Tuesday, June 28, 2011

The Untold Story of China Development Bank

I've just finished reading Erica Downs' excellent monograph: Inside China, Inc.: China Development Bank' Cross-Border Energy Deals (Brookings Institution: March 2011).

Another extremely well-researched and well-written contribution from Erica, this balanced study busts some myths (inter alia, these deals do not mean China is "locking up" sources of energy) and confirms some concerns (China's ability to coordinate -- sometimes -- in financing and supporting a package of deals mean it is going to be hard for US companies to compete).

Although there is very little on China in Africa, this study is well worth reading to get a better handle on how China Development Bank (CDB) works overseas. Between 2006 and 2010, CDB's loan exposure in Africa increased from $1 billion to $10 billion and this is only going to go up.

Moreoever, it is packed with fascinating detail -- almost all of it openly available in Chinese and other media sources -- on how CDB embarks on the major financing deals that have made it stand out as one of China's deepest pockets. The information on the variety of terms (interest rates, maturities) of these deals alone is a major contribution. It confirms what I've seen in Africa: large deals are nearly always structured using variable LIBOR-plus interest rates, and on terms that are often just slightly better than those available from global commercial banks.

The better terms do not reflect direct subsidies, Erica points out, but rather the government backing for CDB, a policy bank. This backing means that CDB has the ability to take more risks and accept a longer term reward than would a purely commercial bank. Still, CDB cares about its profits and its bottom line. As I've also noted, CDB often uses major international law firms like White & Case to help structure these deals.

The multiple media sources Erica relied on also tell me that reporters in other parts of the world (even in China!) are getting much better detail on these deals than reporters are getting in Africa. It also suggests that that there may be no inherent Chinese prohibition on this information. For example, Brazil's Petrobras, the state-owned oil company, has transparently reported on its deals with China in its annual reports. Yet CDB did not grant Erica an interview, which also shows it has a way to go on openness.

Saturday, June 25, 2011

Applause for New Study on Africa and Its Emerging Partners [China]

Released in June 2011: an insightful new African Economic Outlook 2010 highlights a very careful study of Africa's "emerging partners" (mainly, but not exclusively, China).

The annual African Economic Outlook "combines the expertise of the African Development Bank, the OECD Development Centre, the United Nations Economic Commission for Africa, the United Nations Development Programme and a network of African think tanks and research centres".  The study draws on numerous background papers and field reports from member countries.

Chapter 6, "Africa and its Emerging Partners" is one of the most balanced, detailed, evidence-based pieces of group research I have seen on this topic and I highly recommend it. Among the interesting findings: 
  • An analysis of Chinese Ministry of Commerce (MOFCOM) data reveals that, by 2009, 76% of Chinese outward FDI in Africa was in countries defined by the IMF (2007) as hydrocarbon- or mineral-rich .... [however] For FDI from OECD member-countries this ratio is even higher, at 85%. By implication, FDI from emerging partners is actually less concentrated in oil-exporting countries than that of traditional partners.
  • Outlook experts give a cautiously positive verdict on concerns about the impact of the emerging partners on Africa’s development. Prospects are good for the transfer of technology and access to finance. There is no evidence to suggest that the new players are hindering Africa's industrialisation, debt sustainability or governance, but Africa needs a clear engagement strategy and all sides must show greater transparency
  • [S]everal countries have begun formulating such strategy [for engaging emerging powers]: Namibia’s engagement strategy is formalised and the assistance provided by emerging partners is integrated into the national development plan; similarly, Cameroon’s engagement strategy with emerging partners is framed within the country’s development vision for 2035. In Morocco, Chinese operators are actively encouraged to invest in the country to counterweigh Chinese imports and ease the commercial deficit; in Cape Verde, the government plays on the full range of partners to modernise productive capacity and infrastructure; in Equatorial Guinea, officials negotiate in Chinese with their Chinese counterparts.
  • History makes it clear that investment decisions concerning infrastructure projects currently conducted by emerging partners need to be properly budgeted for and framed consistently with a sustainable, realistic, home-grown development strategy. Projects that are approved need to clear the hurdle of high and wide relevance for the country’s development and chosen to be sustainable not only within the country’s current economic conditions but also in times of economic trouble domestically or worldwide.

Full disclosure: I was a reviewer of an earlier version of the chapter. I think they put in a tremendous amount of effort and the results show this:  they did a great job. While the study is available for purchase, parts of Chapter 6 can be read online or downloaded.

