How the Belt Road initiative is reviving Chinese investment in Africa

Viewpoint

China and Africa are expected to move to a higher level of economic cooperation which could transform Africa’s economies, boosted by the formal inclusion of Africa in China’s trillion-dollar Belt Road strategy. However, the future of China-Africa economic cooperation is not without challenges.

Chinese investment in Africa is off to a flying start in 2017, marking a promising rebound following the sharp decline of China-Africa investment which had persisted since early 2015. According to China’s Ministry of Commerce, Chinese direct investment in Africa surged 64% in the first quarter of 2017 year-on-year to over US$750 million. Sun Jiwen, spokesperson for the Ministry Commerce, attributed this rise to President Xi Jinping’s “10 Cooperation Plans” between China and Africa at the Johannesburg Summit of the Forum on China-Africa Cooperation.

China has a long history of investing in Africa but the composition and drivers of Chinese investment in Africa have evolved substantially over time, as observed by David Dollar, a senior fellow at the Brookings Institute’s John L. Thornton China Center. Decades ago, China largely saw economic partnerships with African nations as a means of securing political support. In the mid-2000s, as China’s economy evolved towards export manufacture, numerous Chinese state-owned enterprises started to bulk-up their investments in energy and resources to address China’s natural resource scarcity.

The most important destinations for Chinese investment have been South Africa, Congo and Nigeria. However, China’s resource investments in Africa started to decline a few years ago in response to a global glut and sharp price falls. Following this, China’s investment strategy then shifted to increasing lending by its big policy banks, China Development Bank and China EXIM, to fund African infrastructure projects as a means of deploying China’s excess savings and creating employment opportunities for Chinese construction companies. Today, in China’s diversifying economy, Chinese state-owned and private enterprises are seeking new investment opportunities across Africa, and the Belt Road initiative is expected to play a pivotal role in expanding the scope of Chinese investment in Africa.

As part of the Belt Road initiative, China is seeking to extend its new Maritime Silk Road to Africa, and has committed US$3 trillion to developing shipping lanes in the Indian and Atlantic Oceans connecting the west and east of Africa to Asia and southern Europe. The African component includes connecting economic centres in Kenya, South Sudan, Uganda, Djibouti, Ethiopia, Tanzania and Angola to ports on Africa’s Indian Ocean and Atlantic coastlines. This is aimed at enhancing the trade and economic interlinkages of China across Eurasia and with Africa and the Middle East, as well as create economic links between Africa and both Europe and Southeast Asia.

“With financial ambitions of this magnitude, there is no doubt that [the Belt Road initiative] will have a ripple effect on the continent. Economically speaking, [the Belt Road] could channel China’s overcapacity in areas such as infrastructure development to Africa, a necessary component for its industrialization” say policy experts Yu-Shan Wu, Elizabeth Sidiropoulos and Chris Alden, in a recent article published in May by the South African Institute of International Affairs.

The African countries expected to benefit the most from the contemporary Belt-Road proposals include Egypt, Kenya and Djibouti. According to a report authored by Eric Biego and published by Kenya Broadcasting Corporation on May 13 2017, “The fruits of Road and Belt infrastructural connectivity are already being felt in Kenya. The construction of the 327-billion-Kenyan-shillings (US$3.14 billion) Standard Gauge Railway and the subsequent expansion of the port of Mombasa by the Chinese has seen the country attract many multinationals which have expressed desire to invest in the East African country.”

Port of Mombasa, Kenya. Photo: Marinetraffic.com

The report further noted that, “Economic experts hold the view that this will fuel the potential for increased economic growth and development of Kenya and all countries involved. In their opinion, trading centres will sprout along the railway line. In the process, the food, clothing, construction and training sectors, among others, will flourish.”

Additionally, Kenya received in excess of US$50 million of Chinese direct investment in the first quarter of 2017, making it one of the major African recipients of Chinese direct investment in the quarter, along with Zambia, Nigeria, Ethiopia and Uganda. It appears that Djibouti may have also started to benefit from the Belt Road initiative, as Djibouti saw more than a 100% rise in Chinese direct investment year-on-year in the first quarter of 2017, along with Senegal and South Africa.

Nevertheless, actual African interest in the Belt Road initiative remains patchy. Kenyan President Uhuru Kenyatta was the only African head of state to attend the recent Belt Road Summit in Beijing. The other African nations which sent representatives to the summit are Ethiopia, Egypt and Tunisia, but they each only sent one minister.

Further, the poor governance regime in many African countries, where there is no adequate protection of property rights, rule of law, and accountability of governments, make it difficult for foreign investors to implement infrastructure projects and realize returns. It is hard to prove, but corruption is also more likely in poor governance environments and many foreign investors, including China, are subject to anti-corruption laws. Another hurdle is that infrastructure in many parts of Africa is still inadequate and there is a general shortage of skilled workers. Africa’s private sector also needs to mature to a level where it can partner with Chinese firms in construction, manufacturing and other industries. Lastly, Africa’s unstable security environments have been worsened by the rise of Islamic radical groups, which again deters foreign investment.

Clearly, these regulatory, infrastructure and security challenges can only be managed with the cooperation of the African governments in providing adequate governance and security to foster and protect an enabling investment environment for Chinese investments to succeed. Accordingly, the Belt Road initiative must win consistent support from African nations to succeed. The success of the Belt Road could result in a win-win situation for both China and Africa, positioning Africa as a suitable destination for China's excess savings and infrastructure capacity.

 

Jingzhou Tao is a partner, and Sarah Tao, an associate, both at the international law firm Dechert.

Date

5 Jul 2017

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