New AfDB Study Takes in-Depth Look At China-Africa Partnership

20 September 2011
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African Development Bank (Abidjan)
press release

China's trade with Africa has increased dramatically over recent years. By 2008, it surpassed the USD 100 billion mark to reach USD 114 billion. Despite the 2008 global financial crisis, China-Africa trade nevertheless totalled USD 93 billion in 2009.

A new book from the African Development Bank (AfDB) analyses and details this rapid and continuing growth of trade between China and Africa.

"China and Africa: An Emerging Partnership for Development?" is a collection of studies by AfDB experts and others, which details and comments on this recent phenomenon from various aspects.

The collection looks at the future of this emerging partnership; views the relationship from a post-financial crisis viewpoint; details both China's trade with Africa and its foreign direct investment into the continent; reviews China's manufacturing and industrialization policy in Africa; looks at China's aid and assistance program in Africa; discusses Chinese infrastructure investments and their implications for African regional integration; and analyzes the China-Africa relationship in the context of international aid architecture.

The following are summaries of each of the studies contained in "China and Africa: An Emerging Partnership for Development?"

1. China and Africa: An Emerging Partnership for Development?

This introductory paper summarises the dual purpose of this new publication as to "analyze the economic exchange between China and Africa, and to outline policy recommendations to improve the benefits to both parties".

It notes that trade between China and Africa reached USD 100 billion for the first time in 2008, and that foreign direct investment (FDI) from China into Africa was USD 5.4 billion. By that same year, almost 10 percent of Africa's trade was with China.

China's involvement with Africa goes beyond trade and investment and includes development assistance. At the 2009 Forum on China-Africa Cooperation (FOCAC), China pledged USD 10 billion in concessional loans to Africa.

China's trade with the African continent is currently imbalanced, concentrating on a small number of countries, given the emphasis on oil and minerals.

About 70 percent of Africa's exports to China come from Angola, South Africa, Sudan and the Democratic Republic of Congo (DRC), and are heavily dominated by raw materials (e.g. oil, copper, cobalt and cotton). Some 60 percent of imports from China, largely manufactures, go to South Africa, Egypt, Nigeria and Morocco.

However, despite the rapid growth in trade with China, the European Union (EU) and the United States at the moment remain the largest trade and investment partners for many African economies. The EU accounts for 30 percent of Africa's exports.

The paper notes that China's intense competition in manufacturing and its rising demand for oil highlights the risk that Africa may remain specialized in raw materials in remain vulnerable to volatile commodity prices.

Chinese competition could threaten African countries that export manufactures, such as tobacco products from Benin, refined oil products from Egypt, Algeria and Kenya, wood products from Cameroon and processed food from Mauritius.

On the other hand, China is supporting export diversification in Africa through the establishment of Special Economic Zones (SEZs) located in Zambia and Mauritius, with future sites being considered in North and East Africa.

The paper notes China's commitment to large infrastructure projects in Africa, but points out that the investments could be more supportive of African regional integration. The bilateral nature of China's infrastructure investments limits such support for regional integration across countries, which is considered important for African growth and development.

As in other papers in the publication, it also notes that unlike western donors, China has a different perspective on the encouragement of good governance in Africa.

It states: "China considers intervention in aid recipients' domestic politics as an infringement of sovereignty, while traditional donors emphasize that aid is more effective in countries with good governance".

However, it goes on to say "recently it appears that Chinese companies are becoming more sensitive to corporate social responsibility and are starting to focus on the 'triple bottom line' (profit, social, environmental)".

It brings up the possibility that China could create jobs in Africa. "Africa is not only a source of...commodities...but also a future investment destination for labour intensive manufacturing" because wages are rising faster in China than in Africa.

2. Post-crisis prospects for China-Africa relations

This paper focuses on the impact of the recent global financial crisis on China and Africa, and also explores the relationship between the two regarding development challenges.

The 2008 crisis had a severe impact on Africa, and by the first quarter of 2009 it was clear that economic activity would be severely depressed due to lower remittances from the African diaspora and reduced demand from rich countries.

China was also affected. Chinese officials in December 2008 reported the 670,000 closures of small firms with the loss of 6.7 million jobs, for instance.

However, the paper notes, "China's substantial current account surplus, large international reserves and strong fiscal position provided ample scope for measures to compensate for the fall in external demand", and clear signs of recovery were evident by 2009.

