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Finance - News around Africa - September 19, 2018

China’s $60bn investment in Africa. What’s in it for us?

The relationship between China and Africa has reached a new high with the conclusion of the recent China-Africa summit. During the two-day meeting, President Xi Jinping praised their relationship, saying China is “Africa’s good friend, good partner, and good brother.”

All these good intentions are welcome for Africa, a continent with the fastest population growth in the world and huge investment needs. But that’s certainly welcome on the part of China: it comes at a time when the United States is pushing China hard with several sets of tariffs. In this environment, China has chosen to respond by moving closer to the rest of the world to try to isolate the United States.

South-South cooperation, particularly with Africa, is one of the important axes of this strategy.

The summit ended with two major promises from China: the agreement that market forces will govern economic relations between China and Africa and a $ 60 billion investment in Africa.

Loans rather than investments dominate China’s participation

The data suggests that China’s foreign direct investment in Africa remains low and certainly much lower than that of China-led project financing on the continent. According to statistics provided by the American Enterprise Institute, the value of Chinese project financing in the region has increased significantly: from $ 3 billion in 2005 to nearly $ 40 billion in 2016, in terms of value announced.

This is important even for China, as it accounts for 30 to 50 per cent of China’s total foreign-built projects.

By comparison, foreign direct investment (FDI) in Africa has remained low, with investments of $ 3 to $ 6 billion a year. From 2003 to 2007, the total value of direct investment increased to $ 5.5 billion in 2007. However, the trend suddenly reversed during the financial crisis and remained stable at around $ 3 billion each year after the crisis era.

Project financing are led by Chinese State-Owned Enterprises (SOEs)

Nigeria has been one of the largest markets for China’s project financing; Egypt, Kenya and Angola follow. South Africa receives funding from very limited projects in China.

Most of the project funding was focused on transport and energy, and Chinese SOEs were the main actors in these projects. To achieve the government’s objectives, Chinese state-owned enterprises played a key role: among the large-scale projects in China in 2016 and 2017, those requiring more than $ 1 billion, 13 out of 15 enterprises were launched by Chinese state-owned enterprises.


Not much interest in acquiring African companies

Recently, China’s announced mergers and acquisitions in Africa were less than $ 1 billion, far less than the $ 10 billion Chinese mergers and acquisitions in Latin America. These data may miss some offers; However, mergers and acquisitions seem to be a particularly negligible part of China’s strategy in Africa.

In addition, Chinese mergers and acquisitions in Africa boil down to very few major operations in the energy and infrastructure sector. As such, it seems that Chinese companies are not as interested in acquiring companies in Africa as we could have imagined on the basis of the headlines media.

Chinese corporates’ greenfield investment—FDI where an enterprise is built anew from the ground up—has appeared to be on the rise over the past four years. Even excluding the massive agreement announced by China Fortune Land Development with the Egyptian government for the construction of a new administrative capital in 2016, China’s investments in green fields in 2016 and 2017 have further increased in Africa compared to previous years.

After real estate, China’s investments in the green sector in Africa are highly dispersed, both geographically and sectorally. In fact, beyond resources, labour-intensive sectors, such as textiles, were also targeted, although their share was relatively small. In terms of countries, Egypt, Algeria, Ethiopia, Kenya, Morocco, Mozambique, Nigeria and South Africa benefited from field investments in China. This seems to indicate a diversified interest for China to develop its markets in Africa.

Most of China’s participation in Africa has been to finance Africa’s debt on project finance. Low FDI flows have been dominated by real estate transactions. Finally, state-owned enterprises, not Chinese private companies, dominated the contracts.

Overall, on the basis of recent history, the goals of the recently concluded summit – a $ 60 billion investment and a market-driven process – may not be as easy to achieve as one might imagine.

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