Thorns in the African dream (1)

Chinese companies are facing problems on the ground in Africa as they ignore local politics and stir hostilities. Wang Xiaojuan opens a two-part article.

The importance of Africa to China is easily understood: it offers a huge market, rich supplies of natural resources and raw materials and cheap labour. Thirty percent of China’s oil imports come from Africa, and Chinese investment in the continent is growing at a rate of 40% a year.

Africa also offers China the chance to upgrade and relocate industry. The enormous demand for new infrastructure on the African continent is allowing transfer of significant over-capacity in China’s steel and concrete industries. At the same time, China is supplying capital for African development. And the arrival of Chinese firms presents an alternative to the old colonial nations – giving African nations more room to negotiate.

These mutual benefits have led to a blossoming relationship. Since 2000, Sino-African trade has grown by an average of 32% a year; in 2009, China replaced the United States as Africa’s largest trading partner; at Luanda, Angola’s capital and Africa’s busiest port, Chinese tankers load up to a million barrels of oil a day; in the Democratic Republic of the Congo, China has invested US$6 billion (38 billion yuan) in an “infrastructure for resources” deal; in Nigeria and five other nations, China is actively creating and promoting economic cooperation zones.

The entire continent can see what an army of Chinese engineers has built: from new bridges, roads, dams, railways and national stadiums, to ordinary projects such as residential buildings. China’s arrival is transforming African nations, and their relationships with each other.

But as China has accelerated its expansion into overseas markets, its every move in Africa has attracted global scrutiny and China’s significance for the continent is ever more widely discussed. As a newly rich, emerging nation, China is the leading partner in bilateral economic relations. And as China has always had friendly relations with African nations, it does not struggle as the west does under the burdens of colonial history. Thus, China believes it holds the moral high-ground in its participation in Africa’s development.

But that moral advantage does not automatically turn into favourable public opinion – China’s participation in Africa has come in for both praise and criticism.

On one hand, Chinese and African governments proclaim the innumerable achievements of their partnership and the south-south cooperation model. On the other, the international community, local media, academics and NGOs are wary of China’s influence. Some publicly accuse China of acting irresponsibly, pointing to its environmental performance, low labour standards and lack of transparency.

Working overseas has put Chinese companies to the test over compliance issues. And Chinese government policy on overseas investment has become a matter of global politics.

China’s domestic economy has seen 30 years of near double digit GDP growth. Africa has a huge market for cheap goods. In order to climb the value chain and outsource low value-added industries to poorer countries, like African nations, the Chinese government has encouraged suitable Chinese firms to expand overseas. The idea is for them to march into international markets using China’s huge foreign exchange reserves, in the hope that these reserves do not lose value and help Chinese firms to grow abroad.

Armed with plenty of cash and the experience gained through China’s rapid rise, these companies go in full of confidence, believing they can soon bring the warm winds of modernisation to the undeveloped and untamed land of Africa. China’s yesterday will become Africa’s tomorrow, they think, and Africa offers nothing but opportunity.

Chinese firms do have clear advantages – sufficient investment funds, policy support from their government, cheap Chinese labour and efficient working methods. But Chinese companies still have much to learn about soft power. Africa is not barbarian territory waiting to be developed: it has ancient cultures and traditions. It has won independence from colonial rule and claimed its place as its own, politically and economically distinct, continent. How many Chinese firms going into Africa have done their homework and really understand the countries they will work in?

Speaking at the 5th Chinese Cross-Border Investment Seminar Kong Linglong, head of the department of foreign capital and overseas investment at the National Reform and Development Commission, China’s top economic planner, explained that Chinese firms’ overseas investment is split equally between acquisitions and greenfield investment. Fifty percent of projects are classed as large, with investment of over 100 million yuan (US$15.8 million), and 80% are in the energy and resources sector.

There are different actors doing business in Africa, ranging from central state-owned enterprises, provincial state-owned enterprises and private companies to joint-venture companies, among which 80%
of overseas investment comes from central state-owned enterprises. But only 50% of Chinese ventures overseas succeed. And figures from consultant McKinsey show that in the last 20 years, 67% of overseas acquisitions by Chinese companies failed, either going bankrupt or making no profit, far exceeding the average global rate of around 50%.

Since gaining independence, most African countries have built multi-party democratic regimes: ruling and opposition parties compete to govern; power is balanced between government, parliament and the judiciary; federal and state governments vie for decision-making powers. State constitutions endow citizens with the rights of association, publication and freedom of speech. In addition, there are other domestic laws or regulations to protect citizens’ rights to establish labour unions and guarantee a minimum wage.

Chinese companies learn at home that you need to maintain good relations only with government, and rely on central and local governments to deal with the interest of different stakeholders and ensure everything goes smoothly. They naturally apply that lesson to their work in Africa: even when faced with criticism from other political parties, they still hide behind their good relations with the local government. They believe that the government will speak on their behalf and make sure everything is “fair”.

But not all silence is golden. Often, Chinese companies’ lack of transparency and open communication simply gives opposition parties campaigning space. Political groups in southern Africa often organise anti-China demonstrations, and there has been fierce political debate in southern Rwanda over whether or not China is exploiting the region. Even Tanzania, a nation friendly to China and with a similar political system, has seen anti-China sentiment ignited by Chinese companies undercutting prices and monopolising markets, bankrupting local merchants.

In Zambia’s elections in 2008, the main opposition party, the Patriotic Front, and its leader Michael Sata earned a significant amount of support with an anti-China stance, prompting the Chinese ambassador to say that, if Sata won the election, China may withdraw its investments, including China Nonferrous Metal Mining’s US$400 million (2.5 billion yuan) stake in the Luanshya copper mine. (Sata has since become Zambia’s president and has softened his voice towards China.)

Even the early stages of a resource development project can be very expensive. If China wants to ensure stable output and long-term profit, it needs to consider the political risks in host nations. War, political unrest, deterioration of bilateral relations – any one of these could result in failure and even threaten the safety of Chinese workers.

In February this year, the outbreak of civil war in Libya caught Chinese companies off guard. Although the safe transfer of 30,000 Chinese citizens proved the country’s ability to carry out a long-distance evacuation, a fortune in assets was lost. A spokesperson from China’s Ministry of Commerce said that Chinese companies were working on 50 construction projects in Libya, with contracts worth a total of US$18.8 billion (119 billion yuan). Four listed central state-owned enterprises – China Railway Construction Corp, China Gezhouba, the China Metallurgic Group and China State Construction – announced cessation of work on contracts worth 41.035 billion yuan (US$6.5 billion).

Libya teaches us that China’s economic interests in a nation are closely linked to that nation’s politics. Chinese firms eager to work overseas need to learn that lesson and work to minimise the risks. 

Xiaojuan is project manager at the Heinrich Böll Stiftung China office.

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