21 January 2016

Africa: China Sets Out its FOCAC Focus in Africa

The sixth Forum on China–Africa Cooperation (FOCAC), held on 4–5 December 2015, set in motion a deeper pattern of exchanges with its partners that could drive economic transformation across the continent. In ‘scaling-up’ measures to ease African bottlenecks in infrastructure, skills and finance, China’s efforts are also a litmus test of its legitimacy in global leadership.

FOCAC was founded in 2000 and is held every three years. It has been a multilateral platform shaping China–Africa relations in areas including politics, economics, social issues, culture and the environment. It was initially created in the context of rapidly growing economic ties, but today it is defined by China’s economic transition and its efforts to play a greater role in global governance.

China is already a leader in investing and financing infrastructure in developing countries. The Infrastructure Consortium for Africa estimated that China financed US$13.4 billion of African infrastructure in 2013. This sum surpassed the total financing provided by European and North American countries combined, as well as that of all multilateral and regional development banks.

These trends in China’s outward infrastructure-related investments and exports are likely to be bolstered by its ongoing domestic reform processes and objectives. As outlined in early May in the State Council’s ‘Made in China 2025’ plan, China is seeking new sources of competitiveness in value-added manufacturing, related services and innovation-intensive sectors.

But China’s economic transition is not going to be an automatic or overnight process. The process of shifting its development model from investment- and export-led growth to a slower and more sustainable consumption-led growth path will be long. The shares of China’s domestic consumption and investment will take time to adjust.

In the meantime, investment outflows can act as a key conduit to support domestic growth in a period of transition. China’s leaders have deliberately linked the promotion of outward investment and exports with economic upgrading and industrial restructuring, particularly in equipment manufacturing and heavy industry sectors.

By mid-May, the State Council released a ‘guiding opinion’ for agreements on ‘international production capacity and equipment manufacturing cooperation’. By 2020, the aim is to have established a set of agreements with key developing countries — with a near-term emphasis on Asian and African countries that link up with China’s One Belt One Road strategy and the China–Africa ‘three networks’ (rail, road and aviation) initiative.

The agreements will transfer industrial capacities in a range of sectors, including iron and steel, nonferrous metals, construction materials and machinery, infrastructure, manufacturing and offshore industries. Financial support measures include favourable taxes, preferential loans, export credits, corporate equity and debt financing, currency arrangements and export credit insurance.

In September, Xu Shaoshi, the director of the National Development and Reform Commission, said that 15 bilateral agreements — out of 60 that were considered — had been signed with countries in Asia, Africa and Latin America. The agreement with Kazakhstan consisted of a first round of 25 confirmed projects valued at US$23 billion, followed by a second round of 42 projects worth US$30 billion. To support these projects, a US$2 billion China–Kazakh production capacity cooperation specialized fund was recently announced, with financing provided by China’s Silk Road Fund. Other agreements have also been explored with Egypt, Ethiopia, Indonesia and Kenya.

In the case of Ethiopia, Chinese media reported on the success of a joint project establishing the first light rail system in Ethiopia — and Sub-Saharan Africa. The 32 kilometre Addis Ababa metro line was constructed by the China Railway Engineering Corp (REC). The line cost US$475 million; China Export-Import Bank financed 85 per cent and the Ethiopian government covered the remaining 15 per cent. The Addis metro is a showcase for Chinese production capacities. REC’s chief project engineer proudly explains that Chinese goods and services are involved in the entire production chain from financing and design, to construction and maintenance.

While these achievements bode well for China’s next phase of growth, there is little mention of the contribution by local Ethiopian firms in the production process. In the short term, this is not surprising because capacities and skills in many developing countries can be weak. But in the longer term, local capacities must be actively fostered and integrated into project planning — a lesson that can be drawn from China’s own catch-up growth experience.

These considerations are even more important in the context of China’s efforts to improve upon existing institutions of global governance. Benefits derived from the One Belt One Road and China–Africa ‘three networks’ initiatives need to strike a delicate balance among stakeholders. This is especially the case if they implicate lending from new multilateral financial institutions, like the Asian Infrastructure Investment Bank and the New Development Bank.

A central challenge remains in devising a ‘win–win’ institutional mechanism that can contribute to the dynamic growth objectives of both China and its partner countries over time.

To this end, China has outlined a US$60 billion financial package for 2016–19. It promised US$35 billion in preferential loans and export credits, US$5 billion in grants and interest-free loans, an additional US$5 billion each for the China–Africa Development Fund and the ‘Special Loan for African small and medium enterprises’, as well as a US$10 billion China–Africa production capacity cooperation fund.

But perhaps more tellingly, the latest China–Africa White Paper makes reference to ‘indigenous’ African sustainable development; a term not used in the first White Paper in 2006 that evokes China’s own use of the term in its strategy of ‘indigenous innovation’.

As the China model gradually evolves, the sixth FOCAC summit marks a strategic opening for African countries to enhance the transfer of production capacities and to position structural transformation at the core of ‘win–win’ China–Africa partnerships.

Daniel Poon is an economist with the International Labour Organization and was previously an economist with the United Nations Conference on Trade and Development.

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