Neocolonialism or Business as Usual? Chinese Investments in Africa

13.10.2018 | By Jakub Kucharczuk

For over a dozen years we have witnessed an exceptional growth of China’s economic potential. The effects of the Middle Kingdom’s unprecedented development are visible also outside of China. Africa, a continent which has been dealing with negative social and economic consequences of colonialism, has become a particular experimental field for the developing Chinese economy. Thanks to China, Africa has experienced an influx of cheap products and infrastructure development. It has also encountered social problems, environmental destruction and growing public debt.

China, advocating for its own vision of the international order, draws on Asian models of cooperation where the economic partnership is at the forefront and where the spheres of politics and security do not intervene. In practice, China offers money and does not require any political or social changes in return. This is an extremely convenient model for developing countries with regimes, dictators, monarchs. Countries where democratic rule is not a model expected by society.

Naturally, China does not transfer its money altruistically. Thanks to the financing of infrastructural projects, the Chinese gain favour of the society and politicians in a given country. At the same time, by taking over shares in the largest companies, they gain monopolies and access to resources in demand. A particularly pro-Chinese model of globalisation has been adopted in Africa where the new world order is looked for with hope. This is where many societies, who were exploited by Western countries during the times of colonialism, expect a ‘New Deal’ guaranteeing them greater prosperity. The Chinese success story is a confirmation for the developing countries that the Western neoliberal development model is not the only solution. What is more, many believe that the time of the West has already passed and that the People’s Republic of China will soon become a new ‘Guardian of the World’.

From Export of Ideology to Economic Profits

Mao Zedong, who supported fraternal regimes and communist guerrilla groups, initiated contacts between China and independent African countries. This cooperation, however, was not very developed and ended up immediately after Mao’s death. The Middle Kingdom got back to the negotiating table again in 1996 when the then Chinese President Jiang Zemin visited six African countries: Egypt, Ethiopia, Kenya, Mali, Namibia and Zimbabwe. The visit, which led to the establishment of some relations and conclusion of first agreements on economic cooperation, may be considered a prelude to the new stage of China-Africa relations. The timing was not random as in the 1990s many African countries were experiencing an economic boom, and the political situation in the region was gradually becoming more and more stable. For this reason, China, which was in search of new outlets, saw an opportunity of expansion in Africa. Since then, the Middle Kingdom’s involvement on the continent has been growing dynamically, and economic profit replaced the ideology.

Experts dealing with China’s external economic relations point to some of the fundamental reasons which led to such a dynamic growth of trade and political ties between China and individual African countries. Among the most important causes of expansion are demand for raw materials and alimentary products, search for outlets allowing to sell growing domestic production, willingness to expand the orbit of political and economic influences as well as attempts to dethrone Western and, in particular, US economies.

Experts are also divided as to the impact of Chinese expansion on Africa. Many indicate positive effects, such as the inflow of cheap products or infrastructural development. More and more opinions are raised, imputing neo-colonialism which would be not much different from the exploitation of Africa by European powers over the past centuries.

How Does China Invest in Africa?

China chooses economic partners in Africa by taking into account the wealth of their natural resources. The cooperation is not dependent on the political system, the state of democracy or respect for human rights. This shows that China’s economic interests in Africa do not have goals of a purely political nature. This approach is entirely different as compared to China’s policy in the Mao Zedong era. It is also a policy different than that of the Western states.

The Chinese strategy for Africa is particularly attractive for those countries which could, previously, rely only on the financing from the Euro-Atlantic partners. The rigorous requirements and reluctance resulting from historical conditions meant that many critical infrastructure projects could not be implemented and, thus, African economic potential was not fully used. However, according to Tidiane N’Diaye, the author of the book ‘The Yellow and Black’ who takes a look at China’s expansion in Africa, in many cases, this cooperation is different than what is presented by Chinese politicians or by the authorities of African countries. ‘In fact, China’s cooperation with Africa works rather like ‘Donor-Lessor’ than ‘Winner-Winner’. To support his thesis, he refers to numerous examples of Chinese politicians’ visits to respective countries. According to the author, in each of the states where China offers its assistance, it receives something in return- most often concessions for extraction of oil or other minerals.

