China’s direct investment boom in Africa

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A new economic order is emerging in Africa as the composition of foreign investment and trade changes. China’s economic footprint in Africa is rapidly outstripping the regional position of the US. Africa has been trading more with China than with the US since 2008. Last year, Africa – China trade was over three times higher than US – Africa trade. Chinese direct investment (FDI) flows to Africa have surpassed those from the US for the first time in 2014.

From 2011 to 2016, outstanding Chinese FDI in Africa increased by 130% to stand at USD 53 Bn, against flat levels from the US and UK. The largest recipients of Chinese FDI were, respectively, South Africa (USD 6.5 Bn), Congo (USD 3.5 Bn), Algeria (USD 2.5 Bn), Nigeria (USD 2.5 Bn), Zambia (USD 2.5 Bn) and Zimbabwe (USD 1.8 Bn).

Three factors contribute to the spree of Chinese FDI in Africa.

First, China’s resource-intensive growth is coupled with Africa’s relatively untapped natural wealth. China’s growth is still dominated by fixed investments and therefore demands large volumes of imported energy and metals. Around 31% of China’s total imports are commodities, including 13% of hydrocarbons and mineral fuels. While the demand is there, Africa’s resource-abundant countries often lack the capital or skills to extract natural resources. This complementarity prompts resource-seeking Chinese FDI in Africa.

Second, China’s ‘financial diplomacy’ or bilateral loans are a major source of support for Chinese activities in Africa, contributing to push additional investments into the continent. According to the China-Africa Research Initiative, Chinese government, banks and contractors extended USD 143 Bn in loans to African governments and their state-owned enterprises (SOEs) from 2000 to 2017.

Most of these loans are associated with Chinese policy banks such as the Export-Import Bank of China, China Development Bank and Agricultural Development Bank of China. With a book of USD 35.5 Bn in loans to 500 projects in 40+ countries in Africa, the China Development Bank became the largest provider of concessionary loans to the continent, surpassing even the World Bank.

A large amount of these loans to Africa are in the form of export or supplier’s credit, often arranged within the traditional ‘Angolan model’ i.e., financial cooperation packages modelled as bilateral resources for infrastructure deals. In fact, 81% of the total Chinese loans are directed to either infrastructure or commodity related sectors in Africa.

Chinese loans to Africa usually come with ‘strings attached’ and require Chinese exports or participation in the project being financed, but their actual and potential benefit for the region should not be understated. According to recent estimates of the African Development Bank, Africa needs to invest USD 130-170 Bn annually in infrastructure, and the financing gap is currently in the range of USD 70-110 Bn.

Third, Africa is becoming ever more cost effective for large Chinese manufacturers. As China catches up with advanced economies and local salaries naturally rise, industrial production is gradually migrating to regions with lower costs, including Africa. As of 2016, around 13% of outstanding Chinese FDI in Africa were in the manufacturing sector, against 28% in construction and 26% in mining. Moving forward, however, the manufacturing share is set to increase. With lower labor costs, African countries such as Ethiopia and Rwanda are expected to continue to attract Chinese FDIs in labour intensive sectors, including the textile and footwear industry.

In short, China’s direct investments in Africa are booming and conditions are given for further growth. Importantly, Chinese president Xi Jinping has renewed China’s commitment to Africa during the Forum on China-Africa Cooperation held in Beijing last September. China has promised to mobilize another USD 60 Bn to Africa over the coming years. This is extremely important in a context in which US monetary policy tightening will heighten Africa’s refinancing and rollover risks. While there are legitimate concerns about the level of foreign currency indebtedness in Africa, Chinese authorities seem to be interested in mitigating risks by increasing transparency and compliance. China is once more proving to have the appetite to take risks and search for yield while fulfilling the national aim of improved energy and mineral security.

 

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