Robert Tashima Speaks on Chinese Investment in Africa

Thanks to the Oxford University China Africa Network for having me – it’s a pleasure to join the panel today on Chinese investment in Africa.

I’m looking to provide a slightly more private sector-orientated perspective to what we’ve been talking about, but I’ll start off with an anecdote:

Now, it’s a very random question, but have any of you ever flown from Istanbul to Algiers? It’s not quite as popular as New York-London, but if you do, you’ll get a chance to see the global economy in action. 

Up until recently, flying Turkish Airlines to Algeria meant sitting in a half-empty plane alongside a few Algerian expatriates, Gulf investors and the odd Turkish businessman. 

However, these days, the planes are packed and virtually every seat on flight TK 651 is occupied by a bleary-eyed man speaking rapid-fire Mandarin and smelling as though he just spent 24 hours in airplanes and airports (which he has). 

In fact, chances are that most of your fellow fliers will be new contract workers from the PRC, on their way to one of the numerous billion-dollar worksites in Algeria run by China’s massive state-owned firms.

Of course, if you’re attending this conference, that doesn’t come as a big surprise.

China has traded and aided African economies for decades, but the recent explosion of Chinese investment in Africa has made for popular headline fodder. 

Newspapers trumpeted the “arrival of the dragon” and revealed with gaudy pleasure the astronomical amounts that the PRC was pouring into African countries. 

There was the $4bn infrastructure swap with Nigeria in 2006, the $5bn tender for an iron mine in Gabon that same year, the $5.5bn stake in South Africa’s Standard Bank in 2007. 

China’s cash-rich state-owned institutions dumped capital into the continent at such a pace and with such a seeming disregard for political risk that western investors looked on with jealousy.

The global downturn did little to dampen the numbers, either – 2009 saw a $10bn aid pledge to African countries and rumours of a proposed oil deal in Nigeria worth $50bn. 

While they may have fought harder at the negotiating table, China was showing no signs of slowing down.

However, this narrative, while exciting, has to be put into a broader context.

The project sizes are impressive, but the role of the Asian behemoth on the African continent is often overstated. 

It is growing, sure, but crucially China’s FDI stock in Africa is still a small fraction of the whole, and dramatically overshadowed by North American and European investors, who continue to dominate inbound capital flows. 

There is no doubt that FDI from China, and to a lesser extent, from other major emerging markets – such as fellow BRICs India and Brazil, or Turkey and the Gulf – is increasing, and increasing rapidly. Some estimates state that by 2015 nearly one-third of Africa’s FDI will come from emerging economies. 

Certainly, recent history bears this out – as we’ve heard from other speakers (and as proven by my eminently reliable airline passenger theory).

Estimates of China’s total current FDI stock vary, from $40bn to upwards of $50bn. What makes this most remarkable however is that just a few years ago, investment inflows were tiny and two decades ago, they were virtually non-existent.

In fact, UN data suggests that since 1991, Chinese FDI inflows into Africa have risen nearly a thousand times – from $1.5m to a high of $1.6bn in 2005.

Furthermore even while global investment flows dropped in 2008 and 2009 – falling by nearly 40% in Africa – Chinese FDI to the continent increased by an estimated 80%.

Algeria and Nigeria, for example, are two of the biggest hotspots for Chinese activity, and actually saw an increase in projects during the crisis. In 2009, Chinese firms signed 20 new package deals in Algeria worth some $3.9bn, everything ranging from transportation to housing. One of China’s biggest contracts in Africa to date was a $23bn refinery agreement it signed with Nigeria in 2010.

There is good reason for the surge in activity, beyond China’s growing demand for commodities and materials. Given their economies of scale and lower labour costs, combined with the package deals they are able to offer, large Chinese state-owned enterprises are able to provide clients with lower prices and faster turnarounds. 

And while much has been made about the willingness of Chinese businesses to work in countries where political risk is high or human rights abuses are rampant, western firms, such as United Fruit Company, have just as often demonstrated a high tolerance for the unsavoury.

BUT IT IS STILL MINOR: Given that China’s multi-billion dollar deals were coming at the same time as traditional Western investors like Exxon and Credit Agricole were hawking their assets in Africa, it seems easy enough to tell which direction the wind is blowing.

But therein lies the rub. 

While institutions like the Industrial and Commercial Bank of China and CNPC have been busy, their presence on the continent is still overshadowed by a plethora of European and American firms. 