Indeed, the model described by N’Diaye is supported by many practical examples as well as by the analysis of reports of Chinese projects and supplies of raw materials. Projects financed by Chinese institutions are usually associated with granting of concessions for extraction of oil or other raw materials. Importantly, the largest Chinese companies operating in Africa are mining companies, including, a state giant Sinopec. Because of this mechanism, Chinese support is not seen as a form of corruption with the aim to exert pressure on African decision-makers. Many African politicians value such methods.

The Chinese strategy, aimed at expanding influence in Africa, is so effective because Chinese companies, fighting for access to local markets, take advantage of Chinese financial investments. Chinese companies obtain preferential loans and subsidies not only for implementation of infrastructural projects but also for smaller ones, such as the construction of factories. This aid is given neither to the Western investors nor to the local ones who are deprived of any sources of funding. Considerable support for Chinese companies is also access to cheap labour (this is still the case of contract workers brought from China and often treated as slaves). In addition to this, there is also an effect of scale- enterprises from the Middle Kingdom often implement projects within bigger consortia what translates into more significant business opportunities.

This is why Chinese enterprises can make offers which are several dozen percents more attractive than those made by the competition.

Moreover, it is now more and more common that a Chinese company, which enters a local market, is in a better position than an African one. The generosity of Chinese investors leads to a situation where the authorities of some of the African countries give non-consensual preferential treatment to Chinese companies when commissioning projects. This raises frustration among many local entrepreneurs and makes family businesses go bankrupt.

Everything at The Expense of Chinese Banks

The financing of Chinese investments is one of the most critical factors which have allowed Chinese companies to take over the African market in such a short period. The financial resources, aimed at supporting a given country, are not directly lent to the local government. Instead, the Chinese government authorises a Chinese company (state or a private one) to implement a financial project with the consent of the African government. This investment is financed by a Chinese bank.

In exchange for investment in infrastructure, a Chinese company or consortium receives from the local government a concession to extract raw materials. This is usually done by transferring shares in local companies which already have all required permits.

Often, such informal agreements do not concern one investment, but rather an entire package under which roads, schools, railways or stadiums are built. Without a doubt, this is particularly attractive for African governments when it comes both to the financial and prestigious aspects. What is more, even the largest western companies are not able to compete with such offers as the level of risk is too high and the largest banks do not agree to credit such projects.

The leading financial entity of Beijing is the state EXIM Bank (Import and Export Bank of China) with its role to finance the activities of state-owned companies abroad. It is the third largest bank in the world regarding export loans. It supports Chinese enterprises which carry out export activities and invest in foreign markets. The bank also provides preferential loans to support economic development and strengthen cooperation between countries. This has allowed China to finance dozens of infrastructure investments in Africa, for example, the Merowe dam in Sudan.

The China-Africa Development Fund, established through FOCAC arrangements, is an institution whose aim is to support China’s expansion. Its role is to assist Chinese companies which undertake activities in Africa. Its initial capital in 2006 was five billion dollars. Additionally, the development is supported by smaller investment banks. In the coming years, an increasingly significant role will be played by the financial instruments set up to help the New Silk Road initiative, such as the Asian Infrastructure Investment Bank (AIIB) and the NJS Fund.

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In 2015 China became the most important business partner for the entire continent. The Middle Kingdom is also a leader in direct investments and aid initiatives. For years, Angola has been China’s leading business counterpart in Africa. It is followed by South Africa, Sudan, Nigeria and Egypt. African countries benefit from the preferential trade tariff rates offered by their Chinese counterparts. Obviously, not all countries in Africa are this enthusiastic in accepting Chinese investments. Yet, almost no one talks openly about it. The influx of Chinese money and investments is too vital for the development of these countries.

Translation from Polish: Ewelina Tylec

 

This publication has been cofinanced by the Ministry of Foreign Affairs of the Republic of Poland within “Cooperation in Public Diplomacy 2018” programme.
This publication reflects the views of the author and not the official stance of the Ministry of Foreign Affairs of the Republic of Poland.

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