Demystifying the dragon in Africa

WHEN the Chinese government agreed to fund the Tazara Railway connecting Tanzania and Zambia to the tune of RMB988 million (US$147 million) in 1970, few would have predicted that the Asian nation would become Africa’s most important economic partner.

The investment, which was China’s largest individual foreign-aid project at the time, allowed landlocked Zambia to move bulk goods, especially copper, to the sea without having to transit through the white-ruled territories of the then Rhodesia, now Zimbabwe, and South Africa.

Today, China’s engagement in Africa has evolved from important donor to the continent’s largest trading partner.

Trade between Africa and China has been growing at around 20 percent per year since 2000, reaching US$188 billion in 2015, while foreign direct investment from China has also exploded over the last decade, growing by 40 percent annually to reach US$35 billion.

Most of the Chinese projects in Africa over the last 20 years have been supported by Chinese state-owned enterprises and agencies such as the China Railway Construction Corporation and Chinese Development Bank.

However, over the last decade or so, the number of Chinese private enterprises entering Africa has been increasing.

The firms, having developed at home, are now looking for opportunities across the globe, including Africa, according to David Dollar, senior fellow at the John L. Thornton China Centre at the Brookings Institution and a former US Treasury economic and financial emissary to China.

A recent report by global management firm McKinsey found that contrary to previous reports on China– Africa economic relations, the majority of Chinese firms operating in the region are actually private companies.

There are up to 10 000 of these firms currently operating in Africa, accounting for 12 percent — or US$500 billion annually — of Africa’s industrial output, and creating over 300 000 jobs.

The private companies are mainly involved in the natural resources, infrastructure and manufacturing sectors, and they are mainly focused on serving the fast-growing domestic African markets rather than on exports.

The main destinations for the Chinese firms are Angola, Cote d’Ivoire, Zambia, Kenya, Nigeria, South Africa, Tanzania and Ethiopia, which together account for more than 60 percent of GDP in sub-Saharan Africa.

Critics have argued that the glut of Chinese firms in some African countries will prevent African-owned businesses from entering the market or flourishing.

However, the vast growth opportunities in the continent mean that there is plenty of room for both Chinese and African firms, according to Kartik Jayaram, a senior partner in McKinsey’s Nairobi office and co-author of the report.

Mistrust and controversies

When villagers in Dar-Buruq in Somaliland noticed that their waterways were emitting a pungent smell and their animals refused to drink from the streams, they blamed the nearby Chinese-owned tanning factory owned by PHISS.

Despite investigations by the government of the breakaway East African state, no one has been held culpable for any violations after almost 10 years.

There are also concerns that trade between the two economic partners is unbalanced in favour of China.

However, the firms are also creating jobs, transferring technology and building infrastructure on a scale not seen in Africa before, and most governments are willing to look past some of the more nefarious activities by Chinese companies.

Nevertheless, most African countries are keen on allowing the firms access to their domestic markets, with countries such as South Africa and Ethiopia leading the way. — africanbusinessmagazine.com