Friday, December 23, 2011

China's "Checkbook Diplomacy" and Overseas Investment Reconsidered

A reader recently sent me a link to a design website that profiled Chinese overseas FDI projects, collected by Derek Scissors at the Heritage Foundation. But the website host, Cliff Kuang, uses Derek's great infographics to makes his own, inexpert analysis that perpetuates some of the Cold War frames commonly used to discuss China's emerging global role: FDI as "checkbook diplomacy."

For example, Kuang writes "... you'll notice that [sic] majority of China's trading partners aren't in Europe or America: They're in Asia and Africa and South America. In other words, precisely those countries which have always spoken last on the world stage. China is using its economic relationships to create an alternative bloc of power, which can directly compete with the political might of the E.U. and America." and "China has neutralized our power to oppose it by holding so much of our debt. And it has simultaneously drawn other countries closer to its bloc of power by offering them a taste of its rocketing economy."

Here, obviously, Kuang is mixing up trade with FDI. The charts he is illustrating have no trade data (and if they did, they would show that China's major trading partners are precisely Europe and America, not Africa and Latin America). So if Kuang had used trade graphs, he would have to make a different kind of argument. And the idea that China has 'neutralized' our power by holding our debt? The fact that our defense budget accounts for 48 percent of total global military spending is, I suppose, of no account ...?! As for China's alternative bloc of power, just what is this supposed to mean? Australia, Chile, and Japan? Hello Cold War II?

On the other hand, I think that Derek Scissors at Heritage is doing a great service by collecting and publishing (and continually refining) this project-level data. However, users of this data need to be careful, because it is not truly comparable with other countries' FDI data published by the OECD or other sources.

Why not? Two major reasons.

First, Derek is only tracking investments of $100 million and higher. This is going to leave out literally thousands of smaller investments that might be going into manufacturing, services, or agriculture. The kind of small and medium sized factories that are the first to start up overseas simply won't be captured by this database, and that creates a distorted sense of the sectors to which Chinese investment is going. In 2010, for example, Chinese overseas FDI in mining was $5.7 billion, and manufacturing $4.7 billion. Most of the latter will be in other developing countries. (For the reason why, see World Bank chief economist Justin Yifu Lin's 2011 WIDER Lecture: "From Flying Geese to Leading Dragons" or my 2008 book chapter on "Flying Geese or 'Hidden Dragon'?")

Second, Derek is collecting and recording FDI commitments, not actual flows. So if a project is expected to cost $3 billion over a number of years, he is putting the entire $3 billion in as "Chinese FDI". However, this is only accurate in a merger or acquisition, when the entire amount is actually being paid up front. And it is not how FDI flows are recorded in the OECD countries -- they record actual flows in the year that they actually happen. Mining and other large-scale investments take place over a number of years. Sometimes they don't take place at all (although Derek is doing a good job of adjusting his database to account for this failed projects, from what I can see).

A hat tip to Lisa Guetzkow.

Thursday, December 15, 2011

China in Africa: Global Health and Foreign Aid

In print just in time for the holidays -- a new Center for Strategic International Studies book on China's Emerging Global Health and Foreign Aid Engagement in Africa, available for free downloading on the internet in English and Chinese versions. It includes a paper of mine commissioned for the volume: "U.S. and Chinese Efforts in Africa in Global Health and Foreign Aid: Objectives, Impact, and Potential Conflicts of Interest" (no, I didn't pick the title...) 

Here's the official description from CSIS:

This volume is a compilation of papers that were written for the Conference on China’s Emerging Global Health and Foreign Aid Engagement, sponsored by the Center for Strategic and International Studies (CSIS) and the China Institute of International Studies (CIIS), in Beijing on May 24, 2011, as part of a larger CSIS initiative to examine the global health engagement of the BRIC countries (Brazil, Russia, India, and China). Focusing specifically on China’s health and foreign aid engagement in Africa, the volume includes contributions by U.S. and Chinese experts.