China's economy grew by 8.9 percent in 2009, retail sales rose by 16.9 percent and FDI grew by 30 percent. This recovery was a boon to global markets, particularly to Africa.

The global crisis did not appear to dent China's enthusiasm for investing in Africa. The authors note that "surveys undertaken in early 2009 in Beijing indicate that entrepreneurs would continue to invest in, and trade more, with Africa".

In fact, their study found that "Chinese companies exporting to Europe and America have adjusted rapidly to the slowdown in these markets by finding new markets, such as in Africa".

On development, the paper notes that "China is sometimes referred to as an emerging development partner, although the country has had an aid program since the 1950s".

China's assistance is mainly allocated, it says, to "all weather friends", such as Egypt, Ethiopia, Mali and Tanzania. Due to different definitions of aid, it is hard to quantify China's development assistance, say the authors. Credit and aid data are fragmented over more than 20 line ministries, public banks and other agencies, and it includes a wide range of activities, including grants, scholarships and infrastructure projects.

3. China's trade and FDI in Africa

This author of this paper notes that despite recent dramatic growth "Africa remains a marginal trading partner compared to China's trade with other regions".

China-Africa trade has grown rapidly because "the growth of foreign trade and investment over the past decade has been guided by the desire to secure energy resources, leading to increased relations with Australia, Latin America and Africa".

Even so, "Africa's share of China's total exports and imports - despite recent increases - remains less than 4 percent, and is even smaller for manufactured goods. Trade with China is somewhat more important for Africa, representing almost 10 per cent of exports and imports"

China's outward FDI to Africa is dominated by a few resource-rich countries, plus South Africa. Between 2003 and 2007, more than half of Chinese FDI into Africa was absorbed by just three countries - Nigeria (20.2 percent), South Africa (19.8 percent) and Sudan (12.3 percent).

In fact, the state-owned China National Petroleum Corp is the leading foreign investor in Sudan.

Nigeria's share is set to rise significantly. China is negotiating the acquisition of 16.7 percent of Nigeria's oil reserves.

China's interest in African oil stems from its wish to diversify supply away from Middle Eastern countries to more stable African countries. Also, among sub-Saharan countries, only Nigeria is a member of OPEC.

However, the author points out the future FDI will diversify and focus more on the private sector and the development of small and medium-sized enterprises (SMEs) in sectors such as telecommunications, business services and manufactured goods.

China is also using some African countries as a platform for re-exports.

4. China's manufacturing and industrialization in Africa

The authors of this paper note that Africa's economic growth has been predicated on higher commodity prices while diversification into manufactured production has been limited.

They look into why this is so. what sort of manufactured goods that African countries should be producing for successful export, and China's role in that process.

A key question is whether "China's rapid growth in manufacturing combined with Africa's exports of natural resources is effectively blocking off Africa's ability to follow a manufacturing-led growth path".

The production of manufactures (value added as a share of GDP) in Africa remained constant between 1995 and 2004, and is far below the average of developing countries elsewhere.

Manufactures accounted for only 10.9 percent of the GDP of the 20 largest African economies in 2006 - 9.6 percent if South Africa is excluded. In 2004, a study found that manufactured exports equalled only six percent of sub-Saharan Africa's GDP - not much more than half of the 11 percent average for all low income countries.

In order to improve this situation, one study suggest that Africa should follow a "land-abundant development path similar to the United States rather than the land-scarce Asian economies", pointing the way to adding value to the continent's natural resources through manufacturing.

The authors particularly highlight apparel as an opportunity. "It can be expected that the labour-intensive apparel sector would play an important role in Africa's manufactured exports, given the continent's abundant low-skilled labour and preferential access to the United States and the European Union".

They note that "production of wearing apparel is being transferred rapidly to developing countries". They accounted for only 28.2 percent of global production in 1995, but 57.5 percent in 2006. Two-thirds of that change took place between 2002 and 2006.

They observe that ".the clothing sector is the only manufacturing sector in Africa that displays international competitiveness"

However, African countries need to keep an eye on costs. For instance, "total cost of a pair of pants made in China is about $1 while a similar product produced in South Africa costs ten times as much".

On trade with China, the authors note that while Africa ranked only 7th as an export destination and 8th as a source of imports in 2008, "China's trade with Africa is expanding more rapidly than with most other trade partners".

Between 1995 and 2008, China's exports to Africa rose by 23 percent per year, faster than exports to Europe, the United States or ASEAN countries.

