Wednesday, October 19, 2011

China International Fund in Africa: Caixin's New Revelations

Dar es Salaam Airport, Sept. 2011 photo: Tang Xiaoyang
 Entering and leaving the airport in Dar es Salaam, it's hard to miss the massive fence around a piece of ground that the Tanzanian government hopes will become Terminal III. On the fence in bold letters one can read "Investor: China International Fund, Ltd." But peek behind the fence, as I did earlier this month, and you will see ... nothing:  an empty piece of land without a hint of construction or machinery. Another example of the "talks big but doesn't deliver" style that frequently characterizes the deals signed by this sleazy Hong Kong company.

Two days ago, the Chinese newspaper Caixin published an investigative report on China International Fund (CIF) done by a group of journalism students at Columbia University. Accompanying the  report are two other articles in Chinese, and an introduction by Caixin. (hat tip to Wei, and thanks to Tang Xiaoyang.)

The first of the Chinese language articles focuses on CIF's complicated oil deals in Angola, and the second on problems Chinese contractors have faced when they've gotten involved with CIF contracts.

This latter issue is one that arouses intense feeling on Chinese blogs. One blogger commented about the headaches inexperienced Chinese contractors had after they jumped at the chance to carry out construction projects for CIF (usually after being enticed with a promise of getting work without having to go through a tender): "Dancing with wolves is not fun ... you might think you're going to eat wolf meat, but you turn out to be the wolf's snack."

Caixin notes, tantalizingly, that their own reporters were able to access a "previously undisclosed Ministry of Commerce study [about CIF] with surprising conclusions." Unfortunately, Caixin is no Wikileaks. They included no links to the MOFCOM study. But we learn some details, including the "surprising conclusions": MOFCOM accused Xu Jinghua (Sam Pa) of essentially hijacking China's economic diplomacy in 2003 and 2004 by presenting himself in Venezuela and Argentina as an official representative of the Chinese government. (This was strenuously and publicly denied by China's Ministry of Foreign Affairs, which has also warned about the quality of CIF's work.)

What did the journalism students discover? They write extremely well and they had some great interviews. Choice new details emerge of the personal appearance of CIF's head, the rogue businessman Xu Jinghua or "Sam Pa".  He has a toothbrush moustache. He and associate Lo Fung Hung were "dressed like street people" for a meeting with Israeli diamond dealer Lev Leviev (Lo wore a diamond tiara; Sam wore "cheap-looking pants"). We learn more sordid details of multiple lawsuits against Sam Pa, and some new details about CIF's real estate purchases in Manhattan (what a great choice for money laundering!), and bungled deals in Madagascar. There's a great quote from a lengthy interview the students snared with investment banker Mahmoud Thiam who was Guinea's mining minister when the CIF arrived in Guinea:
"When a new government comes into power, especially an inexperienced one, there's one phenomenon that never fails: every crook on Earth shows up. And every crook on Earth has the biggest promises, has access to billions of dollars of lines of credits, of loans."
This quote is followed later by another gem, from one of the participants in the meeting between a CIF subsidiary and Lev Leviev, where a deal was signed but came to naught: "The letter may as well have been written on toilet paper."

Overall, this is a very helpful step in the effort to shed light on a very murky outfit and overall provides new details as well as a fine summary of the important earlier work on the 88 Queensway Group by the U.S.-China Economic & Security Review Commission. The students are to be commended.

Just two things trouble me in Caixin's introduction and the students' report.
First: Caixin's introduction says that CIF has "demonstrated unparalleled power".  I don't see that at all. CIF talks big, but frequently it can't walk the walk. Outside of Angola, I see a series of bungled and failed deals where CIF has not been able to secure financing, or has provided a "down payment" but little more.

But second, and more importantly, the students say: "CIF has introduced a new model for doing business in Africa [emphasis added]. A private Hong Kong company would provide loans from Chinese government banks to help resource-rich African countries build their infrastructure. In exchange, it would get oil and minerals to sell to China."

I don't buy most of this. First, the overall model of oil-backed loans is far from new, as I discuss in The Dragon's Gift and in my blog post October 17. Second, loans-for-infrastructure secured with resources are also not new in Africa. China Eximbank had been doing this before Angola, and even in Angola, China Eximbank's oil-backed infrastructure line of credit preceded the CIF deals.

Third, very little infrastructure appears to actually have been built by CIF. We've read about the collapse of projects even in Angola, and the fact that the Angolan government had to issue bonds to pay for some of the projects when CIF couldn't raise funds. Finally, the statement "loans from Chinese government banks" implies that somehow CIF is linked into the big deals (totaling to date -- in Angola -- $14.5 billion) financed by China's official policy banks: China Eximbank or China Development Bank. They are not. Or at least I don't see any evidence for this.

