Introduction
China is the most populous country in the world, with a population of close to 1.3 billion. The nation has experienced tremendous economic growth over the last couple of decades to join the league of the world’s superpowers. How often does one see an item branded ‘made in China’?
The country’s GDP is rising at a high rate and many pundits are foreseeing that in the near future China will overtake the US as the world’s superpower. So what has caused china’s recent change of fortunes? Success of the Chinese economy is largely attributable to its expansionary policy. Unlike the West, China is investing heavily in Africa and other third world countries and this has spurred growth.
The scramble for Africa in the 1900’s was predominantly a European affair. The Europeans seemingly underestimated Africa potential as an investment destination. China, on the other hand, has made successful forays into African countries and now commands a heavy presence in most African states.
The question that lingers, therefore, is why Africa? This paper looks at the African countries that the Chinese have heavily invested in order to understand why they prefer Africa as an investment destination unlike western and European countries. The profitability and riskiness of African markets is the subject of this study to derive a comprehensive conclusion of Africa’s viability as an investment destination to the Chinese.
Chinese Presence in Africa
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African countries present a haven of opportunities to the Chinese. Africa is rich in natural resource such as oil and copper, that provides raw material to manufacturing industries. Being a third world continent, most parts of Africa are underdeveloped and depend on IMF funding for loans to fund development projects.
IMF normally imposes stringent requirements and unfavourable payment terms to borrowing countries hindering the acquisition of finances from this global financier. China provides an alternative to African countries by offering foreign aid and loans to finance projects at favourable terms.
Statistics show that by the year 2006, China had given aid to Africa amounting to 5.5 billion and had provided loans amounting to 800 million to fund projects across Africa. Most of these projects are projects that western donors have ignored over the years therefore this creates goodwill between China and African states (Haley 2006).
Main Imports and Exports
China has grown to be an industrial powerhouse, its exports are scattered all over the world. Most multinationals have manufacturing franchises located in China mainly because of the low production costs and availability of resources. China’s main exports to Africa include apparels, machinery, equipments, and textile, footwear and transport equipments. The main destinations of Chinas exports in Africa are the states of Angola, Zambia, Nigeria, Kenya, Uganda and South Africa.
In return Africa exports numerous raw materials to China, this are predominantly crude oil, iron ore, diamonds, logs and cotton. Angola has replaced Saudi Arabia as the largest source of crude oil to China. Sudan, Equatorial Guinea, Chad and Congo also supply crude oil to China. The chart below shows the composition of Africa’s export to China.
Investments
The Chinese government adopted an expansionary strategy in the 1980’s that has seen their corporations establish bases in various parts of the world and Africa is not an exception. Heavy Chinese presence is visible in most African states. Most nations view China as a good partner as compared to Western and European states.
Investments are largely informed by the availability of raw materials and untapped resources which China seeks to utilize to drive its economy into a global superpower. Africa alone is home to over 700 Chinese corporations, formed through joint ventures or privately owned by Chinese corporations. Chinese investments in Africa have four classes, these are:
- Oil and gas
- Non oil resource extraction
- Infrastructure development
- Telecommunications
- Textile Manufacturing
Oil and Gas
Due to the global anxiety over international oil prices and availability of the resources, China has acquired strategic oil and gas fields across Africa. Investments in oil and gas extraction operations secure China from deficits of the precious commodity.
Through state owned corporations such as the China National Petroleum Corporation, China has managed to secure developments rights of petroleum fields across 20 African countries. Development by Chinese companies is currently underway in Angola, Sudan, Nigeria and Equatorial Guinea (Reed, 2006).
Drilling operations for exploration of potential oil fields are also underway in nations such as Ethiopia, which bear oil prospects. Apart from extraction, China is also constructing pipelines and other infrastructure in oil producing nations to facilitate transportation of the crude product. Is not only the country earning revenue from these exploits but also securing its oil supplies and building good relations with African state (Taylor, 2010).
Non-Oil Resource Extraction
Apart from oil, Africa is also rich with numerous natural resources and minerals that are of interest to the Chinese. China’s economy thrives on the electrical and electronics industry. Extraction of metal ores in Africa provides China with raw materials for their manufacturing industry. Being the world’s second largest consumer of copper, china has invested funds in the Zambian copper industry to a tune of approximately 170million us dollars.
South Africa, DRC and Namibia also form part of Chinese mining portfolio in Africa. Apart from minerals, China is a major trading partner in the timber and Logging industries of Gabon and Equatorial Guinea. China forms 70% of all the timber exports in Equatorial Guinea alone. The large consumption of timber albeit good for trade, has raised concerns over the maintainability of the rain Forests that provide these resources.
Telecommunications
Western and South African Firms have dominated the African telecommunications sector for a long time. This includes Vodafone and MTN respectively. Being the fastest growing telecommunications market globally, the telecommunications industry in Africa is not devoid of Chinese presence.