The authors note the lack of African success in manufacturing compared to Asia. "One problem is that Africa's economic policies, governance and institutions have been far weaker than in many of the successful Asian economies".

They go on to make recommendations for the future. "Africa needs to strengthen "the policy umbrella", through more stable macroeconomic policies, more dependable provision of government services, and expanded infrastructure investments, including support for regional trade (e.g. improved roads and border post management)".

5. China's engagement and aid effectiveness in Africa

In this paper, the author acknowledges that traditionally China has focussed its assistance on countries with which it has good political relations and countries with oil and mineral resources.

However, he notes that "recent trends have seen some broadening of Chinese assistance".

He also reports that there has been some expansion of investment outside primary industries. One study notes that there has been "significant investments in non-primary industries such as clothing, the food industry, transport, building, tourism, power plants and telecommunications".

In recent years, the author concludes, "China's engagement with Africa has expanded to cover most countries on the continent and beyond natural resources to light manufacturing and services".

It also finds that "Chinese enterprises have played a positive role through transferring technology". As a result, "trade with China could contribute to the product and geographical diversification of African exports".

On FDI, the author points out, as other papers in the publication do, that Chinese FDI is relatively insignificant. It was 1.1 percent of all FDI into Africa in 2007. However, that compares to only 0.2 percent in 2003, and "China's FDI to Africa is growing much more rapidly than FDI from other countries".

On the level of development assistance from China to Africa, once again because of definitions, it is hard to estimate. However, the paper quotes a study suggesting that Chinas aid flows substantially exceeded the USD 731 million reported by official sources. It may have reached USD 8.1 billion.

Another study estimates that China's overseas development assistance to sub-Saharan Africa averaged between USD 1 billion and USD 1.5 billion annually during 2004 and 2005.

The estimates suggest that "Chinese aid to Africa is growing rapidly, but remains small compared to assistance from OECD/DAC members"

Chinese aid differs from western aid in that it is usually tied. "Development assistance is usually granted in kind, while financial assistance is given to finance contracts that are implemented by Chinese companies".

6. China's Infrastructure Investments and African Integration

In this paper, the authors emphasize the importance of regional, integration if Africa is to reap the benefits of economies of scale, access to globalized markets and to strengthen its position in international negotiations.

It also discusses the establishment of a core group of African countries with FOCAC to promote regional integration.

Such a group could pursue initiatives such as improving access to the Chinese market and advancing regional infrastructure projects. In the longer term, it could establish a coordinated approach to debt relief and the untying of development assistance.

It emphasizes the importance of improved transport infrastructure and integration, particularly for Africa's land-locked countries. Transport costs impede trade growth for those countries. For instance, transporting a container between Japan and Abidjan costs USD 1,500, but the cost to a land-locked country is double.

It also underlines the importance of China trading and dealing with Africa's various regional trading and economic groupings such as ECOWAS, COMESA and SADC, and notes that such regional trade has been growing over recent years.

Chinese investment in infrastructure in Africa has remained stable at about USD 5 billion a year. Recent examples of projects include roads and bridges in the DRC, railways in Angola, and power stations in Zambia.

Also, China is building high-voltage power transmission lines to interconnect countries in southern Africa, strengthening regional integration.

In the rail sector, China's largest deals include the construction of mass transit systems in Nigeria, and the construction of new lines linked to mining developments in Gabon and Mauritania.

The largest ICT project with Chinese involvement is the rollout of a national communications network in Ethiopia.

China has also made moves into the African financial sector. The Industrial and Commercial Bank of China has acquired 20 percent of South Africa's Standard Bank for USD 5.6 billion, and the China Construction Bank has entered into a strategic partnership with FirstRand of South Africa.

7. China, Africa and the International Aid Architecture

This paper looks into the implications of China's rising prominence in aid and assistance for the practices that govern the international aid architecture.

As in other papers, it notes that while Africa is often called an "emerging donor", it has had an aid program since the 1950s. Egypt was the first recipient of Chinese aid in 1956.

Now, every country in Africa, apart from Swaziland, has received some aid from China.

During the mid-1970s, China had aid programmes in more African countries than the United States did.

The paper concludes that China will continue in its aid and assistance program. "The evidence suggests that Chinese finance will be a significant, continuing source of capital for African countries. In 2009, the Chinese pledged to commit USD 10 billion in new preferential loans (a mix of export credits and concessional aid loans) to Africa by 2012.

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