Wednesday, June 22, 2011

Lisa Sodalo, a student at the Sorbonne in Paris, writes (on the basis of fieldwork!) a comment: "China in Cameroon's Construction Sector: Towards Enforcement of Higher Labour Standards than Local Regulation?" in the May 2011 China Monitor, published by the Centre for Chinese Studies at Stellenbosch University in South Africa. Among her interesting findings:

  • Chinese construction companies, like their foreign and local counterparts, hire most frequently through a local sub-contractor called a tacheron. This intermediate employer recruits the necessary number of men to complete a determined work or service, at an agreed and fixed price.
  • Safety and hygiene at work are legally part of the subcontractor's duties. Therefore, in the event of an accident, the responsibility lies with the intermediate employer, the tacheron... [yet] the primary employer, Chinese or otherwise, might be in a better position to implement the rules related to safety and hygiene, as well as to compensate the worker in the event of an accident.
  • A national study estimates that less than ten percent of [all] workplaces enforce the hygiene and safety laws. Data regarding the enforcement of these codes on Chinese sites is unavailable.
  • The minimum wage in Cameroon's construction sector is approximately 63 USD per month, but across the country numerous men are willing to work at a lower rate, including for Chinese companies. Comparatively, migrant workers (min gong,民工) employed at similar positions in mainland China are remunerated approximately 183 USD per month.
  • Cameroonian sources in this industry claimed that Chinese companies generally bring their fellow citizens to work on their projects. The situation might be evolving, as every Chinese construction site visited showed Cameroonian labourers working under Chinese management.
To read more, click here.

Monday, June 13, 2011

Bill Gates, Hillary Clinton, China in Africa, and The Dragon's Gift

Saturday last week The UK's Daily Mail posted an interview with Bill Gates in which he mentions that he was reading The Dragon's Gift in preparation for an upcoming visit to China:
His passion for aid is such that he devotes his spare time to reading about it: ‘At the moment I’m reading Getting Better by Charles Kenny, and I’m going to China soon, so I’m reading The Dragon’s Gift, about the history of Chinese aid to Africa.’
After attending a small informal dinner last week in Beijing with Bill Gates, a couple of Chinese experts, and a trio of Gates Foundation staff, I can confirm that he did read The Dragon's Gift. He sprinkled analysis, and references to it throughout the evening's conversation. If it had been a seminar, I would have given him an A. :).
Clinton and Banda in Zambia. Photo Credit AP: Susan Walsh
So now Donald Trump and Bill Gates have read The Dragon's Gift, and The Guardian recommended it to Britain's new Conservative-Liberal government. Yet it's clear from media coverage of Secretary Clinton's visit to Zambia that Mrs. Clinton is probably not among those who have read it.

Below are a few clips from her press conference in Lusaka (emphasis added):
"Acknowledging that China, the world’s biggest energy user, has extended its influence across Africa, the top U.S. diplomat said she recognized that while its size accounted for its presence in the continent, she had reservations about its reach: 'We don’t want to see a new colonialism in Africa.' ...  The U.S. is 'concerned that China’s foreign assistance and investment practices in Africa have not always been consistent with generally accepted international norms of transparency and good governance,' Clinton said yesterday at a news conference in Lusaka after meeting Zambian President Rupiah Banda. Clinton pointed to U.S. efforts to improve political and economic governance in countries like Zambia as an example of a different approach. 'The United States is investing in the people of Zambia, not just the elites, and we are investing for the long run.'*
The implication that China is not investing for the long run, or is only interested in narrowly investing in Zambian elites would be hard to argue for anyone who has read my book. Chinese leaders' multiple visits to Zambia over the past five decades, numerous aid projects including the iconic Tan Zam railway (which is still being supported by Beijing as it limps along), and business investment in multiple sectors, suggest a much longer, deeper, and broader set of interests than Secretary Clinton appears to be aware of.

And while the Secretary's concern about Africa's political and economic governance is commendable, I wish she had shown the same concern about US foreign assistance and investment practices in Africa. Our foreign aid is transparent -- and China's is not -- but this same transparency makes clear that even after the end of the Cold War, several countries with poor records on democracy and governance -- Mubarak's Egypt and Ethiopia -- have been the largest US aid recipients in Africa. This support is clearly not "consistent with generally accepted international norms" of good governance. As I have noted before in this blog, it is a sad fact that energy security concerns trump good governance in relations between the Obama administration and the notoriously corrupt human rights abusers heading the Obiang government in Equatorial Guinea.

China has a long way to go in improving its multi-faceted engagement on the continent, but the US is not there yet either. The difference is not as complete as Secretary Clinton would have us think. Pointing to the principles that do generally guide our aid, ignoring US companies happily investing with a pat on the back from the Obama administration in places like Equatorial Guinea, and then comparing our aid to Chinese aid and investment is a common debate tactic among op-ed critics (Michael Gerson did this recently in the Washington Post). I would have hoped that Secretary Clinton would do better than this. But perhaps as her major advisor on Africa (and, probably, on China's role there) is Ambassador Johnnie Carson, the person who, in the Wikileaks cables, famously dismissed China in Africa as "a pernicious economic competitor ...[with] no morals", it's not a surprise.

As many of the comments on the Zambian Watchdog reposting of this story make clear, Africans are under no illusions about Chinese -- or US -- goals in their neighborhood.

A hat tip to Calestous Juma for the Zambia story and to Joe for the story of the Times interview with Bill Gates.

*The quotation comes from a different news story on the visit: http://www.dawn.com/2011/06/11/clinton-warns-against-new-colonialism-in-africa.html