China’s ballooning demand has driven its economic actors to explore new ground abroad, but African FDI continues to be dominated by traditional investors. This is not surprising, given that it was starting from virtually zero just ten years ago. It is, after all, the speed of China’s growth that has been most captivating, both at home and abroad. 

However, conflating rapid expansion with economic dominance is a mistake.

On a global scale, the amount of FDI stock owned by China abroad is roughly one quarter of the FDI stock owned by foreign countries in the PRC.

Now, as many of you know, digging up hard data in emerging markets can be challenging – we have spent literally years on the ground in countries like Nigeria and Libya, trying to sift through balance sheets and production figures to try and makes heads or tails of them. However, according to most measures, developed countries – primarily from the EU and North America – still account for 90% of FDI stock in Africa. 

According to the World Bank, European countries, led by the UK and France, have been the biggest foreign investors in sub-Saharan Africa, accounting for 68 percent of the FDI stock in recent years. The US and Canada follow, with 22 percent of the total stock. 

China meanwhile hovers at somewhere between 1 to 2%, outstripping Japan and Korea but behind countries like Spain and the Netherlands.

Take Algeria for example, where 35,000 Chinese workers are involved in numerous housing and transport projects. France still remains the largest non-hydrocarbons investor in Algeria, funneling well over $300m into the country on an annual basis. In the country’s flagship energy sector, companies from the UK (Petrofac-Berkine), Italy (Saipem-LPG Hani Messaoud) and France (Total-Arzew) all signed deals well above the $1.5bn mark last year. In fact, British Petroleum is one of the country’s all-time biggest foreign investors.

Nigeria is no different. The largest source for FDI in recent years has been the US, pouring in more than $350m a year. Royal Dutch Shell is the country’s largest IOC, while German-owned construction firm Julius Berger is the largest private sector employer.

Part of this superlative roll call of European and American firms can be explained by the fact that the average size of most of China’s projects remains fairly small. 

CNPC, ICBC and their fellow acronyms are huge but limited in number. Take a trip down to the Chinatown bazaar in the heart of Lagos, and you’ll find literally dozens of registered shopkeepers and vendors, primarily Chinese, involved in importing electronics, auto parts and textiles from the PRC. 

In Algeria, according to the Chinese consulate, the vast majority of the 500 or so Chinese firms registered to do business are traders, shopkeepers or restaurant-owners, with only 50 or so ranking as large corporations. 

While the headline-grabbing projects of recent years were almost exclusively done by Beijing’s mammoth state-owned enterprises, of the more than 900 Chinese firms that actively invest in Africa, less than 1/8 are state-owned. The remaining 800+ are small-scale service, retail and manufacturing firms. 

A final factor that mitigates the hype of China’s dominance in Africa is the fact that the country is not immune to the same ills that afflict other investors – such as cancelled contracts and postponed bids. 

An $8bn railway contract awarded to China Civil Engineering and Construction Corporation (CCECC) in Nigeria in 2006 was part of then-President Obasanjo’s Oil for Infrastructure strategy. It was later put on hold by the following government over questions of, shall we say, procedural import. 

Currently, two years later, it is still under review. 

The China Railway Construction Corporation similarly lost two contracts in Algeria following politically-motivated investigations into the procurement process.

And that $50bn proposed oil deal in Nigeria that I mentioned earlier? It never materialized.

These sorts of problems are not unique to China – just ask Shell, Halliburton, or Vimpelcom – and there is no doubt that China’s influence as a direct investor will increase in the years to come, with their FDI stock in Africa estimated to double by 2015. 

However, for time being, North America and Europe remain the most dominant investment community in Africa, dwarfing China’s share of capital inflows. And while the headlines have highlighted some of China’s marquee projects – which let’s face it are elephantine – the hype is overstated.

Furthermore, reforms have broadened Africa’s appeal to international capital. As a result, Africa’s share of global FDI has grown past 5%, and investment is increasing not only from China, but from other countries as well. 

Planes to Lagos, Algiers, Dakar and Luanda are bringing in not only Chinese, but Brazilians, Emiratis, Germans and Canadians.

If you buy into the “airline passenger theory” – and you should – then the Paris to Libreville flight may give a more accurate view of the world economy than the Istanbul-Algiers route. Discounting the Gabonese expats returning home, you’ll be lucky if you see even a couple of Chinese businessmen. The French, Americans and British still make up most of your seatmates.