Wednesday, December 29, 2010

The Dragon's Gift: The Real Story of China in Africa was just chosen as one of Zocalo Public Square's Top 10 Books of 2010:

Brautigam provides a new way to see China’s economic growth, offering context for all the fearful headlines about its relationships with African countries.
Thanks, Zocalo -- "the website that connects people to ideas and to each other".  

Click here to read Zocalo's full review of The Dragon's Gift.

China-Africa Economic and Trade Cooperation White Paper

I've been getting calls these days from journalists who want to discuss "China-Africa Economic and Trade Cooperation," the new white paper produced by the Chinese government. Some say they find it fascinating. For anyone who has been following these issues closely, there is little new in the paper, which serves as a progress report on trade, investment, and aid. The report refers regularly to "China" and "Africa" as though these are two separate states (sometimes it mentions "African countries"). I sympathize with this; it's all too easy to slip into discussions of China and Africa as though the continent and the country are two equal partners.

The report does contain two new pieces of data from the notoriously untransparent Chinese government:
(1) Chinese FDI in African manufacturing. The report carries the first official statistics on the distribution of Chinese investment in Africa by sector that I have seen since about 2000 (see the chart that accompanies this article). Data on Chinese FDI needs to be viewed with some skepticism. I pointed out why in an earlier blog posting here. However, data is far more likely to be under-reported than over. Keeping this in mind, the report notes that by the end of 2009, accumulated manufacturing investment in Africa came to 22% of the total. This would make it $2 billion, at a minimum. Clearly, Chinese manufacturers are interested in investing in Africa. This data fits well with what I have seen, and the arguments I have made in The Dragon's Gift and "'Flying Geese' or 'Hidden Dragon'?
(2) Debt cancellation. Between 2000 and 2009, the Chinese government has canceled an accumulated 18.96 billion RMB yuan (about $2.8 billion at an exchange rate of 6.8 RMB to the dollar) of debt for 35 African countries. This is interesting to me, as it shows a slowdown in debt cancellations over time. It reinforces my conclusion that the debt cancellations were only (as announced by the Chinese) about the old, overdue, zero-interest foreign aid loans, and not the new concessional and/or market-rate loans provided by the China Eximbank. As far as I've seen none of those loans has been canceled.
The report provides data on African investment in China, which, it says, amounts to an accumulated $9.93 billion. Although African entrepreneurs in South Africa, Mauritius, and elsewhere have been investing in China, this relatively large figure includes investment that transits through the Indian Ocean island of Mauritius, which hosts a popular offshore financial center. This FDI, which is then labeled as coming from Africa via "Mauritius" is more likely to be from Chinese domestic investors who are "round-tripping" in order to take advantage of incentives for foreign investment. A similar dynamic has made "Mauritius" appear to be the largest foreign investor in India.

On a minor note, the report shows that Chinese translators are not immune to mistakes common in the Western media. For example, at several points the report's translators mistakenly substituted "Libya" for "Liberia" as in the discussion of a Chinese vocational technical center being provided for "post-war Libya". In fact, the Chinese are building a Liberian vocational training center on the outskirts of Monrovia at Gardinersville, on the site of the previous MVTC.

Monday, December 27, 2010

China's Resource-backed Weapons Exports: Norinco

book cover: Harper Collins
My nighttime recreational reading these days is Richard McGregor's The Party: The Secret World of China's Communist Rulers. I've not seen much yet in the book that sheds new light on China's engagement in Africa, with one interesting exception. In a chapter on the Party and the military (in which McGregor notes that the "heroic frontier business exploits" of the People's Liberation Army are now "a thing of the past") he gives an example of a business deal forged in Iraq in connection with the Iran-Iraq war (1980-1988).

Apparently Iraq bought weapons from China during the war, on credit, but couldn't repay. This unpaid debt and negotiations seem to have dragged on for years. Finally, McGregor reports, on p. 116: "it was paid in kind in 1996 by offering PetroChina a $1.2 billion oil concession in tandem with Norinco, a state-owned weapons manufacturer. The US ousting of Saddam Hussein delayed the project, and work did not begin on it until 2009."

The use of commodities to secure or repay export credits has a long history in China. As I pointed out in The Dragon's Gift, Japan used this system to finance its early exports and turn-key projects in China back in the 1970s.

