Africa-China: An Economic Relationship with Staying Power

A FEEEDS™ series blogspot

A Look at the Economic, Business, and Investment Relationship

The Power Relationship: Why it Exists, Where it’s Going?

Why is a country like China, now eclipsing Japan as the second largest world economy with a 2010 growth rate of 10.3 percent, and sub-Saharan Africa, identified as the next emerging market frontier with growth rates in the region projected to reach 5.5 to 5.75 per cent in 2011 and 2012 (http://tinyurl.com/IMF-World-Update) developing an economic and business relationship that has everyone talking? Because they need each other and the linkages are not only unmistakable, but profound.

For both China and sub Saharan Africa, there are some fundamental facts that underscore not only the potential strength of the nascent relationship, but what some would call the symbiotic nature of the relationship’s future progression and impact on the world’s economy. At a February 2011 Washington, D.C. Woodrow Wilson Center event, World Bank Managing Director Okonjo-Iweala made this point clear when she said that “the debate is no longer about whether China should be in Africa; it is there. The debate today is about what the nature of the relationship should be. China has a long term strategy for Africa; Africa does not have one for its relationship with China” (http://tinyurl.com/Woodrow-Wilson-Center). Her point is that Africa needs to have a short, medium and long-term plan, as well as strategic direction about the Africa-China relationship.

We are hearing more and more about the Africa-China economic, business, and investment relationship. So what are the symbiotic linkages – there are three:

--For China – the need for resources, and commodities to support its large population;

--For Africa – having resources for commodities, its own domestic demand for commodities and a large population.

Thus, there is no coincidence in the nexuses listed above – resources, commodities, and population. Population for both China and Africa are one of the biggest elements in their symbiotic relationship. China falls on the need side of the equation as it population needs both resources and commodities. Africa’s population is on track to be home to 1.9 million people by 2050, with half being under 25 years of age (http://tinyurl.com/RRSanders-Blog). Its population should be responsible for taking the lead in not only developing the natural resources but Africa’s leadership will need to ensure transparency in both the extraction of its resources and the financial gains. Approximately 40 percent of both Africa’s and China’s populations live in cities – meaning growing urban consumers demanding commodities (http://tinyurl.com/McKinsey-Lions-of-Africa). On Africa’s side of the population equation, the Continent needs investment, training, education, and development – all elements China can bring to the table to help Africa reach its Millennium Development Goals.

What is the focus of the Relationship?

Right now the offerings from China are primarily in two areas: business and investment, with a number of key countries in its sights. Nations such as South Africa, Nigeria, Angola, Zambia, Mauritius, Kenya (pending port deals), Mauritius, Ethiopia (electric power), and Tanzania (recent $3 million in coal/iron sectors) are targeted countries for China’s interest. However, the main focused of China’s activities are in extractive areas (coal, copper, iron, oil, etc); agriculture (142 projects by end of 2009), infrastructure (construction), and forestry. (http://tinyurl.com/Foreign-Affairs-Africa-China). There are also reportedly 100 million Chinese living and working in Africa from businesspersons to sellers in African markets (http://tinyurl.com/Guardian-Invasion-of-Africa) -- establishing and building both investment relationships and family ties for the long term. According to China’s official white paper report on Africa issued at the end of 2010, China invested approximately $9.33 billion on the Continent writ large (figure includes Egypt) and also has goals to develop economic zones in Zambia, Mauritius, Nigeria, Algeria, Egypt, and Ethiopia with some monies from China’s new $5 billion China-Africa Development Equity Fund and the China Export-Import Bank. Two-way Africa-China trade, which is growing at roughly 44 per cent per year, is over $114 billion and a new $1 billion SME fund for Africa was also established according to the 2010 report(http://tinyurl.com/China-White-Paper) .

With democratic and transparent African leadership on the direction and nature of the business relationship, sub Saharan Africa stands to gain for both its growth and development. Over the last 12 months several sub-Saharan Africa countries have signed financing agreements with China’s Export-Import Bank. Here is a very short checklist:

-- Ghana: $10.4 billion concessionary-loan agreement for various infrastructure projects, payable over 20 years;

-- Nigeria: $900 million loan agreement ($500-million for construction of railway linking Abuja-Kaduna, $400-million public security communications project);

-- Zambia: $243 million for Zesco Limited and Sino Hydro of China to increase capacity at the Kariba North Bank power station by 360MW;

-- Ethiopia: $293.5 million for building of 9 vessels for Ethiopian Shipping Lines (ESL), the largest order the Ethiopian national company has made in its 46 years;and,

-- Angola: $1.5 billion to cover projects in agricultural sector, particularly to boost cereals (rice, maize, soya);

-- Mozambique: $214 million to help improve communication infrastructure.

The bank’s overall investment at end of 2010 was reportedly over $200 billion (http://tinyurl.com/Dengruo-Africa-Finance). As African commercial banks are cautious about investments, China has stepped in as a financier of key major projects. We can expect more along these same lines in the future. Let’s not forget that China is also financing the renovation of the African Union Headquarters in Addis Ababa for approximately $100 million (http://tinyurl.com/Ethiopian-Review), and collateral oil deals with countries like the Republic of Congo.

Africa’s Economic Outlook- A New Emerging Market Frontier?

The Economist noted that from 2000-2010, six of the world’s ten fastest-growing economies were in sub Saharan Africa and that in five years African economy will outpace Asia (http://tinyurl.com/Economist-Blog). This will increase as more African countries become middle income countries as Senegal did in 2010, and Ghana is expected to do in 2011, and as profits from Chinese investments begin help African capital markets. McKinsey reports that the rate of return on foreign investment in Africa is higher than for any other developing region, and that by 2020, Africa’s combined agriculture-resources-infrastructure sectors could generate nearly $2.6 trillion in revenue, $1 trillion more than today(http://tinyurl.com/McKinsey-Lions-of-Africa). The Continent’s potential is base on improved political and macroeconomic reforms in many countries. However, we cannot forget despite this good news, more needs to be done on the democracy, anti-corruption, and transparency fronts. This means also using these tools to keep an eye on its varied economic relationships with China to ensure the following checklist:

-- Investments create jobs for Africa;
-- Business deals are transparent and fair;
-- Trade balance improves in favor of Africa;
-- African labor force is trained and used in Chinese-financed projects;
-- Environmental impact assessments are done for extractive projects;
-- Value-chain development is part of investment projects;
-- Renewable energy is used; and,
-- Technology is transfered to Africa’s next generation.

If these steps are followed by Africa then the Africa-China economic relationship, which is certainly here to stay, can serve both well. How Africa manages its relationship with China, by making it more strategic, with long-term planning can lead to the type of growth and development that those of us who are Africa activists want to see for the Continent.