Friday, December 9, 2011

London Debate on the Motion: "Beware the Dragon: Africa Should Not Look to China"

SOAS Dean Stephen Chan at the Intelligence Squared Debate
I spent my birthday (!) last week debating the motion: "Beware the Dragon: Africa Should Not Look to China" at an Intelligence Squared event at Cadogan Hall in London.

For the motion: Ghanaian intellectual George Ayittey and Ana Maria Gomez, European Parliamentarian from Portugal. Against the motion: myself and Stephen Chan, Dean of Arts and Sciences at SOAS (School of Oriental and African Studies).

What struck me most was the large number of people who were undecided about this issue, and how hearing actual evidence and research -- instead of what passes for that in much of the media -- can swing public opinion. The audience vote before we started the debate was For the Motion: 154. Against 106, and Undecided 126. When the debate was over, the audience was polled again. For the Motion: 149. Against 212 and Undecided 25. Our side picked up 106 new votes. To understand why, you have to watch the debate. Don't miss Stephen Chan, he was superb!

The entire debate went from 6:45 until 8:30. It's all on Youtube. But you can also watch short pieces of it on Intelligence Squared's website, including each debater's starting presentations, about 10 minutes each. Here's the link to mine and the others are on the same page.

Wednesday, December 7, 2011

US Eximbank versus China Eximbank

photo credit: Agence France Press
The head of the U.S. Export-Import Bank, Fred Hochberg, has responded in an open letter (November 4, 2011) to suggestions made by Stephen Hayes, president of the Corporate Council on Africa in his November 1, 2011 testimony before the Senate Foreign Relations Committee that we could do better in supporting our companies' business efforts in Africa. I've just stumbled on this while looking (in vain) for data on the terms of loans for specific transactions that U.S. Ex-Im Bank has supported.

While I appreciate Hochberg's valient defense of his bank's performance in Africa, his characterization of Chinese large infrastructure transactions in Africa as "subsidized by the Chinese government ... at every level" is simply incorrect.

Hochberg mixes up apples and oranges. The large infrastructure transactions that are secured through commodity exports to China (not the same as "secured through resources for Chinese state owned companies") are not concessional. China Eximbank does have a small subset of concessional loans at fixed interest rates of 2 or 3 percent and repayment over 20 years. This interest rate is subsidized, but these are not the loans that finance the large, resource-secured transactions. Worldwide, between 1995 and 2009, China Eximbank committed $11 billion in concessional loans, total, whereas its commitments of non-concessional credits to Angola alone came to $10 billion during that period.

Hochberg states that his bank would need to provide "taxpayer subsidized loans if we were to compete toe to toe with the financing being provided by the Chinese." But this isn't exactly true, as we can see if we look at the rates for U.S. Ex-Im Bank's loans.

Forgive me if I get a bit technical now. U.S. Ex-Im Bank's fixed rates (CIRR) for loans in early November 2011 ranged from 1.47 percent to 3.35 percent depending on the term of the loan (repayment period). But the U.S. Ex-Im Bank's major business involves providing guarantees or "cover" for private bank loans. Quoting U.S. Ex-Im Bank:  "Generally, a floating rate pure cover interest rate will be based on LIBOR [London Interbank Offered Rate] and have a spread in the range of 0 to 100 basis points (for larger transactions) or 20 to 400 basis points (for smaller transactions)."

One hundred basis points = 1 percent. So our Ex-Im Bank will guarantee floating rate loans based on LIBOR plus a margin (spread) of 0 to 4 percent.  Similarly, China Eximbank's large infrastructure export credits are at floating rates based on LIBOR plus a margin of 100 to 300 basis points (1 to 3 percent) or even higher. They usually need to be repaid over a period of 13 to 17 years. There is no indication that these large Chinese infrastructure loans are subsidized. So the loans that we guarantee can be cheaper than China Eximbank's export credits, or they can be more expensive. Or so it looks to me. But I'd be interested in how it looks to readers of this post.

