The Evolving Paradigm of Chinese Investment in Africa

The commodities ‘super-cycle’ has come to an end and so with it China’s seemingly insatiable demand for resources and raw materials from Africa, with the Asian powerhouse entering a ‘new normal’ in which its economy grows at a slower but healthier pace

Writers:

Barri Mendelsohn, Managing Associate, Corporate, London, King & Wood Mallesons

James Douglass, Partner, Energy & Infrastructure, London, King & Wood Mallesons

George Zhao, Partner, Beijing, King & Wood Mallesons 

A key economic factor that has enabled foreign direct investment (FDI) in Africa to increase over the past decade was the surge in commodity prices and demand for raw materials. More recently, the rise of the African consumer has generated investment, with some predicting that Africa’s consumer-facing industries will grow by more than US$400 billion by 2020 due to the acceleration of a growing middle-class.  

In 2009, China became Africa’s largest trading partner - overtaking the United States - and in 2015 it announced that its cumulative FDI into Africa from 2000 to 2014 was US$30 billion, a significant amount but still behind France and the United Kingdom. The Chinese State and State-owned banks, in particular, finance a substantial amount of investment on the continent. This is supported by the Chinese Government’s ‘Go Global’ strategy aimed at promoting the export of Chinese goods and services by national champions and increasing the competitiveness of Chinese companies globally.

However, it has been well documented that the commodities ‘super-cycle’ has come to an end and so with it China’s seemingly insatiable demand for resources and raw materials from Africa and elsewhere. At the 2015 World Economic Forum in Davos, Premier Li Keqiang stated that China is entering a ‘new normal’ status in which its economy grows at a slower but healthier pace. However, as a leading investor into Africa, the slowing Chinese GDP growth rate has caused concern that China's outbound investment into the continent will decrease substantially. In November, 2015, China’s Ministry of Commerce announced a 40 percent year-on-year decline in investment to the continent.

The decreasing demand from China and the impact of lower commodity prices is having profound implications for African economies and has exposed the lack of diversification in these economies. Current policy and currency volatility in the larger economies such as Nigeria, Angola, Ghana and South Africa are directly linked to dramatic falls in global commodity and oil prices. In addition, the commodity slump has put pressure on African currencies, pushing up consumer prices, cutting government revenue and leading to higher inflation. Such changes are likely to impact FDI into Africa in the immediate future, whether from China or elsewhere.

However, there are initiatives underway which should provide stimulus to counterbalance these forces.  Notable examples include the Chinese Government’s newly-launched/approved projects and plans which, to some extent, should increase China’s demand for mineral resources. From January to September, 2015, the PRC National Development and Reform Commission (NDRC) approved 66 of infrastructure projects with expected investment reaching RMB 1,440 billion in total.

In addition, the Chinese Government's ‘Silk Road Economic Belt’ initiative serves as a trading and investment booster to Africa. In the first six months of 2015, African countries along the Belt witnessed a 12.9 percent increase in throughput of containers handled in international waterways. In the first seven months of 2015, Chinese contractors concluded US$49.94 billion worth of contracts which mainly involves power construction, house-building and construction of transportation facilities.

African governments have stepped up their efforts in creating a conducive environment to facilitate FDI. Governments have taken steps towards fighting corruption, increasing transparency and establishing legal and regulatory frameworks across major sectors. Such initiatives provide a more welcoming environment for FDI and thus foster increasing flows into Africa.

Development finance institutions (DFIs) and export credit agencies have emerged as key enablers for FDI in Africa. These institutions and agencies enable FDI through the provision of guarantees and credit enhancement instruments, such as partial credit guarantees, partial risk guarantees and political risk insurance to facilitate FDI, especially in PPP and infrastructure projects. Countries like Nigeria, Kenya and South Africa have been the biggest beneficiaries of such products and as such, have witnessed, on average, a higher rate of FDI. Development institutions such as Africa Development Bank, the World Bank Group and the International Financial Corporation provide such products, and have been important advocates for FDI in Africa.

Will China continue to invest?

Despite the fallout in commodity prices and China’s internal economic slowdown, the question remains whether China will continue investing in Africa at previous high levels.