Chinese corporations such as ZTE and Huawei are making successful forays into the African market. From research laboratories, factories, to telecommunications training centres, Chinese firms play a significant role in the development of telecommunications in Africa. East African countries such as Kenya and Tanzania are the main beneficiaries from Chinese investments in the African telecommunication Industry.
Infrastructure Development
Most African states are developing countries, hence do not posses highly advanced infrastructure. The need to develop roads, schools, hospitals and other facilities has provided the Chinese with yet another opportunity at investing in Africa. Statistics show that about 772 building and construction projects across Africa are under the contract custody of Chinese firms. These projects are mainly based in the water, power transport and telecommunications industries.
China support to development projects in Africa surpasses that of OCED, which stood at a paltry 12.5 billion US dollars in 2005. In Rwanda, Chinese corporations have paved 80% of their roads. Other countries where the Chinese forms a bulk of the road contractors include Zambia, Angola, Mozambique and Kenya. It is worth noting that most construction projects are strategically based in areas where The Chinese have interests for resources. Most projects centre on mines and oil fields to facilitate transportation of the extracted products.
Textile Industry
The textile industry is a major player in the Chinese Manufacturing industry. Due to low operational costs and a favourable production environment, most textile companies have franchises in china where they carry out production work. China therefore has a huge demand for cotton as a raw material the for textile industries. China is one of the largest importers of African cotton. The Chinese have set up processing plants in cotton growing regions across Africa to prepare the farm produce for exportation.
Why Is Africa Attractive To China?
It is beyond doubt that the scale of Chinese Investments across Africa is growing at a faster rate and is almost overtaking western nations. The questions that linger therefore are; why does China find Africa so attractive? Why are Chinese investments across Africa growing faster? This is despite the fact that European countries form the bulk of African colonizers. Here are some of the reasons why china finds Africa so attractive.
Endowment in Natural Resources
Africa is heavily rich in natural resources such as oil, diamonds, copper, timber, cobalt just to mention but a few. African states lack the financial capacity and human expertise to extract and transport products. China’s growth has been largely spurred by its manufacturing industries hence there has been increased need of resources such as crude oil and copper.
Africa provides a secure and cheap alternative to China’s need for supplies. Africa has the resources while China has the prowess therefore it is easy for Chinese firms to establish investments in African countries. Investments are mutually beneficial to both China and Africa.
Socio Economic Status
Africa is predominantly a third world continent; most nations in Africa are developing countries. Economic growth rates in Africa are on the rise and this is largely attributable to improvement of infrastructure. There is increased demand for roads, hospitals schools and other facilities.
This provides an opportunity for Chinese firms to take part in building or construction projects either as financiers of loans or as contractors. Unlike their locally based counterparts, Chinese firms have superior financial capability, human resources and equipment to undertake complex projects.
Political Instability
Availability of resources in African countries has been known to cause a lot of conflicts and political upheaval. Countries such as oil rich Angola and mineral rich DRC have been entangled in Civil wars for decades as the citizens and western forces scramble for these resources.
Such conflicts in the end have left the resources underutilized. Most warring nations have experienced relative peace and stability therefore presenting a great investment opportunity for the Chinese. In Angola for example, immediately after the civil war, the Chinese invested heavily in Angolan oil when other countries thought it was too risky.
Neglect by Western states
Most African states experience political upheavals characterised by rebellious uprisings, which make western nations perceive Africa as too risky for investments. States such as Burundi, Rwanda, Sierra Leone, Uganda and most recently Ivory Coast have been plagued by clashes and civil strife.
Such kind of instability in Africa has resulted to neglect by western investors hence providing China with an opportunity of fostering alliances. Chinese aid is responsible for development projects in war torn areas in Africa and by so doing, china creates sufficient goodwill that enables them to acquire development contracts. Apart from acquiring development contracts, such kind of aid and support enables china to access Africa’s untapped resources.
Chinese – Africa Relations
Just like most African states, China was at one time under western influence and power. China therefore share the same ideology and struggle with most African states, hence is able to present itself as a trade partner instead of a big brother. Unlike the USA and Russia who play big brother to African states, China considers itself as a leader of developing countries as its able to better understand African Challenges and diagnose appropriate solutions.
China is deemed to support interests of African states, which have been neglected by western nations. China does not discriminate against any regime in an African state and does not give any pre conditions before it invests in a country (University, 2008). There is therefore a good relationship between Africa and China hence providing a serene environment for doing business.
The Chinese are willing to support repressive regimes such as the Mugabe government in Zimbabwe and the oppressive regime in Burundi. Instead of meddling in African affairs, the Chinese are offering their support to counter western opposition.
Why Africa Is Not As Appealing To Western Countries As It Is To China
Chinese influence in Africa is overtaking that of western nations. These presents a paradoxical situation bearing in mind those most African countries were colonized by European states. What are the Chinese doing right that western states are failing to do?
