 81%, is in Sudan, which has 5% of Africa’s proven oil reserves.

“It is actually not easy for us to find projects. The oil market has more than 100 years of history and all the good projects are already taken. As a newcomer, it is obviously not easy to do well,” said Fu Chengyu, CEO of China National Offshore Oil Corp is quoted as saying in a report by Erica Downs, China energy fellow at the Brookings Institution in Washington DC.

In the same report, Downs argued that the notion of a state-driven push to buy up global resources may be more fact than fiction. For example, Sudan was omitted from a list of countries that Chinese companies are encouraged to invest in, but this didn’t stop China National Petroleum Corporation from filling the void left by Western oil firms following America’s decision to impose sanctions on Khartoum in the mid-1990s.

“The lack of close coordination among China’s [oil firms] is due to the fact that [they] view one another as rivals, competing not only for oil and gas assets, but also for political advantage,” Downs claimed.

New horizons

But oil  is only part of the story – Chinese companies from a wide variety of sectors regard Africa as a viable market.

“It wasn’t just the oil and mining companies,” Standard Bank’s Maree said of his experiences dealing with Chinese corporate interest in the continent. “It was also the mobile phone companies and the construction companies, and so on.”

In the tech sector, Shenzhen-based Huawei saw sales in the continent top US$2 billion across 40 countries by 2006.. Huawei’s rival ZTE plans to invest US$400 million in Angola with a view to cornering the local market. China National Electric Equipment Corp, meanwhile, enjoys profit margins in Africa that are five times what it can get in more competitive mature markets.

The scope of Chinese involvement is vast: It may be logging in Mozambique, shoemaking in Nigeria or household goods production in Sierra Leone.

Then there are the banks. China Export and Import (Exim) Bank is funding more than 260 projects across 36 African countries while China Development Bank had loaned more than US$1 billion to Africa as of March 2007. This money has so far helped build 9,000 kilometers of roads and railways as well as eight large- and medium-sized power plants.

One country that has attracted a fair share of Chinese attention is Zambia. More than US$300 million has been sunk into the mining, manufacturing projects, construction and agriculture industries. Zambia’s copper belt has proved such a hit with Chinese mining firms – as well as a host of spin-off industries – that Beijing set up a special development zone there earlier this year.

Beijing made a commitment to establishing at least five of these zones at the China Africa Cooperation Forum in 2006. One already exists in Mauritius and it has been reported that two more are planned for Nigeria.

The idea behind these zones is to provide access to Chinese officials who may grease the wheels of trade by providing business contacts, reduced tariffs and streamlined processes. Beyond this, though, it is difficult to say exactly what the zones entail, who funds them and how African businesses might benefit.

“There is a little bit of opaqueness when it comes to China and Africa and this is one of those areas,” said Chris Alden, a lecturer in international relations at the London School of Economics who has written much on Asia-Africa ties.

Different approach

The Chinese government has highlighted these zones as potential vehicles to deepen economic ties with specific countries. In this way, they can be seen as part of an approach to Africa that differs from that of Western countries. It is all about cash, with no questions asked about human rights or institutional corruption. However, loans from China are often used to hire Chinese companies. Similarly, infrastrucure investments are closely tied to access to natural resources.

The irony is that China may be acting like a developed country by taking a single approach to a very varied continent.

“The Chinese have, so far, approached Africa in an odd way with a single formula,” said Alden. “No conditions, certain forms of packages and inducements to win positions.”

As their relationships in the continent deepen, however, this approach may become untenable.

“They have to get away from Africa as a whole and start viewing it through the prism of local politics, local economics and the like,” Alden added.

The deal between ICBC and Standard Bank may be a giant step in that direction, opening the door to a wealth of local knowledge. Standard’s Maree said initial cooperation would likely focus on Africa, with ICBC looking for access and Standard Bank for new customers.

It is worth asking how prospective Chinese clients, many of which are state-backed and perhaps unfamiliar with stringent credit checks, will work with the more sophisticated checks and balances at Standard. Chinese banks may be improving their standards but they still have a tendency to push deals through without paying enough attention to risk.

“There is a let’s-get-the-deal-done attitude, which is refreshing in a way. But of course we have to make sure that whatever deals we do have had all the right due dilligence and that everything stacks up,” said Maree.

Kotze takes this a step further, suggesting that, through deals like the ICBC-Standard tie-up, Chinese companies can aquire invaluable experience – about both managing international business in general and operating in Africa specifically.

In this way, the country will be better-equipped to fill what he believes is a vacuum being created by waning Western political influence in the continent.

“Africa is that last beachhead. The EU and the US have pulled out, really – they are only after resources – so it’s a bit of a vacuum. It’s up for grabs.”

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