In May 2014 during his visit to Africa, Premier Li Keqiang indicated that by 2020 China’s outbound foreign direct investment (FDI) stocks in Africa should reach US$100 billion. However, China investments in greenfield projects and in expansion of existing projects in Africa have fallen far below these targets. The fact that large Chinese State and state-owned enterprises (SOEs) have been reducing their investments is perhaps the most significant reason behind the lag in FDI, although some have continued to invest, such as the state-owned Zijin Mining Group Co. Ltd, which in May, 2015 announced that it had acquired an interest in the DRC’s Kamoa copper mine and Porera gold mine for the price of RMB 2.52 billion and RMB 1.82 billion respectively.

Another notable example is the Simandou project in Guinea which is one of the largest untapped, high grade iron ore resources in the world with more than 1.8 billion tonnes of estimated reserves. The CIOH consortium (comprising Chinalco, Baosteel, China Africa Development Fund, China Rail and China Communications Construction) has a 41.3 percent interest in this project with Rio Tinto holding a controlling interest.

Increasingly, there has been collaboration at State-level aimed at boosting Chinese investment in Africa. This culminated recently in December, 2015 with the Forum on China-Africa Cooperation (FOCAC), hosted in Johannesburg, which comprised delegations from 50 African countries, the African Union, and China. In the context of the Forum, President Xi Jinping pledged US$60 billion to African states expected to be allocated to preferential loans and export credits, the China-Africa Development Fund and also other facilities targeting loans to SMEs. 

President Xi Jinping also presided over the signing of agreements and loan deals with South Africa worth 94 billion rand (HK$50 billion), mainly for infrastructure and in a recent state visit to China in April, 2016, Nigeria’s President Buhari negotiated a reported US$6 billion loan from China for support of various projects covering power, road, rail, infrastructure investments. There has also been reports of a proposed US$500 million ‘panda bond’, a first African sovereign bond issued on the capital markets denominated in RMB.

Chinese private enterprise

Unlike SOEs, the number of Chinese private enterprises investing in Africa and the volume of their investment are rising. The new Measures for Administration of Overseas Investment promulgated by the PRC Ministry of Commerce (MOFCOM) in September, 2014 relaxed overseas investment procedures to facilitate outbound commercial activities. With various funds such as the China-Africa Development Fund, as well as support from the Chinese banks and less stringent financing conditions, private companies have more chance of obtaining financing support.

The African Yellow Book: Africa Development Report (2014-2015) launched on 29 September, 2015 states that as of the end of 2013, 70 percent of Chinese enterprises investing in Africa were private or small and medium-sized enterprises.

By way of example, Jinan Yuxiao Group, a private Company in the real estate sector, has obtained more than 40 exploration licenses and four mining licenses and Zhongsu James Mining Co. Ltd, established by a Chinese private firm, acquired mines in Mozambique with a value of more than RMB 200 billion.

Diversification of sectors

It is predicted that significant funds will be spent by Chinese investors on high-speed trains, electricity, telecommunication, engineering machinery, automobiles and aircraft manufacturing in the near future.  

China has also agreed plans to build a new railway line in East Africa by providing financing of approximately US$3.8 billion for the first phase of this project, and in November, 2014 China Railway Construction Corp agreed to build a 1,400 kilometre railway in Nigeria, which amounts to China’s largest-ever FDI deal outside of the extractive industries.

Chinese telecoms companies have already contributed significantly to bridging the ‘telecoms divide’, developing telecoms infrastructure and providing low-cost handsets to millions of rural inhabitants. Indeed, Huawei has recently launched new networks in South Africa and Nigeria, while ZTE Corp is overseeing a 4G mobile infrastructure expansion in Kenya. In March, 2016, Huawei entered into a partnership agreement with Africa’s leading custom software application provider, Techno Brain, whose main goal is the transfer of technology in the information and communications technology (ICT) sector.

Agriculture is also becoming more attractive to Chinese investors; China has acquired 12 million acres of land for the purpose of grain-growing. As of 2015, the Chinese Ministry of Agriculture has signed 31 co-operation agreements with 17 African governments/organisations and has built 22 agriculture demonstration centres.

Signs of further diversification include the approach taken by Djibouti, which, in January, 2016, signed agreements with China to set up a trade zone and establish a legal framework to allow Chinese banks to operate locally.

The ‘new normal’

The industrial transformation and slowdown of domestic demand in the ‘new normal’ Chinese economy has caused a reduction in China’s demand for mineral resources from Africa. Consequently, Chinese outbound investment, especially those made by SOEs, has been impacted. However, for private commercial entities, the ‘new normal’ presents new opportunities in Africa and these are being exploited by Chinese investors with continued State and DFI assistance.

Read the fully illustrated article in the latest issue of Africa Outlook magazine here.