Wednesday, December 22, 2010

Moises Naim and the $9 Billion Dollar Myth

Moises Naim (photo: le livre noir de l'economie)
This week in an Indian opinion piece on India-China rivalry, I read yet another reference to a myth first circulated (I think) by Moises Naim, editor of Foreign Policy, and then picked up by Fareed Zakaria. Here's how the story was told today:
"In his book The Post-American World, Fareed Zakaria quotes Moises Naim, editor of Foreign Policy magazine, telling a story about the Nigerian Government negotiating a $5 million loan for train systems with the World Bank in 2007. The bank had insisted that the Government clean up the notoriously corrupt railway bureaucracy before it approved the loan. The deal was almost done when the Chinese stepped in and offered the Government a whopping $9 billion loan to rebuild the entire train system — with no democratic and human rights strings attached. The World Bank was sent home within days!  This is how China works."
This is a great story. The only problem is (as I point out in The Dragon's Gift):  it never happened.

I don't mean to impugn Moises Naim's veracity. No doubt someone from the World Bank did tell him this tall tale. But because he seems to have liked the story, he never checked the facts. In fact, this is not how China works, and repeating this fictional story only helps cloud our understanding of Chinese engagement in resource-rich countries in Africa.

What really happened -- as just a little research would have revealed -- was this:  a Chinese company (CCECC) won an $8.3 billion contract to rebuild the Lagos-Kano railway. The Chinese government had offered a line of export credit for $2 billion at a competitive commercial rate, and a preferential export credit for $500 million. The Nigerian government discussed a number of projects that might have benefited from these tied credits, not just the railway. At the end of the day (as Nigerians are fond of saying), the $2 billion credit was never used and expired. The railway contract was suspended, and the $500 million preferential credit was renewed, and is likely being used today to fund a much smaller railway project. More on this

Sunday, December 19, 2010

China's "Rogue Aid": Japan Times

The Wikileaked documents have spawned a number of stories on China and Africa. Here's one from Japan Times that offers up some interesting insights, but that also gets a bit garbled, particularly the part that purports to discuss my book, The Dragon's Gift. The headline ("Pernicious 'rogue' offers of aid") is calculated to push the "China threat" button, even if, as in this case, the reporter's story itself is fairly balanced.

One of the myths that circulates widely (and is repeated without question in this story) comes from a much-criticized report on Chinese aid prepared by the US Congressional Research Service. According to the Japan Times:
A U.S. congressional report last year quoted research showing that total Chinese aid in 2007 was $25 billion. Aid to Africa in the 2002-2007 period was more than $33 billion.
As I've noted on this blog before, these estimates are so preposterous that they should simply be treated as amusing, a funny story, except that they were presented to the US Congress as serious. Here's the inside story: what was the "research" quoted by the CRS report? A background paper on "Chinese aid" done as a class project by a group of graduate students from NYU. The students, perhaps encouraged by the researchers, decided to count every media report of a flow of finance from a Chinese entity into Africa, Latin America, or Asia as "aid". They lumped together grants, official and commercial bank loans, export credits, supplier finance, foreign direct investment, and so on. As long as it had some link to the Chinese government (i.e. it was from a state-owned bank or company) they added it to their database and called it "aid". 

This methodology has two obvious problems. First, investment, export credits, supplier finance, etc., is not "aid" but commercial in nature, and should not be counted as official development assistance. Second, the fraction of projects mentioned in the media that actually go forward is small, no matter who is financing them. This overstates the size of Chinese engagement. While the CRS report claimed that China gave $18 billion in "aid" to Africa in 2007, by my estimates, the real figure of official aid disbursed in 2007 was less than 8 percent of that.

Thursday, December 16, 2010

The ever-interesting economist Professor Chris Blattman comments on "China: Not Playing By the Rules?" in his blog,
In a front page headline today, the New York Times comes to the rescue of Gamesa, a Spanish company producing wind turbines in the nefarious Middle Kingdom.
The NY Times was reporting on Gamesa's complaint that Chinese companies are not playing by the rules, but taking advantage of government support. Blattman continues:
State subsidies and policies to foster infant industries at the expense of foreign competitors. This sounds almost like the dark and nefarious practices followed by… Spain.
Personally I see nothing dark or nefarious here. This is good old fashioned industrial policy at work. How else do we expect poorer countries to converge to riches? Innovate on the frontier? I am an amateur economic historian at best, but here’s my opinion: almost never been done.
China’s story today sounds a lot like continental Europe in the early 19th century, Japan after the Meiji Restoration, and the Asian Tigers in the 20th. Go back two hundred years and you can find the British press enraged with the same complaints as they lose their textile industry to that backwards backwater, France.
I remember well the same complaints made about Taiwanese copying when I lived in Taipei in 1979-80. Blattman points out that while suffering from "unfair Chinese competition", Gamesa had still managed to double its sales of wind turbines in China. Click here to continue.