In Angola, it's possible CIF could have acted as a broker in one (maybe more) oil-backed deals in which commercial banks -- including commercial Chinese banks -- participated. Here is how the 88 Queensway study described CIF's financing (pp. 14-15; 35):
Financial documents from the Hong Kong Company Registry indicate that CIFL took out four loans over the course of three years in order to pay for its infrastructure projects, although financial documents do not contain exact figures for the amount of money for each loan. The banks providing these loans include the following: Bank of China (branch in Hong Kong) Limited; Calyon* (a French bank); and Wing Hang Bank, Limited (based in Hong Kong). ... [CIF claims to have received finance from French bank Société Generale but not necessarily for projects in Angola]. ...
This implies that CIF was the borrower, as opposed to the Angolan government. In any case, this doesn't look like "loans from Chinese government banks". If the students have better information, bring it on.

*We also know that Calyon was lead arranger for the proposed $3 billion 2005 syndicated loan deal which according to Sonangol, was "secured by a long-term offtake agreement between [Sinopec subsidiary] Unipec and China Sonangol with the oil destined for the Chinese market." These are the participating banks: Banco BPI; BNPP; Deutsche; DZ Bank; Fortis; HSH Nordbank; KBC Bank; Natexis; Nedbank; RBS; Société Générale; Standard Bank; Sumitomo; UFJ; WestLB.  China Development Bank has also participated in a syndicated loan to Angola.


Monday, October 17, 2011

China and Oil-backed Loans in Angola: The Real Story

The story of China in Angola has been told so often, and almost always those telling the story neglect the larger context of how Chinese banks fit into a pre-existing system whereby Angolans financed so much of their government spending for so long: through oil-backed loans from Western banks. What was really going on between 2003 and 2005 when China's first oil-backed loan was signed in Angola? Below, an excerpt from The Dragon's Gift (pp. 273-277) where I answer that question. Tomorrow I will refer back to this excerpt when I comment on a new report on China International Fund.

Oil-rich Angola is a country deeply cursed with natural resources -- a tropical paradise laced with landmines and hemorrhagic fever, bauxite and gold. Angola also features as one of the prime exhibits in the chorus of condemnation about China’s engagement in Africa. We start this chapter with a closer look at this relationship. Unpeeling its many layers can lay bare some of the myths and realities of China’s engagement in Africa.
First, a brief history. Angola’s war for independence became an East--West conflict after Portugal abruptly gave up power in 1975. The Soviet Union and Cuba stepped in to support the new socialist government. The United States and apartheid South Africa aided the rebels. With the end of the Cold War, Angola’s proxy struggle morphed into a fight for control over blood diamonds, natural gas, and oil. The death in battle of the sixty-seven-year-old rebel leader Jonas Savimbi in 2002 finally allowed Angolans to end more than forty years of war and limp toward something resembling normalcy.

The Angolan government financed the war with a shadowy system of off-budget accounts that sometimes sloshed with oil revenues and sometimes ran dry. Over the years, the once Marxist leadership grew wealthy on a toxic diet of oil money and kickbacks from weapon sales. “Corruption is widespread throughout society,” the IMF wrote in a report leaked to the press./1 Ten out of every fifty infants born in Angola died before reaching their fifth birthday.

As the war drew to an end, Angola was badly behind on its debts. They owed more than two billion dollars to the Paris Club, nineteen wealthy creditor nations that meet informally to decide on bilateral debt issues. But they also owed more than eight billion to other creditors, some (such as a group of Russians) even shadier than the Angolan government itself. These moneylenders were clamoring for payment; some tried to seize government assets outside the country.

Enter China. The story that follows has some of the flavor of the classic 1950 film Rashomon, in which an encounter in the woods is retold, very differently, through the eyes of each participant./2 The conventional wisdom goes something like this. After the war, the IMF and the West decide to clean up Angola. The IMF insists that Angola improve oil revenue transparency and open its tangled accounts for inspection. Backed into a corner by 2004, the Angolans are about to agree, when China steps in, offering Angola billions of dollars of aid. Flush with cash, Angola turns its back on the IMF, taking China’s offer, which comes with no strings attached. “Angola is avoiding pressure to clean up corruption thanks to aid from China,” concludes a typical news item./3 Reports on China in Africa rarely fail to mention this cautionary tale. It is always obvious who plays the villain.

