March 9, 2021

China Will Seek to Enhance Relations with Africa in 2021 and Beyond, Says EIU Report

In a report that explores the evolving relationship between Africa and China, The Economist Intelligence Unit says relations between the two "have been tested by the impact of the Covid-19 pandemic that spread across the continent in 2020. Disruption to national and international travel, trade and investment caused a synchronized downturn in all but a few economies in Africa. However, the Chinese government and some Chinese companies are making shrewd moves to build goodwill in the region, protect their strategic interests and set the foundation for stronger commercial engagement in the years ahead."

Titled Taming the dragon: new frontiers of co-operation, below are the report's key findings:
  • China will seek to enhance relations with Africa in 2021 and beyond, with a fresh focus on agriculture, environmental issues, the digital economy, healthcare provision, industrial capacity, regional connectivity and free trade and national security;
  • The Belt and Road Initiative (BRI) will continue to drive international connectivity with major developments in the pipeline to enhance trade facilitating infrastructure;
  • Enhancing food security is high up the list of policy priorities in both Africa and China. Engagement in African agricultural ventures increasingly characterized by corporate mergers, acquisitions and joint ventures involving private companies;
  • Digital expansion will be boosted by the completion of a cross-border fiber-optic cable in Pakistan, forming the backbone of China's Digital Silk Road; and
  • China will seek to engage in more bilateral and collective free-trade deals, presenting the potential starting point for more in-depth trade and investment ties.

"China has worked hard to establish a solid footprint across Africa through years of high-level political engagement and the provision of access to much-needed project finance and expertise," the report explains. "Chinese companies have delivered thousands of transport, power and telecommunications projects in Africa over the past two decades. China has also supported export-oriented industrial park developments and taken a dominant position in many African markets for products such as competitively priced consumer goods, building materials, plants and machinery, and electronic equipment."

Impressively, "The value of Chinese construction contracts in Africa has topped US$40bn every year since 2011 (surpassing US$50bn in 2014-17), and for years the number of Chinese workers in Africa has been close to 200,000 (although this slipped from a high of 264,000 at the end of 2015 to 183,000 at the end of 2019), according to the National Bureau of Statistics of China." The EIU further says that "[t]his level of expatriate staffing reflects extensive Chinese engagement in Africa—expertise that is required, given the scale and complexity of some Chinese ventures in Africa, employment conditions attached to Chinese loans and foreign direct investment (FDI), and loose expatriate employment regulations across much of Africa. Interestingly, recent leading information revealed that both Chinese and local firms operating in the construction and manufacturing sectors in Angola and Ethiopia tended to employ just as many Chinese workers as local ones, paid them similar amounts and trained them to similar standards."

"China is the region's single largest bilateral trader and provider of foreign capital in the form of commercial loans and FDI," the report notes. "Over the past two decades loans and FDI have been directed towards transport, power, extractives and telecoms projects, as have smaller but increasing amounts to manufacturing, finance, business services, and health and education." Furthermore, "Resource-rich countries, including Angola, Algeria, Democratic Republic of Congo (DRC), Egypt, Nigeria, South Africa and Zambia, have been major beneficiaries. Countries on the eastern seaboard, including Djibouti, Ethiopia, Kenya and Tanzania, have received finance for major industrial and transport-sector projects. The financial splurge looks likely to continue, although financial forays may be more selective and even more diverse in the years ahead, given Chinese financial exposure to some parts of Africa coupled with China's own evolving strategy and needs."

"An interesting feature of China's financial engagement in Africa is the primacy of loans extended to the region over FDI flows," according to The EIU. "This could suggest that Chinese companies have tended to be more risk averse when it comes to Africa and may have attempted to minimize operational risks linked to political and regulatory issues. However," as indicated in the chart above, "the gap appears to have narrowed in recent years, possibly suggesting that China has become more confident about a more hands-on and exposed approach to its engagement. Whether this is true—or will last, given the impact of Covid-19 on African financial stability—remains to be seen."