Monday, December 13, 2010

China's DRC Roads Redux

Chinese road construction in DRC. photo
While searching for an update on China's multi-billion infrastructure contract in the DRC, I came across a blog posting on the website of a Canadian company, Kilo Goldmines, Ltd., which had a photo of Chinese road construction in the DRC (right). Accompanying it was this note:

"While there are critics of this deal and pundits who claim this is the 'second colonisation' of the DRC, this barter deal is widely seen as a key catalyst to help jump start the economy and rebuild core infrastructure that has been neglected for decades. Kilo is a primary beneficiary of some of this newly developed infrastructure including rehabilitated roads around its Somituri project."

Saturday, December 11, 2010

Chinese Refineries in Nigeria, Chad, Niger & Ghana: The Sudan Model?

Khartoum Refinery. photo credit:
We've read recently about Chinese offers and deals to build refineries in African countries: Nigeria, Chad, and Niger and in Ghana, alumina, (but perhaps oil in the future). Not all of these deals have been concluded or financed, but we can learn something about the probable structure of the deals by revisiting the first of these: the Khartoum Refinery, a joint venture between the government of Sudan and China National Petroleum Corporation (CNPC), which opened in June 1998.

This refinery was financed by CNPC (there is no mention of China Eximbank, which was still a relatively small player in the 1990s), probably through a supplier's credit. According to a 2002 report by the IMF, the financing was secured by crude oil exports -- not access to a new concession, but as a guarantee.

At first, the debt service payments for the refinery were non-transparent, i.e. not included in the government's budget. The IMF made greater transparency a condition, and by 2002, as the Fund noted, Sudan's "budget now fully incorporates the debt service payments for the construction of the Khartoum refinery" (p. 21).

The IMF and the World Bank were concerned that Sudan had scaled back on debt payments owed to their two institutions in 2001. The value of Sudan's crude oil exports amounted to US$1.3 billion in 2001 (p. 10), but much of this value belonged to Sudan's foreign investors. In 2002, Sudan's net foreign exchange receipts were projected to be only around $120 million. Debt service for the refinery (which mainly supplied Sudan and its neighbors, including Ethiopia) amounted to $60 million annually. This left only about $60 million "for payments to the World Bank, the Fund, and other creditors (p. 38, n. 22)."

How did CNPC step ahead of the IMF and the World Bank, who are generally recognized as any borrower's "preferred creditors" (i.e. they are supposed to be paid first)? The debt service on the Khartoum refinery was fully secured by Sudan's crude oil exports. As the IMF noted, if debt service was not met, "the CNPC has the right to lift the equivalent amount of crude oil in kind. Nonpayment is thus not a realistic option (ibid)." Through securing its credit by crude oil, CNPC effectively became Sudan's most preferred creditor.

In its letter to the IMF, Sudan noted that in addition to including the repayments for the refinery in the budget, i.e. making it all more transparent, it planned to "implement a system that will ensure cash payment, as budgeted, of oil collateralized debt service payments in order to avoid in-kind lifting, thus further increasing transparency of oil revenues and avoiding distortion of oil delivery obligations" (p. 68). This was implemented.

What can Nigeria, Chad, Niger and Ghana learn from Sudan's experience?

First, clearly, securing the refinery with future oil revenues (and, perhaps, having Chinese managers) allowed Sudan to refine its own products rather than exporting crude and importing refined products, which is what Nigeria does today as a result of its failure to keep its refineries working. (We don't know how profitable/cost-effective the Chinese-built Khartoum Refinery, is in comparison with other, similar refineries. This information would be useful for countries contemplating similar arrangements.)

Second, be transparent. If a poorly governed country like Sudan can practice budget transparency for Chinese finance, there's no reason why others can't.

Third, price your domestic petroleum sales at or even above the market, as Sudan has done, in order to keep the petroleum sector above water and repay your creditors. Nigeria has far to go in this regard.

Fourth, you may be able to get away with the preferred creditor arrangement, but it won't be a walk in the park. It's easy to see from this why the IMF and the World Bank dislike the Chinese model of commodity-secured credits. They do effectively enable Chinese creditors to step ahead of the IMF and the World Bank in having Chinese credits repaid. This was one of the issues in the long stand-off over the $9 billion Chinese credit to the DRC.

Finally, keep in mind that by tying up your future revenues, you could at some point find yourself so squeezed that half of your net foreign exchange earnings are tied up in payments for just one project, as in Sudan.