Rashomon is a film about truth and perception. Let us complicate this simple tale by telling it again, from a different point of view. In this story, José Eduardo dos Santos, Angola’s president since 1979, begins using the state-owned oil company Sonangol as a “cash cow” to finance the war, political payoffs, and other state expenses. By the end of the war, Angola has taken out an estimated forty-eight oil-backed loans, nearly all arranged, very profitably, by respectable Western banks: BNP Paribas of France, Standard Chartered of the UK, Commerzbank of Germany, and so on.

The IMF tries to wean Angola off its risky diet of expensive short-term loans. They ask Angola to commit to a host of reforms. For example, Angola’s April 2000 reform program contains forty-four conditions and benchmarks, including raising income taxes and liberalizing trade. If they keep on track for six months, they earn a seal of approval that could then make them eligible for debt rescheduling through the Paris Club, and international aid.

Angola negotiates at least four IMF programs between 1995 and 2004, but fails to stick with any of them. In 2001, with the war still ongoing, Angola again promises the IMF it will reform: create greater transparency in oil revenues, turn over customs management to a British firm (Crown Agents), reduce fuel subsidies, raise water rates, rein in borrowing, and privatize several money-losing enterprises.

However, Angola again fails the test -- not only on the transparency issue (which the IMF agrees is improving but still has far to go), but on the other conditions, particularly its unwillingness to stop borrowing. The international watchdog group Global Witness estimates that between September 2000 and October 2001 alone, international banks provided Angola up to $3.55 billion in seven secretive, high-cost, oil-backed loans.

For a while the Paris Club continues to present a united front to Angola’s attempts to get relief on its overdue loans. They want Angola to successfully complete at least one IMF program. But then in 2003 the Germans break rank, settling a debt reduction deal unilaterally. This allows Germany’s companies to return to Angola, and Germany to extend new export credits. Meanwhile, the French bank Société Générale helps Angola out with another large oil-backed loan for $1.15 billion.

Now we see China enter this crowded room with an oil-backed loan of its own. The $2 billion line of credit offered by China Eximbank in 2004 is unlike most other oil-backed loans, however. First, it costs less. Angola, a relatively high-risk country, has been borrowing at a premium of up to 2.5 percent over LIBOR (the London Inter-Bank Offered Rate, the benchmark interest rate for international finance). The Chinese loan is at LIBOR plus 1.5 percent. Second, it has a grace period of five years, with payment over a further twelve years, far longer than the European banks’ normal term of four or five years, without any grace period. “This is not foreign aid,” a senior Chinese diplomat tells me. “But it is a very good rate.”

As we already know, the most unusual feature of the line of credit is that it will be used entirely for infrastructure projects, the same oil-for-infrastructure model Japan used in China three decades before./4 Four decades of war left Angola’s road system “in a shocking state of disrepair,” a World Bank team reports./5 Bombs destroyed more than 300 bridges. Rural roads and farming fields were planted with landmines. Urban infrastructure “dramatically deteriorated,” streets were “in a state of virtual collapse.” Raw sewage spilled out of the open gutters during heavy rains and ran down the alleys of chaotic shanty towns. Angolans badly need infrastructure. To get aid funding from the West, their leaders are being asked, not unreasonably, to end the cozy system of oil finance that served as a substitute for a proper budget and a central bank all these years./6 The negotiations with the IMF were not even about finance. “We are not looking for money,” the Angolan Finance Minister said about the IMF. “We are looking for a seal of approval that we can present to creditors in order to reschedule our debt.”/7

This alternative story is more complicated, but this brings it closer to reality than the first story, with its shadow play of good and evil. The first story also misses something else. There is a second act. Within months of the Chinese loan, a group of Western banks, including Barclays and Royal Bank of Scotland, arrange an even larger oil-backed loan for $2.35 billion, at 2.5 percent over LIBOR, with repayment over five years. “We were very excited,” one of the bankers told a trade magazine, which called the deal “the largest oil backed transaction in the entire history of the structured trade finance market.”/8 In late 2005, Angola asks the French group Crédit Agricole (Calyon) to arrange another $2 billion loan; sixteen international banks participate. The United States Eximbank provides credits of $800 million for Angola to buy six Boeing aircraft./9 China Eximbank makes two more oil-for-infrastructure loans, of $2 billion and $500 million, between 2005 and 2007. Again, out of the crowd, only the Chinese loans make headlines.

