Chinese investment in Africa is in need of an overhaul

As the relationship between China and Africa has blossomed in recent years, one area that has attracted particular attention is investment. Chinese investment in the continent has not only contributed to the development of both parties, but has implications, strategic and otherwise, worldwide. However, with the amount involved now at historic highs, it is urgent that China upgrade its investment in Africa so as to promote sustainable development.

Investment has gone through three phases since it began in the 1980s. In the early days Chinese businesses relied heavily on government-sponsored aid projects to gain a presence in local markets. The investment was mainly in equity joint ventures, cooperative joint ventures and leasing. At the same time, some companies with long-standing trade relations in Africa started setting up factories on the continent.

At that time, because of the limited strength of Chinese enterprises, most of the investment projects were small. Between 1979 and 1990 China invested $51.19 million in 102 projects in Africa, equivalent to $500,000 for each project.

Investment grew steadily in the 1990s as Africa's investment environment improved and as Chinese businesses grew.

Over the decade, investment diversified as the targets of funding expanded from textiles, agro-processing and machinery equipment to mining, manufacturing and services. The types of investors also diversified, taking in state-owned, private and self-employed businesses, whose investment was in solely funded enterprises and joint ventures.

Over the past 12 years China's investment in Africa has sped up, its path eased by government policies and by the power of the market. There are two main frameworks on the policy side. The first and most important one is the Chinese government's "going out" policy, outlined in the 10th Five-Year Plan (2001-05) and reaffirmed in the 12th Five-Year Plan (2011-15), that has been a key driver of Chinese state-owned enterprises investment in Africa.

The second and most relevant one is the Forum on China-Africa Cooperation, set up in 2000, which created three platforms for promoting Chinese investment in Africa: the China-Africa development fund; trade and economic cooperation zones; and special loans for African small and medium-sized enterprises.

On the market side, it has often been a diverse group of entrepreneurial types, typically from southern Chinese provinces such as Zhejiang, Fujian, and Guangzhou, who have set out for Africa initially as small traders, but realized that there are other opportunities where their skills and capacity for hard work can turn into profits. Indeed, entrepreneurs from Fujian, Guangdong and Zhejiang have done a great deal for Africa's development.

Over the past 30 years China has made a sizeable investment in Africa. The Ministry of Commerce says that in 2010 China invested $2.1 billion (1.6 billion euros) in Africa, 3.1 percent more than the previous year. More than 2,000 Chinese companies have invested in various sectors, including electronics, telecommunications transport and agriculture.

Still, Chinese investment in Africa represents just a small piece of Chinese outward foreign direct investment worldwide, 3 to 4 percent in 2011, but it is growing. Africa is the third-largest recipient of Chinese outward direct investment behind Asia and Europe. By the end of 2011 total Chinese direct investment in Africa reached $14.7 billion, 60 percent higher than in 2009.

But China's investment in Africa is not as concentrated as Western reports suggest. It covers 49 countries and regions, its coverage being much higher than that of other powers, including the United States, the European Union, India, Brazil, Turkey, and South Korea.

In the case of the US, the top 10 African recipients account for 92.35 percent of its total investment in the continent, and 44 other countries the rest; in the case of China, the top 10 recipients account for 76 per cent of its investment, and 39 other countries the rest.

Most Western analysts believe that what is mostly driving China's investment in Africa is its quest for natural resources, an argument that is particularly unconvincing as well, when you look at the US.

The investment strategies of Chinese companies are increasingly diversifying from agriculture and mining, to manufacturing, services, infrastructure, capability building and human resources training.

A report by the Carnegie Endowment for International Peace says that from 1979 to 2000 more than 46 percent of Chinese investment in Africa went to manufacturing (15 percent of that to the textiles industry), 28 percent to mining, 18 percent to services, and 7 percent to agriculture. In 2009 only 29 percent of Chinese investment went to mining.

In the case of the US, in 2010, some 56.6 percent of its investment in Africa went to mining, more than 30 percent to services, and less than 10 percent to manufacturing and agriculture combined.

And finally, it is not SOEs that dominate China's investment in Africa. With the simultaneous growth of Africa and of Chinese small and medium-sized enterprises, more and more of the latter are opting to invest in Africa. They account for more than 85 percent of the more than 2,000 Chinese companies in Africa, and more than half the total investment.

However, while China's investment in Africa is growing rapidly, it faces many challenges. The most significant of these is the urgent need to upgrade. Yes, China's investment, especially in infrastructure, has contributed much to African reconstruction following conflicts and has done a lot to foster sustainable development. But most Chinese investment goes into areas where there is low added value. In other words, China's investment in Africa lies at the bottom of the value chain, which means not only low competitiveness when facing international rivals, but also risks lagging behind once Africa's economy gains a solid footing of sustainable development.

Protecting overseas interests is another big challenge for Chinese investment in Africa. The risks derive not only from market uncertainties but also from political and social instability and even competition from other traditional and emerging powers. For example, the Chinese government had to evacuate more than 35,000 Chinese in Libya after the recent upheavals there.

If the status quo is maintained, investment management is also at risk. As the various interests and complexities in China's Africa policies multiply, especially regarding investment in the continent, managing those policies becomes all the more critical. In this regard, one need look no further than the sharp and insistent criticism of Chinese "neo-colonialism", the "second scramble for Africa", Chinese companies' poor performance in corporate social responsibility, and the lot of Chinese workers and immigrants.

Added to all of this, there are signs that a spirit of innovation is being lost in China's investment in Africa. Many Chinese business people and officials are content with the way things are in the China-Africa economic relationship, scarcely casting an eye to the future and the road ahead.

Such a mindset is damnable if for no other reason than that keeping your eye on the long-term is much more profitable than being transfixed by the here and now.

So to harness and ease the way for Chinese investment in Africa, both Chinese government and businesses need to streamline investment management mechanisms, strengthen peace and security cooperation with Africa, improve methods of protecting overseas interests, and remain alert to risks. If that is done there is no reason why Chinese investment in the continent cannot pick up, both in its speed and in its quality, strengthening a partnership that is already worth celebrating.

The author is deputy director, Center for West Asian and African Studies, Shanghai Institutes for International Studies. The views do not necessarily reflect those of China Daily.

(China Daily 01/04/2013 page6)