Sunday, July 11, 2010

Chinese Investment in Africa: Good Deals or Bad?

Back home for a few days after weeks of travel, mainly South Africa & Namibia, including some research, and a lot of the World Cup... I've been offline a lot, and haven't been posting much.

I just read a draft paper by two US-based economists who use Chinese FDI data to analyze determinants of Chinese investment in Africa. I've already posted here on the problems with using Chinese official FDI data. (Derek Scissors at American Heritage Foundation, who hosts the China Global Investment Tracker, commented recently on a different set of challenges raised for those who try and track investments by using media reports: "An accurate assessment, however, is confounded by widespread credulity regarding Chinese investment. Although global media trumpet supposedly “gigantic” Chinese deals, such reports can be based on disinformation spread by host country governments.")

But the paper by the two economists reminded me of another issue. They state as a "fact" that Chinese companies will pay significantly inflated prices in order to get access to resources, citing a 2006 article in African Affairs -- Jedrzej G. Frynas and Manuel Paulo, 2006, “A New Scramble for African Oil? Historical, Political, and Business Perspectives,” African Affairs, 106, 423, 229 – 251 -- as their source for this "fact".  But at the same time, others worry that Chinese banks & companies are not giving African countries good deals (see for example, a comment on China's huge Congo deal). 

Where does most of the evidence lie? Are Chinese companies consistently paying inflated prices? Or are they "ripping African countries off"? Has behavior changed over time? If it varies, why and how? I don't have the answers to this -- informed comments, evidence & analysis are welcome.



8 comments:

  1. and then there is the non-quantifiable stuff, perhaps even more important in coming years .. goodwill, and that word (i dislike), "softpower" ...

    we often forget that egos make decisions, and simple human things, such as, no one likes a bully, have been hugely under-rated as components of how countries are perceived by other countries...

    china is making some good moves, many of which are not measurable by numbers ..

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  2. Interesting ... especially when one thinks about economic conditionality and several decades of resentment over structural adjustment lending.

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  3. "Where does most of the evidence lie? Are Chinese companies consistently paying inflated prices?"
    In Madagascar a recently announced deal has a Chinese company WISCO paying $100,000,000 up front for a permit de recherche on an iron ore project. No other international iron mining company was interested in making this large of a payment for a license on an unproven resource. Madagascar has had a coup government led by a 35 yo former nightclub disc jockey in place for over a year and the coup government heralded this investment as a second track for foreign assistance during a time when all EU, US, World Bank and IMF non humanitarian aid has been canceled. The deal has been announced in Chinese and Madagascar press but details have never been made public.
    Did they pay too much? Are they "ripping of Madagascar" by paying an unconstitutional government of kleptocrats? Will the deal last after a legal, internationally recognized government is elected? Only time will tell.

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  4. It is almost certain China always pay a higher price for natural resource than the west companies. Firstly it is because China is a late comer in the natural resource market, almost all valuable mines are already occupied by west NMCs. Secondly China has been denied in buying shares of western companies' mines to secure her own resource supply. This also makes China's foreign reserves less valuable because the green backs China collects don't have much use. Most China's reserves are in US dollar and are put in US government bonds, which has a very low yielding.

    In terms of iron ore, China imports a couple of hundred million tons every year. But since the iron ore market is a monopoly of three MNCs, the price spikes year by year that almost push Chinese steel companies to bankruptcy. So even China may pay a higher price to Madagascar, it is still much better than been ripped of by Rio Tinto, BHP and Valley Inc.

    wei

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  5. Deborah, I am excited to hear you speak next week. I posted the schedule on my blog!

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  6. I think I'll start a list of "research topics for MA and Ph.D. students on China-Africa." Stories of Chinese mineral investment and deals and signing bonuses are fascinating. Clearly, all of this is crying out for more systematic, comparative study. Perhaps Transparency International has already begun this, or Global Witness. It's an obvious area for careful, dispassionate, balanced research.

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  7. I am currently doing a research proposal which in which i intend to focus on the economic and political relationshhip between China and Africa. Within this I intend to cover the role of china as a financier of infrastructure and energy projects etc but I have not decided on a specific title 'direction' so to speak. Does anybody have a specific interest in which they think there should be more research conducted with these factors in mind?

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  8. I don't think China can make a "bad" investment decision at this rate. Whatever it's doing right now is obviously working, because China is on its way to the top as a global superpower.

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