Finally, I was pleased to see data in Hochberg's letter to show that U.S. Export-Import Bank support to projects in sub-Saharan Africa has gone up from an average of $455 million annually (FY2006-FY2009) to $800 million (FY2010), and $1.4 billion (FY2011).  At this rate of growth, we may stand a chance of catching up to China Eximbank... which is probably putting in around $6 billion annually.

Addendum on December 8, 2011: Thanks to Dr. Helmut Reisen, head of research at the OECD's Development Centre, here are links to the approved current export credit rates for most OECD currencies:
More generally:,3381,en_2649_34169_1_119656_1_1_37431,00.html

Wednesday, November 30, 2011

Creative Destruction: Chinese Competition and the Rebirth of Ethiopia's Shoe Industry

Ethiopian brand Sole Rebels targets the export market
I returned from Ethiopia about a week ago. Leather is a big deal in the country (and several Chinese firms are investing large amounts in tanneries and shoes). Around 2001, Ethiopia's shoe industry was severely hit by competition from cheap Chinese imports. Omar Redi of Fortune (Addis) reports on the shoe industry's remarkable recovery over the past decade. Originally serving only the local market, Ethiopian companies like Peacock are now exporting to Italy. "The industry," Redi says, "has survived the onslaught from Chinese competition and prospered."

Highlights of the Ethiopian shoe story:
  • The history of leather industry in Ethiopia dates back to 1928, but focused only on the local market. Chinese imports began to swamp local markets around 2000. 
  • In an unexpected twist of fortune, the Chinese challenge presented an opportunity for Ethiopian shoe manufacturers by pushing them to focus on the quality, design and durability of their products so that they can win the hearts of, at least, the local users.
  • For Peacock Shoes, the pinnacle of the problem was a wake up call; they realised that if they did not compete with better quality and price, their business in the shoe manufacturing sector would crumble.
  • "It was at the height of the challenge around 2001 that we imported our first huge machineries from Europe," Elias said.
  • A leather training institute also helped. Since January 2009, the institute began benchmarking work, under which best practices in the industry from across the world are implemented at Peacock and Anbessa Shoe Share Company.
  • Peacock Shoes now earns around $4 million a year from exports to Europe. Read more here.

Friday, November 11, 2011

Human Rights Watch Report on Chinese-Owned Mines in Zambia

Zambian Miners                     Salim Henry: Reuters
I'm currently doing fieldwork in Ethiopia (where, by the way, internet blocking, if it exists, has not stopped me from accessing my blog). I've been getting a lot of emails about Human Rights Watch's new report on China Non-Ferrous Mining Corporation (CNMC)'s copper mines in Zambia

The report details a climate of systematic violation of Zambian labor regulations, particularly regarding safety. Some people have noted that I am credited as having read a draft and "provided helpful suggestions". What do I think about the report?

First, I have a lot of respect for Human Rights Watch and their methodology: it is a deep, participant-observation, research-oriented approach to improving the human rights situation worldwide. The researcher for this report, Matt Wells, is an incredibly talented, conscientious, and careful researcher who triangulated his findings and went back again and again to check and double-check. This was not a quick and dirty job. HRW also published the response of the Chinese parent company CNMC -- the large Chinese company that owns and runs four copper mines -- which was defensive, but took the report seriously.

