Thursday, January 7, 2010

Sting in the dragon's tail?

No matter how you look at it, there is no getting away from China's increasingly active role in Africa. Last month, China signed a $6bn loan deal with the Democratic Republic of Congo [DRC-Democratic Republic of Congo] just at a time when funds from elsewhere were drying up. This is a complex deal and one that will take some time to unravel but it is clearly linked to both access to the DRC's massive reserves of minerals and the equally large market this giant African country offers.

Elsewhere we learn that there has been a seismic shift in the direction of South Africa's trade. In the course of the past year, China has become the most important trading partner - both in terms of exports and imports - with Africa's strongest economy.

The gloom that had gathered over the country's economic commentators following the collapse of the proposed telecoms merger between India's Bharti Airtel and MTN has been lifted by the announcement that South Africa's iron ore exports to China have increased by 35%.

This has come as a huge relief to South African mineworkers who were facing large-scale lay-offs following the decrease in demand for the country's minerals from their traditional markets in Europe and Japan. Orders for iron ore, for example, had shrunk to only half the normal volume and other minerals had suffered equally. China, on the other hand, continues to not only sustain its demand but is increasing it.

While an increasing number of South African companies are now turning to China for their imports, exporters of non-traditional products such as wine have seen a spike in their order books from that country despite the strong rand.

But South Africa is just one country to see the tangible benefits of trade relations with China. Last month, Kenya sent a delegation to Beijing led by Prime Minister Raila Odinga to negotiate a deal valued at around $3.5bn to develop the port of Lamu on Kenya's northern coast. The project will involve developing a transport corridor including road and rail links to Ethiopia and Sudan.

Kenya turned to China after an earlier deal with Qatar to develop the port in return for thousands of hectares on which to grow food had collapsed. If the deal goes through, China, as it has elsewhere, will provide the finance as well as technical expertise. If the corridor becomes a reality, it will open up Kenya's underdeveloped north and could be a major boost to the country's economy.

The latest Chinese gambit in Nigeria is one of the boldest moves it has made against Western oil companies. The state-owned national oil company CNOOC has asked for stakes in all of Nigeria's prime oil blocks, most of which are controlled by Western companies.

Nigeria is in the process of renegotiating contracts with oil companies and the administration of President Umaru Yar'Adua has kept to its pre-election pledge to demand higher licence and operating fees from the companies. China is offering better terms. For the first time in five decades, Western oil companies are finding themselves at the wrong end of the negotiating table, with Nigeria now able to tell them to 'take it or leave it'.

Beyond securing resources and markets

But China's influence does not end in securing resources and markets. There have been very encouraging noises coming out of Beijing that the leadership is seriously considering ploughing some of its vast store of foreign exchange reserves, estimated at around $2.27bn, into Africa and other developing countries including the Bric nations. In September, the deputy governor of China's central bank, Hu Xiaolian, suggested the creation of a 'supra-sovereign-wealth investment fund' which would invest the reserves in developing countries to "allow those countries to serve as new engines in global recovery".

Yifu Lin, a Chinese academic who is now the World Bank's chief economist, wants Chinese companies to step up their investments in Africa and Southeast Asia, including outsourcing some low-end manufacturing to boost consumer demand.

China is making no bones about its motives in supporting economic development in Africa. During a conference in Nanjing last year, I was given the logic: Africa, with a population of one billion people, is the largest virtually 'untapped' market left in the world. China wants to provide this market with its goods and services. If it can do so, it can insure itself against a constriction of the US and European markets where it is likely to face not only increased competition but perhaps also political hurdles. "If we can serve the needs of the African and other southern markets," I was told, "we can continue to grow".

But for the African market to be viable, it has to have grass-roots purchasing power so, "by helping to develop the African market, we are helping ourselves. A better-off Africa means a better-off China; a wealthy Africa means a super-wealthy China!". QED

Can it really be as simple as that? Or is there a sting in the dragon's tail?

COPYRIGHT 2009 IC Publications Ltd. - AFRICAN BUSINESS November 2009