On the topic of free trade and industrial development, "A new feature of Africa's evolving commercial relations with China could well be the emergence of more bilateral and collective free-trade deals. Mauritius became the first African state to launch a bilateral trade deal with China when a free-trade agreement (FTA) between the two countries came into effect in January, marking the first step in a potentially new direction for Sino-African relations in which Mauritius could well act as a catalyst and template for other free-trade deals in Africa. Currently, 13 African countries (Algeria, Tunisia, Egypt, Sudan, Ethiopia, Uganda, Nigeria, Zambia, Zimbabwe, Botswana, South Africa, Seychelles and Mauritius) have bilateral investment treaties with China, which could morph into more comprehensive trade and investment agreements in the years ahead." As illustrated in the image on the left, "China has also developed industrial parks and free-trade zones in a wider range of African countries, as well as an evolving network of special economic zones across Africa, which present the potential starting point for more in-depth trade and investment ties."

"In addition to this," the reports says:
China has expressed support for pan-African and sub-regional free-trade arrangements that seek to build larger markets and more integrated supply chains on the continent For instance, China is supportive of the enormous African Continental Free Trade Area (AfCFTA) agreement, which began its initial implementation phase in January. China considers the AfCFTA and other smaller sub-regional agreements as 'win-win' situations, at least in the short to medium term. These FTAs necessitate infrastructure development and industrial know-how (including more and better highways, railways, seaports and airport infrastructure) and industrial know-how, which are areas where China excels on the continent. However, regional FTAs could create competition for Chinese manufactured products in the longer term. A clearer picture will emerge surrounding the impact on Sino African relations of the AfCFTA and other regional FTAs once rules of origin are better established for the provision of African goods and at what level external tariffs are set for Chinese imports. At present, China does not appear overly concerned and is more eager to exploit the opportunities that Africa's regional FTAs look set to create.
Regarding telecommunications and the Digital Silk Road, The EIU points out that "China dominates the market for smartphones and feature phones (traditional-style push-button mobile phones) in Africa, and this is unlikely to change soon. Chinese companies offer affordable prices and tailored products to African markets that provide a clear competitive edge."

"Transsion and Huawei, together with Xiaomi, Oppo and a few other minor players," as reflected in the chart above, "provide more than two-thirds of registered smartphones and an even larger share of feature phones in Africa. A dominant and expanding handset presence is just one part of China's strategy for the telecoms sector in Africa, which has and will continue to drive the rapid spread of mobile data and voice services across the region."

The report further asserts that "Even more crucial to China's future engagement in the telecoms sector in Africa, and a key pillar of its broader commercial strategy, is control over existing hardware and the rollout of next generation technology. Chinese companies including Huawei, ZTE and China Telecom are major providers of backbone and last-mile technology in Africa with an eye on wider rollout of mobile and fixed-line infrastructure. Huawei may have been excluded from key telecoms infrastructure contracts in North America and Europe, but the company has deep roots in Africa that provide it with a solid and seemingly irreversible foothold to pursue expansion plans in the region."

What is more, "Information and communications technology (ICT) services could receive a boost in 2021, as China will soon lay the final stretch of a cross-border fiber-optic cable in Pakistan that forms the backbone of its Digital Silk Road and will support China's digital expansion across Africa." As illustrated in the image on the left, "The cable will connect to the submarine PEACE cable in the Arabian Sea that links to various entry points in Africa, providing countries participating in the BRI with enhanced access to the Chinese tech sector while reducing reliance on western-developed and controlled cable services. Data centers, smart cities, 4G expansion and possible 5G introduction are on the menu and will help to shape Chinese involvement in telecoms and other business areas across Africa in the years ahead."

