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How China recoups its generous US$60 billion commitment to Africa

It would be presumptuous to judge China's pledge to Africa merely on the ground of geopolitical deliberations or short-term economic index. It might be decades long before we can see substantial results as China attempts to toggle its interaction with Africa from the Angolan model to Ethiopian model,and to shed off criticisms of alleged new colonialism and strive for a win-win situation between China and the least developed continent on earth.

Photo: China Central Television

A recent report released by Kenya’s Ministry of Transport has revealed that the Chinese-funded railway linking its capital Nairobi with the second largest city of Mombasa has recorded a loss of US$100 million in the first fiscal year.

The railway was built on a concessional loan of $3 billion borrowed from the Export-Import Bank of China. It is expected to take 15 years to repay the debt. Kenyan authorities denied that the cost of the railway project was too high to make it economically viable. Officials said that passenger trains were often fully seated, but they could not lobby companies to use freight trains, which is the reason behind the current losses. In the new fiscal year, they aimed to boost freight volume on the railway but if they fail to do that and make profits, then it is up to the taxpayers to repay the debts. It is estimated that China currently holds 70% of Kenya’s debt.

From Djibouti to Ethiopia, Kenya to Egypt, Chinese money is flooding Africa with Beijing’s astonishing investments in ports, roads and railways, fueling western countries’ fears that some African countries now owe sums doubling that of their annual economic output, so that there will come dependency, exploitation and intrusion on such nations’ basic sovereignty.

China vehemently denies that its investments in Africa are exploitive, arguing instead that its generosity illustrates its commitment to the economic and social development of the continent. It would be presumptuous to judge China's pledge to Africa merely on the ground of geopolitical confrontation or short-term economic index. After all, China can't make sure each African country will be successful in just a few years. It might be decades long before we can see substantial results. However, what we can do now is taking a retrospection on China's past interaction with the continent including both successes and failures, and draw a lesson from it.

Angolan model

Most of China's financing is used to acquire Africa's natural resources in a way known as the “Angolan model”, where the recipient countries use oil or minerals as a guarantee to obtain China's low-interest loans.  In March 2004, China Exim Bank and Angola signed the first oil-guaranteed loan agreement. In 2006, this type of financing agreement helped Chinese companies, including Sinopec, obtain exploration rights in the oil zone with a loan of US$4 billion. In 2008, China Railway Group acquired gold, copper and cobalt mining rights in Congo through the same model. Now, with a port and a railway extending to the Congolese border China built for Angola, export of oil, copper, zinc and manganese have surged in Angola and Congo, most of which flow to China.

Such financing has also tremendously benefited Chinese companies who have been able to secure lucrative construction contracts. In Angola alone, Chinese companies have secured project contracts worth nearly $9 billion. Their projects often preferred to employ Chinese workers instead of local under-educated population and led to corruption charges and environmental disputes with the local community.

The Angolan model had been hailed a showcase of win-win situation between China and Angola as the war-torn African country started its reconstruction in earnest after decades of wars ended in 2002 and got its much needed investment and technology from China, and its economy kept a two-digit growth for over a decade since then due to the reconstruction process and booming oil industry, and China in return reduced its dependence on the oil from the Gulf region as Angola has become one of the largest oil suppliers to China.

However, this practice will no longer be the norm. Investing in Africa used to be cheap and unencumbered by worries of corruption, employment, and environmental damage. The tide has been turned as Japan and South Korea are also eagerly seeking resources globally to boost their economies. These new comers have intensified competition for resources and trading opportunities with the African market, compelling all relevant investors – Whether it's mining iron ore or building railroads — not only to improve due diligence standards, but also to improve relationships with the wider community.

Of course, there is no panacea to success. Investors from different countries have different ways of doing business, characterized by its own unique defects and merits. For example, Japanese investors are well-known for being cautious, so their decision-making and implementation may take a longer time. While Chinese investors are more aggressive and cost-effective, addressing the urgency in carrying out infrastructure projects.

In the past, such aggressiveness and efficiency-oriented behavior have not been without controversy, somewhat damaging the reputation of Chinese investors in Africa. Some people have criticized China for investing in local resource projects but contributing nothing to the local community, giving the impression that it is only hunting for and storing resources globally although local population greatly benefitted from the infrastructural projects undertaken by Chinese companies.

As investors from other countries continue to pile up stakes in the competition, Chinese investors are adopting international standard and more sustainable practice by increasingly hiring and training local employees and sourcing local products, transferring valuable technology to the community. These contributions will undoubtedly make it easier for Chinese investors to get more mining and trading opportunities in Africa in the future.

Ethiopian model

To strike a more balanced partnership between China and Africa, China shall create more jobs and grow manufacturing locally in a way known as the “Ethiopian model”. Due to mounting payrolls back in China, manufacturing in Africa are becoming very attractive. The hourly labor cost of China's manufacturing industry is now three times that of Africa, and the gap is likely to widen rapidly.

In Ethiopia, Chinese companies have chosen to build factories there to produce labor-intensive products such as shoes and handbags. The trend in Ethiopia illustrates the fact that Africa offers hundreds of millions of cheap labors. Ethiopia’s success in attracting foreign manufacturers has become a beacon of hope for Africa. It shows the poor countries on the continent can succeed by following a common pattern of development that enriches the rest of the world, namely, industrialization. Industrialization is allowing relatively unproductive farmers to enter the rapidly growing manufacturing sector with much higher productivity.

And also, the creation of job opportunities figured high on the agenda of every government, and this is particularly in Africa, where employment played a key role in poverty alleviation, and employing more local man power can help Chinese companies and expatriates to get rid of their foreignness and better integrate into local societies.

By 2050, the African population is expected to double with the youngest demography on earth, providing the biggest and youngest work force to be tapped into. During the just concluded China-Africa Forum, China and Africa has agreed on personnel training and tech transfer to foster Africa’s manufacturing capacity. It is in everyone’s interest Africa will industrialize and emerge as the world’s new manufacturing hub in the not so distant future. 

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