Here are some of my comments to HRW on the draft:
This is an excellent piece of work, obvious due diligence and care taken to get facts right, and to provide a comparative perspective with other employers in the Zambian copper mines. It’s a harrowing catalog of poor safety practices, endemic suspicion on all sides, cutting corners and wasteful, short-sighted approaches to worker relations.
The paper leaves a bit of a feeling that the rest of the mining sector is far better run and organized than CNMC’s part. No doubt that’s generally true, but workers have also complained of “serious human rights violations” at KCM (see the article below), with wildcat strikes, people being fired, and a general “chaotic” labor situation in the mines in general.
The fatality figures also suggest that the Chinese are by no means the only mines with safety problems. Matt hasn’t put fatality figures in – they are dated, but some do exist (see my blog post on The Economist article for a link to these figures.
I think the paper would be/would have been even more powerful with more direct comparisons. Chinese factories have been able to raise their standards to US standards in South Carolina (problematic as those may be from some perspectives) and Chinese mines should be able to meet Zambian standards! Dan Haglund has pointed out that the short-term mentality of a lot of the Chinese managers meant they weren't invested in the long-term relationships, training, safety, good labor relations that would be a win for everyone.
There is some context missing from the report. I didn't think it showed that Zambian copper mines are in general places with a lot of labor relations problems and where workers do not trust management to promote their interests. I sent along a link to a story of wildcat strikes at KCM, another of the large (non-Chinese) mines, which provides...
...further evidence of the chaotic nature of labour relations in Zambia's copper mines. It seems barely a single pay round can proceed without a wildcat strike, police intervention and a round of contested sackings of rank and file workers operating beyond the control of trade union leaders. The latest trouble has been at Vedanta Resources' Konkola Copper Mines, the largest of all Zambia's mining companies, and the pacesetter for all other pay settlements. Negotiations seem finally to have concluded with the two mining unions with management enforcing a15% deal after a wildcat strike and protests sufficiently serious to close the plant temporarily and lead to the deployment of riot police as workers refused to trust their own union representatives, let alone management.

In another demonstration of the reliance of the companies on the physical force of the Zambian state to maintain order, Miners were temporarily excluded from the plant and their gate passes confiscated. Police officers then picked a number of workers up from their homes at midnight. They were taken to the plant, where they were interrogated. [Twelve workers were fired.] ... KCM spokesperson Sam Equamo claimed the workers were disciplined because they disrupted operations without giving chance to their union leaders to brief them on what had been negotiated with KCM management. The workers themselves described their treatment as a serious violation of their human rights and urged the government to intervene.
In responding to me, Matt Wells acknowledged worker complaints at the other companies but said that his research still shows pretty conclusively that CNMC is consistently the worst of what can be a pretty bad bunch. A lot of the miners working for CNMC had been laid off from other mines during the global financial crisis, and were in a position to make specific comparisons on safety issues.

CNFC is actually viewed by Chinese  leaders and officials as a model company (for China), and many aspects of its work in Zambia reflect this: the decision not to let workers go during the global downturn; the decision to purchase other risky mines that had gone bankrupt, even, as Dan Haglund has pointed out, their improvements since the early years of running Chambishi mines. Their prompt written response to HRW's criticisms, while formulaic, also shows that they want to be seen as a responsible actor. 

With Michael Sata elected, it is possible (though not guaranteed) that Zambia may start to put money into its mines inspections and safety departments, that the abuses laid out in HRW's report will become exceptions rather than daily violations, and that there will be accountability in this dangerous and lucrative sector. I'm sure there will be multiple points of view on this, however, and I welcome a discussion here.

Wednesday, November 2, 2011

Senate Testimony on China and Africa

This isn't me. But this is surprisingly close to how it looked.
Yesterday together with Amb. David Shinn and Stephen Hayes of the Corporate Council on Africa, I walked through the hallowed halls of the Dirksen Office building to testify in front of the Senate Foreign Relations Committee (text and video here) on China's engagement in Africa. I was impressed by Senator Coons (who organized the meeting). Kudos to his staff; they did a great job briefing him. The other senators (naturally) varied in their level of understanding of this issue. Few got beyond the headlines.

The invitation to speak to the Committee arrived late last week while I was in Bergen, Norway, for a packed week in residence at the University of Bergen -- preparing and delivering three lectures on China (including one on China's impact on governance in Africa at Chr. Michelsen Institute). I probably should have skipped Seun Kuti's concert in Bergen on Saturday night and stayed in my hotel to write my testimony. It was tempting to enter The Dragon's Gift into the record ... in its entirety. But I refrained.

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.  