Then, to the surprise of the Paris Club, the Angolans decide to simply pay off their debts with their booming oil revenues. Transparency improves, even without the conditionality of the Western donors: with technical assistance from the IMF, the Angolans finally begin to publish a fairly complete account of their oil revenues and expenditures on the website of their Ministry of Finance./10 There is still enormous corruption, but roads, clinics, and schools are being built. Although some believed the Chinese loans arrived in cash, they were wrong, as we have seen from our study of China’s unusual resource-backed infrastructure loans. A second look reveals that it was Western banks that gave loans without requiring transparency, and Western companies that exported Angolan oil, providing cash flows for the ruling party. The Chinese deal was not without risks, but it was also revolutionary for the country: for the first time, there was a hope that some of Angola’s riches might actually be translated directly into development projects.

1/Henri E. Cauvin, “I.M.F. Skewers Corruption in Angola,” The New York Times, November 30, 2002.

2/Rashomon was directed by the legendary Akira Kurosawa. This tale of Angola is based on author’s interviews with IMF staff, Washington DC, November 2008; China Eximbank, Beijing, November 2008; and interviews conducted in Angola in 2007 by Tang Xiaoyang, who generously agreed to share summaries with me. It relies as well on the following materials: Government of Angola, “Memorandum of Economic and Financial Policies,” April 3, 2000, available at: (accessed May 22, 2009); Government of Angola, “Memorandum of Economic and Financial Policies,” February 7, 2001, available at: (accessed May 22, 2009); Angola Country Reports, Economist Intelligence Unit (various issues); “Angola: Oil-backed Loan Will Finance Recovery Projects,” UN Integrated Information Networks, February 21, 2005. For excellent overviews of the Angola case, see Manuel Ennes Ferreira, “China in Angola: Just a Passion for Oil?” in Chris Alden, Daniel Large and Ricardo Soares de Oliveira, eds., China Returns to Africa: A Rising Power and a Continent Embrace (New York: Columbia University Press, 2008), pp. 295--317; Lucy Colvin, “All’s Fair in Loans and War: The Development of China--Angola Relations,” in Kweku Ampiah and Sanusha Naidu, eds., Crouching Tiger, Hidden Dragon? Africa and China (Scottsville, South Africa: University of KwaZulu-Natal Press, 2008), pp. 108--23.

3/Christopher Swann and William McQuillen, “China to Surpass World Bank as Top Lender to Africa,”, November 3, 2006.

4/Repayment begins separately as each project is finished, using a designated escrow account funded by proceeds from oil exports, at market rates. Though few realized it, China’s loan uses the same oil-for-infrastructure model Japan offered China almost thirty years earlier. The loan funds remain in China (in the pattern described in Chapter 5), with Eximbank disbursing them directly to the Chinese companies doing the work.

5/World Bank, “Angola: Broad-Based Growth and Equity,” Washington DC, 2007, p. 85.

6/Why did China negotiate such a relatively generous deal? The huge block of guaranteed business for Chinese construction companies made it “win-win” for the Chinese. But the Chinese also knew that in 2004 Royal Dutch Shell was preparing to sell its 50 percent share of Block 18, one of thirty-four concessions in the Atlantic waters off the coast of Angola. Shell was about to accept an Indian offer: $620 million plus $200 million for railway reconstruction by Indian companies. Instead, Angola’s national oil company Sonangol unexpectedly arranged for the block to be sold to a joint venture between itself and the Chinese oil company Sinopec. The timing of the $2 billion Eximbank loan may have been connected to the unexpected entry of Sinopec into its first ownership stake in Angolan oil (a direct quid pro quo was never established). Henry Lee and Dan Shalmon, “Searching for Oil: China’s Strategies in Africa,” in Robert I. Rotberg, ed., China into Africa: Trade, Aid and Influence (Washington DC: Brookings Institution Press, 2008), p. 120. The subsequent loans offered in 2007 did not seem to be connected to investment.

7/“Angola: Birthday Blues,” Africa Confidential, 46(23) (November 2005): 5.

8/“Angola: Standard Chartered Draws Fire,” Mail and Guardian (South Africa), June 8, 2005.

9/“Angola: Birthday Blues.”

10/A final character deserves a story of its own: China International Fund (CIF), a private Hong Kong company. CIF is connected to China-Sonangol, a Chinese-Angolan joint venture in oil trading, and Beiya International Development Company, a shadowy property development and construction firm. Beiya is
chaired by Xu Jinghua, alleged on some Chinese blogs to be a Russian military academy classmate of the Angolan President, Dos Santos. CIF has also set up oil-for-infrastructure lines of credit in Angola. These were rumored to be many times higher than the Eximbank loans. But in October 2007 Aguinaldo Jaime, a graduate of the London School of Economics, former governor of Angola’s Central Bank and a key architect of Angola’s reforms, released an official figure of $2.9 billion for the CIF loans, and even these have not been forthcoming as planned. In 2007, the Angolan government itself had to issue treasury bonds to finance some of the projects planned under the CIF arrangement. (Alex Vines and Indira Campos, “Angola and China: A Pragmatic Partnership,” Center for Strategic International Studies, Washington DC, p. 10.)