The report, however, notes bumps in Sino-African relations lie ahead:
Concerns have escalated over the past twelve months regarding African debt exposure to China the potential loss of sovereignty over strategic assets and resources following failure to make payments. However, China has proved reasonably flexible in postponing and restructuring debt repayments so far in countries such as Angola, Ethiopia, Kenya and Zambia. In the case of Kenya, in January the government secured a six-month debt-repayment holiday worth around US$245m, although China had taken a tough stance; the potential for a debt for asset swap with regards to the Port of Mombasa port looked a real possibility until fairly recently. To date, China has signed debt service suspension agreements with a total of 12 African states and has provided waivers of matured interest-free loans for 15 African states under the G20 Debt Service Suspension Initiative, and more could follow. However, Africa's current financial difficulties are not easily solved, and debt restructuring has largely kicked the problem down the line in the hope that economic conditions improve and financial strains ease. 
My colleagues in Africa concur with The EIU's assertion that "Anti-Chinese sentiment within some African populations is simmering below the surface, with citizens resentful of Chinese economic influence and the lack of higher-value job creation for locals associated with some Chinese investments." The report adds that "[t]here is a perception that ruling elites in Africa are complicit in Chinese predation of national resources and the displacement of African workers and products by Chinese substitutes. Whether or not these feelings are justified, the developments of 2020 increased tensions and elicited a response from China to appease its critics. For instance, the trip to Nigeria [this past January by Wang Yi], the Chinese foreign minister, incorporated efforts to smooth relations that had frayed following reports of Africans being targeted for Covid-19 testing and forced quarantine in Guangzhou, China. These sentiments will be hard to shake off, and further outreach efforts should be expected to help pave the way for future trade and investment."

Business leaders and investors looking at opportunities in Africa may find value of the report's concluding paragraphs:
China is on a new geopolitical and economic drive in Africa, and countries across the region stand to benefit substantially from Chinese interest in the region in terms of industrial and technological development, regional and international connectivity, and global value-chain integration in the years ahead. Currently, Africa remains receptive to Chinese engagement, recognizes the benefits that could accrue, and is actively seeking Chinese economic support, which bodes well for Sino-African relations. However, securing Chinese commitments is not a given, and achieving the best possible deal will require that African governments and companies hone their bargaining skills and fully value what they have to offer.
The direction of travel appears to be setting the foundations for an increasingly busy two-way street between Africa and China. This will undoubtedly throw up challenges for corporations from Africa and those based elsewhere in North America, Europe, the Middle East and other parts of Asia. However, evolving Sino-African relations will create more and new business opportunities that can be exploited by non-Chinese entities. Chinese companies will consolidate their presence in the region but do not have exclusivity to trade-facilitating infrastructure, industrial parks, power-generation sites, IT infrastructure, or consumer markets—whether or not they have helped to build or finance these.
I have witnessed the increased engagement of Chinese businesses in Africa over the past several years. While the FDI is greatly needed, particularly for those African countries possessing an abundance of natural resources, there has been negative outcomes including the use of Chinese workers rather people from local cities and villages, corruption resulting from weak government institutions and opaque contracts with Chinese firms, and unsafe working conditions and environmental degradation. I have also seen a rising number inexpensive goods and crafts manufactured in China dumped in local markets throughout Africa, which makes it difficult for local manufacturers to sell their products.

With respect to the continent's digital economy, many tech services require an operating license granted by a government agency. I have seen local entrepreneurs being denied a license in favor of a competing company from China. A friend from Ethiopia once asked for my opinion about launching a fintech company based in the country's capital of Addis Ababa. While I agreed that there are few companies operating in this sector, I advised him that he should be mindful of Chinese companies deploying similar services in the country and throughout the east Africa region.

These challenges notwithstanding, the African continent possesses as large youthful population and a (slowly) rising middle class looking for more sophisticated consumer products and technology services. What is more, African businesses understand they will need to invest in tech services in order to better compete with their domestic competitors and access export markets oceans away.

Is it a better investment to support a local African company or a larger Chinese corporation that has robust plans for entering the African economy? I see pros and cons for either, but perhaps "both" is the best answer. What do you think?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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