Center for Global Development Working Paper 230, November. Benedicte Vibe Christensen (2010).

This article examines the Sino-African economic relationship, and how China might better administer its financing to promote sustainable African growth.

In this report, Christensen examines Chinese engagement in Africa from Beijing’s point of view.  In particular, it investigates the significance of Africa in China’s trade and financing decisions, and to what degree China affects African macroeconomies.  Christiansen advances a rather interesting argument, calling for Beijing to take increased responsibility for the importance of its economic actions in Africa:

“China, as an emerging global player and one of Africa’s largest trading and financial partners, can no longer ignore the macroeconomic impact of its operations on African economies.  Indeed, consistent with its own Africa Policy, it is in China’s interest that its engagement is compatible with sustainable economic development in the continent.  This will require that Chinese trade, financing and technology transfer are provided at a pace that African economies can absorb without running up against institutional constraints, the capacity to service the costs to future budgets, or the balance of payments.  A key corollary is that China show good governance in its own operations in Africa” (1). 

Africa is economically important to China in several ways.  First, it is a potentially large consumer markets, with a population of approximately one billion.  Second, there are significant investment opportunities considering that average growth rates totalled six percent annually in the five year period before the onset of the global recession in 2009.  Third, Africa has natural resources necessary for China’s continued growth, including oil, cobalt, copper, iron ore, manganese, and uranium. 

However, China faces political, economic, and reputational risks in Africa.  Corruption, inequality, election fraud, and breach of law are unfortunately common.  The risk of global price fluctuations is compounded with that of national economic policy.  China’s actions in Africa have drawn notice from the international community, making issues of future debt problems, labor standards, and environmental pollution important.  For all of these reasons, Christensen argues that China “increasingly needs to consider its operations from a position of a responsible global player with an important seat in the international organizations and G20” (2).

Africa accounted for 3.9% of China’s imports and 3.4% of China’s exports in 2009.  Africa (Angola, Nigeria, and Sudan in particular) accounted for approximately 30% of China’s oil imports in that year.  Africa supplies over 80% of China’s cobalt imports, and a large amount of China’s timber and chromium imports.  As a benchmark, China “has already overtaken the United States as Africa’s largest trading partner” (4).  However, Christensen cautions that “From the African perspective, China clearly holds more importance as a trading partner than vice versa” (4). 

Sino-African aid and nonconcessional financing have grown alongside trade and foreign direct investment.  Unfortunately, due to data limitations, “the magnitude of these glows remains a guesstimate” (5).  Christensen estimates that aid (including concessional Eximbank loans totalling $1.5 billion) grew from $0.3 billion in 2001 to $2.1 billion in 2009.  Beijing takes a different approach to aid than many Western countries, preferring to provide Chinese goods and services focusing on concrete deliverables rather than liquid grants.  Comparatively, Chinese aid to Africa totals less than that from the United Kingdom or Germany and only a third of that from the United States.  

While China has invested significantly in African natural resources, some of the international concern surrounding this issue is inflated.  World Bank estimates suggest that “only about 10 percent of Chinese-financed infrastructure investments are directly linked with natural resource extraction” (8).  Vivian Foster reports that the “bulk of Chinese infrastructure finance is targeted at projects that meet the country’s broader development needs” (8).

The government announced the China-Africa Development Fund in 2006 to support and leverage Chinese equity investments in Africa.  By January 2010, the Fund had invested $540 million in 27 projects, which the Ministry of Commerce reported would support $3.6 billion in investment.

According to UNCTAD statistics, Chinese foreign investment stock in Africa totalled $7.8 billion in 2008, accounting for 4% of China’s outward stocks and 2% of Africa’s total stocks.  Approximately 1,600 Chinese companies were registered in Africa in this year.  Christensen reports that though these might be underestimates, China still “accounts for a relatively small share of total FDI flows in Africa” (9).  Chrisensen notes that “While the larges part of foreign direct investment has gone into natural resource extraction, more recently telecommunications, construction and banking have also been targets for such investment.  …Significant investments have also been made in manufacturing, fisheries, electric power, ports, tourism, agribusiness, water systems, and waste management” (9).

Christensen advances the interesting argument that Chinese financing has been complementary to that provided by the international donor community.  Traditional donors focus on “social infrastructure” like water and roads, while China focuses on “production-oriented infrastructure” like power plants and railroads.  In particular, “Chinese investments come as a package deal with financing, operators, and a very quick gestation time for aid-financed projects.  This is very attractive to African governments who have argues that traditional bilateral and multilateral donors have taken too long to implement projects” (10).  African governments often find Chinese aid a relief after years of dealing with macroeconomic adjustment requirements from traditional donors.  Christensen reports that Chinese aid “is extended without economic policy conditions; the only requirement is support of the One-China policy” (10). 

The Forum for China and Africa Cooperation serves as a coordinating body for political and economic contact between China and African countries.  When the body was established in 2006, Beijing “committed itself to doubling development assistance to Africa over the next three years and to providing $5 billion in preferential credits and export credits as well as debt relief on zero-interest loans granted before 2005” (11).  $10 billion was pledged for 2010-2012.  Christensen reports that combining FOCAC pledges with official loans, Chinese financing to Africa likely totals at least $20 billion.  However, “Such financing is less concessional than aid from traditional donors and resembles rather export credits from traditional lenders” (11). 

In order for its loans to be serviced, Beijing must obviously ensure that it is funding sustainable projects.  But with its role in African economies growing, Beijing must also consider its larger macroeconomic impact.  Christensen argues that “This does not mean that China has to abandon its policy of noninterference in the internal matters of the recipient countries through policy conditionality. But it means that the size and allocation of its financing and operational modalities should be informed by macroeconomic considerations.  Any assistance should fit the absorptive capacity of the country. It also means that China might consider whether it needs a new process for discussing macroeconomic issues with the recipient countries.”  (14).  Large FDI inflows can cause currency appreciation and a loss of export competitiveness, for example.  China’s impact on African labor markets is also significant, as Chinese firms tend to prefer to hire Chinese workers rather than African workers.  This can be a sensitive issue in countries with high unemployment rates and where skill transfer is a goal.  China should also coordinate its investments with larger national development goals.  On this front, public expenditure management systems that prioritize public investments would be useful.  Beijing should also pay greater attention to issues of macroeconomic debt sustainability in its lending practices.  Better data should be kept and released on financing deals. 

Christensen concludes with a call for three initiatives: increased policy coordination in Beijing regarding aid to Africa, enhanced financial data transparency which would improve data available to African policymakers and “give China due credit for its operations in Africa,” and increased attention to China’s macroeconomic impact in African economies.  Regarding the last priority, Christensen recommends increased regional consultation on economic conditions, development priorities, and debt sustainability.