The Hong Kong-based CIF has a bad reputation among Chinese mainland companies: “So far, half a dozen contractors have had unpleasant experiences with the CIF, which stands accused of routinely delaying payment for completed work and keeping rates as low as possible.” Zhou Jiangong, “Africa Frenzy Feeds China Stock Bubble,” Asia Times Online, March 27, 2007, available at: (accessed May 22, 2009). While the smaller Eximbank projects moved ahead, many of the large projects being funded by the CIF loan – the Benguela Railway renovation, a new airport, a massive housing complex -- stalled over the course of 2007 and 2008. Chinese bloggers believe that the CIF program must have been approved by the Chinese government; the Chinese embassy in Angola denied any knowledge of the CIF venture. For excellent reviews of the CIF saga, see Lee Levkowitz, Malta McLellan Ross, and J. R. Warner, The 88 Queensway Group: A Case Study in Chinese Investors’ Operations in Angola and Beyond, US-China Economic & Security Review Commission, July 2009; and Alex Vines, Lillian Wong, Markus Weimar and Indira Campos, “Thirst for African Oil: Asian National Oil Companies in Nigeria and Angola,” A Chatham House Report, August 2009.

See also: Alec Russell, “Angolan Loan Casts Light on Ties with China,” Financial Times, October 19, 2007; Alex Russell, “Infrastructure: Big Projects Fall Behind Schedule,” Financial Times, January 23, 2008.

Monday, October 3, 2011

Michael Sata and China in Zambia

Photo credit: Reuters
While Michael Sata was winning the Zambian election, I was next door in Tanzania, doing research in Morogoro, and without internet access. The election, and peaceful transition, bode well for Zambia. They voted for change. How will this affect China's role in Zambia, or in Africa more broadly?

Foreign Policy's blog described the election as "a setback for China." Sata's victory is widely seen in the West as "a vote of no confidence against [China's] existing projects" in Zambia. The Atlantic carries a more thoughtful piece along the same lines by the experienced reporter Howard French.

But look more closely. Sata's initial steps after the election confirm the importance of the relationship with Beijing:  his first official appointment at State House was with China's ambassador Zhou Yuxiao (right). Sata emphasized that Chinese investors need to respect Zambian laws. The ambassador nodded.

In the 2006 election, which he lost, Michael Sata famously played the China card, with relentless attacks on Chinese "infestors". However, reports that "China" (an earlier Chinese ambassador) threatened to cut ties with Zambia if Sata won the (2006) election usually fail to add that Sata promised to recognize Taiwan as an independent country if he won. This pledge was nowhere in evidence in the 2011 election. Sata toned his rhetoric down considerably in this round.This could be seen as a win for Beijing.

During the campaign, Sata signalled that he would continue the Zambian government's support for foreign investment. Close observers like Chanda Chisala emphasize his pragmatism and, surprisingly, his management skills.

If Michael Sata carries out his campaign promises, we should be seeing greater attention and more money for enforcing labor rights and safety standards in Zambian mines, where the Chinese are the worst offenders. All of the mines (which include non-Chinese companies: London-listed Vedanta Resources, Canada's First Quantum Minerals and Swiss commodity giant Glencore) could be hit with higher royalty rates and/or windfall taxes. Sata has also warned that he will be enforcing work permits, limiting the number of expatriates allowed to enter to work on projects.

We could also see a crackdown on Chinese informal traders operating without permits in Lusaka's Kamwalla market and elsewhere. China's close friend Tanzania has done crackdowns like this twice since 2008. Apparently, it was a great success: I saw almost no Chinese traders in the large Kariakoo market in Dar es Salaam on this trip, a big change from 2008. The crackdown also did no harm to the official ties between the two countries.

It remains to be seen if other African opposition politicians see Sata's win as a lesson in playing the China card. Ironically, Sata was a far more lively "China basher" in the 2006 election, which he lost. But so far the new pragmatism from the "fiery populist" and the first few days of a Sata presidency do not herald a sea change in China-Africa relations. If China and Zambia move fairly smoothly into this new stage, we will have yet another example of how the Chinese emphasize relations with states, but not a particular leader or regime.