Wednesday, September 7, 2011

World Bank Pushes (?) China to Offshore Manufacturing to Africa

Robert Zoellick hugging panda. Credit: AP
World Bank president Robert Zoellick has taken on the idea that China is restructuring, and that some of the lower-end manufacturing jobs will be going abroad. Why not to Africa? As readers of The Dragon's Gift know, the Chinese have been thinking about this at least since 1984, and have put a number of tools in place to help make this happen (see Chapter 3: "Going Global").

In a recent YouTube video, Bob Zoellick elaborates on his efforts to engage Chinese officials to take "practical steps" on this. I wonder if he knows he's preaching to the choir?

A hat tip to Henry Hall at China Africa News. He's made his site a go-to place for current events and analysis.

Monday, September 5, 2011

Chinese Workers Build Infrastructure in India

photo credit: Deborah Brautigam (c)
Catching up again -- over Labor Day -- I read a fascinating article by Rama Lakshmi from the Washington Post: "Chinese Workers Fuel India's Staggering Infrastructure Boom," (October 24, 2010). What I read could have come from many parts of Africa. And in particular, it reminded me of towns I visited in Eastern Nigeria where Chinese teams were working with Nigerian workers to construct factories for Nigerian owners. It puts the widespread use of Chinese workers in Africa in international perspective.

Takeaway Points:

(1) Skilled Chinese workers can be effective trainers:
Perched precariously on scaffolding, several Chinese workers showed Indian laborers how to weld the shell of a blast stove at a steel plant construction. Step by step, the Indians absorbed the valuable skills needed to build a large, integrated factory from scratch in record time.... "This factory is a classroom for Indian workers and we will create a benchmark for speed, quality and cost," Singh [the company's director] said.
...The Indian workers are learning a new work ethic from the Chinese and are now more punctual, not stopping work to take frequent tea-breaks or gossip, managers said.
(2) While India has a labor surplus, low level workers lack appropriate skills.

"India may be an IT superpower ... But the biggest gap is in the availability of skilled electricians, carpenters, welders, mechanics and masons who can build mega infrastructure projects ... Most of these workers have to be trained on the job. And that often delays the projects and makes them more expensive."
 (3) The ratio of Chinese to Indian workers: at one factory site (under construction) was 1600 Chinese supervisors, technicians, and other laborers to 5000 Indian workers, or 25:75.  This is fairly similar to the 20:80 ratio I've seen, on average, in Africa.

(4)  Speed, as well as skill, is the great China advantage.
The Indian workers earn slightly less than the Chinese, whose speed ultimately brings down the cost of the project.... The steel plant is expected to take 18 months, a rare feat in India. ..
These details provide one answer to the idea that vocational training may be all that's needed. Sure, it will help in building skills, but maybe not in building work habits. The tone of the article was refreshing: curious, balanced, informative, detailed. A hat tip to DH. 

Saturday, September 3, 2011

Zambian Economist Reviews "The Beijing Consensus"

The always interesting blog Zambian Economist reviews Stefan Halper's "The Beijing Consensus: How China's Authoritarian Model Will Dominate the Twenty-First Century." (This is the book my research assistant said "makes China out to be rather scary"). Halper's book repeats a number of China-Africa myths, including the one about China giving Malawi $6 billion in aid. One day I might also review it, if only to point these out, but in the meantime, an excerpt from the Zambian Economist review:
...Taking Zambia as an example, it is not obvious that we would necessarily be better in terms of democratic outcomes without Chinese influence. Beyond the perverse economic plunder of mineral resources (which is primarily western led), it is difficult to argue that in terms of governance, the 1991 – 2001 period  under IMF / World Bank overlord were necessarily better than 2002 – 2010 period under increasingly Chinese control of Zambian interests. Indeed The Beijing Consensus does acknowledge the flaws and inevitable downfall of the American led "Washington Consensus". It therefore begs the question what these "western values" and practices being eroded are. Is it merely American dominance, for better or for worse?  For many poor nations there’s little difference between a Beijing dominated world and an American one. Similarly, if we looked at the Zambian government’s policy it is unclear what the Lusaka government is learning from Beijing. The Beijing model is direct state led involvement in key strategic sectors and stricter requirements on foreign investments (e.g. in the car industry). That is hardly Zambia’s approach. Indeed when one extrapolates across other developing nations (e.g. Malawi, DR Congo and Angola) a similar picture emerges. Many of these countries are more liberal than Beijing, and where they are intolerant of democracy, it is because they have always been intolerant – not because Beijing has introduced it....
To read the rest of the review, click here.