Most western states view Africa as too risky for investment. Political instability, poor governance, corruption, poverty and illiteracy are just some of the factors that seem to turn off western investors. Unlike china, western states have failed to see the economic potential that Africa harbours. Stringent rules and regulations by IMF make it hard for African nations to acquire loans to fund development projects. Most African states do not meet the required regulations for loans and donor aid provided by western nations.
The West acts as a big brother to Africa instead of a business partner. China on the other hand does not discriminate on African countries. The Chinese government is willing to venture into African countries that are considered too risky by the west. The relations between china and African countries is improving hence most African countries are looking east for donor funding, development projects and aid.
Compared to western nations, china has strong political ties with Africa, which are good for business. Instead of issuing sanctions and embargos on African nations like western countries do, the Chinese offer a helping hand in form of aid military support and investment. When the US removed its troops from Sudan in the 1990 and issued travel alerts to its citizens, China moved in offering military support, food aid and relief food with a view of accessing Sudan’s oil resources.
Western nations such as the United States are viewed as the world’s superpower. These nations are highly developed socially, politically and economically. Africa’s resources do not therefore present a viable investment opportunity; they opt to invest in fellow developed countries.
The Chinese economy on the other hand, despite having experienced tremendous growth in recent times, is ranked as a developing country. China views Africa as a haven of raw materials such as oil, metals, timber and cotton that are of much use to its growing economy. Most western countries are self-sufficient and only import agricultural products from Africa and not raw materials for their industries.
Compared to western nations, the Chinese are willing to undertake development projects in Africa at lower costs. Western multinationals operating in Africa set very high profit margins, as high as 15% therefore only few firms are willing to invest.
The Chinese on the other hand set lower profit margins, as low as 3%, which is easily achievable hence Chinese corporations, can easily establish them in Africa. China is taking up projects that western corporations started and abandoned before their completion (Sesana, 2010).
Most western multinationals unlike their Chinese counterparts, are not subsidized by their governments hence are not able to operate with low profit margins. Chinese corporations on the other hand receive government subsidies making it possible for them to offset losses and meet operational expenditures.
How African Countries Feel About Increased Chinese Presence
Chinese presence in Africa has been greeted by both a warm and cold reception by locals. Whereas others view it as a new form of colonialism, others welcome their presence. Chinese multinationals have been credited with the infrastructural developments of many countries such as post genocide Rwanda.
Donor funding and food aid has also gone a long way towards stabilizing the humanitarian situation in warring countries such as Sudan. Nations such as Burundi that have been neglected by western corporations have benefited immensely from china’s exploits. China provides better development options for Africa than western states or even the IMF, through funding and low project costs (Laing, 2007).
China’s forays however are not without criticism from locals. Residents in Zambia for example, feel that the Chinese are taking all their job opportunities as noted by Sesana (2010). There are fears of xenophobic attacks in areas with heavy Chinese presence.
This is because locals fear for their jobs. Failure of the Chinese to employ local residents in African projects worries both the local government and the international community. In Angola for example, Chinese workers dominate the workforce in Angola’s oil field. Statistics show that 90% of the labour force is Chinese (Sesana, 2010).
Chinese exports are littered all over Africa from clothes to electrical equipments therefore they are deemed to undermine the local industries. Consumption of Chinese goods that are in most cases cheaper and of better quality, stifles the growth of Local industries hence affecting negatively the local economy.
The Chinese unlike their western counterparts are less wary of the environmental impacts that development projects have. There has been resistance in Zambia and Nigeria over the Chinese company’s failure to address environmental issues that arise from projects. In addition, the locals feel that the Chinese are not doing much to improve their economy and to cater for the wellbeing of workers working under Chinese projects.
The international community has also criticised China’s foray into Africa. Western countries claim that China undermines efforts by western communities to stem the vices of corruption and impunity by supporting countries, which have been given reform ultimatums.
The international community also takes issue with Chinese operations, which fail to incorporate the local community and to raise the standard of living amongst locals. Such criticism however may be subjective since the Chinese seems to be enjoying great success in a region that has been subject of neglect by western nations for long (Askouri, 2007).
Conclusion
China’s influence in Africa is growing by the day and is going to surpass western nations in the near future. This is largely attributable to favourable Chinese relations with Africa and the failure of western countries to seize investments opportunities.
The west perceives Africa as a risky investment destination hence most multi nationals are very cautious when it comes to investing in Africa. China on the other hand is willing to take risks, China views the challenges presented by Africa as opportunities instead of obstacles.
Low profit margin expectations make it possible for Chinese corporations to continue operations unlike western companies, which set high standards that are an obstacle (Bezlova, 2006). The Chinese government also plays a major role in china’s invasion of Africa. Apart from giving their corporations subsidies, the government also ensures good relations between china and Africa. Diplomatic, military and aid support provided by the Chinese government creates good relations between China and Africa hence providing a favourable environment for business.
Reference List
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