Wednesday, August 31, 2011

China Development Bank's $3 Billion Line of Credit in Ghana: Better than the World Bank?

Ghana's speaker of the house of parliament in Beijing, 2008
The framework for China Development Bank's offer of a $3 billion line of credit was approved last week by Ghana's parliament. The controversial credit was debated over several sessions of parliament, and the opposition abstained from the final vote. Finance minister Duffuor said the credit is "comparatively cheaper than floating a Eurobond" and from what I can see, the line of credit is roughly equal to, or potentially better than, a non-concessional World Bank IBRD loan, although clearly not better than the World Bank's IDA credits.

What's interesting about all this? Three things: (1) Ghana's democracy and lively parliament show that a better governed country allows more transparency about its engagement with Chinese banks; (2) Because of that transparency, we are learning a lot from Ghana about how Chinese banks engage, and they don't seem to have prohibited Ghana from releasing this information; (3) China's resource-secured line of credit model appears alive and well. The IMF and World Bank are not going to like this challenge to their position as preferred creditors.

The terms of the CDB line of credit differ in its two installments. The first tranche of $1.5 billion will have a 20yr maturity including a 5yr grace period. The interest rate will be 6 month LIBOR (London Inter-Bank Offered Rate) plus a margin of 2.95%, with a commitment fee of 1% and an upfront fee of 0.25%. The terms of the second $1.5bn tranche are 15yr maturity including a 5yr grace period, interest rate of 6 month LIBOR plus a margin of 2.28%, and probably the same fees.

The credit appears to be secured by a petroleum off-take arrangement and escrow account, the same model China has been using for decades in Africa, most famously in Angola. As one report states:
Repayment of the loan facility ... would be effected from petroleum revenue and other government owned resources. Due to the aforementioned terms of repayment, the report stated that a commercial contract for the off-take of oil would be entered into by the Ghana Petroleum Corporation and the Chinese authorities. According to the report, the government would reduce the impact of commercial projects on the public debt, through an on-lending and escrow arrangement for most of the projects under the facility.
With a debt burdened past, Ghanians rightly worry about the increasing levels of debt being incurred by their government. Their parliament needs now to ensure that all the projects financed under these credits have proper feasibility studies, and that the contracts they finance are won through open, international, competitive tenders. There should be plenty of Chinese companies competitive enough to win contracts that these loans will finance, and according to the terms, up to 40% can finance non-Chinese contractors.
Under clause three of the Master Facility Agreement, a minimum of 60 per cent of each tranche was required to be paid to the People's Republic of China (PRC) contractors, a clause which allows about 40 percent of the facility to be applied towards local content sourcing, or sources other than the PR
Ghanians are already trading accusations about corruption and worries about kickbacks. With infrastructure contracts this is a very real worry. But from what I've seen the intial allegations stem from a lack of understanding of the convention of upfront fees. Some believed the fees serve as a commission of some kind to some broker or deal maker, but this kind of fee is common, even in World Bank loans, which also have upfront fees. The World Bank's IDA loans for the poorest countries currently have no commitment fee (this is a change) but do carry a service fee of 0.75%. The World Bank's IBRD loans (for middle income countries, probably Ghana falls here now) vary in fees. The highest are for special development policy loans,  currently at 6 month LIBOR plus a minimum of 2%, with upfront fees of 1% of the total loan amount, while "Development Policy Loans with a Deferred Drawdown Option (DPL DDO) carry a 0.75% front-end fee, plus a 0.50% renewal fee; and Catastrophe Risk or Cat DDOs carry a 0.50% front-end fee, plus a 0.25% renewal fee".

A hat tip to Naa Aku Addo for the story. Below, more details of the loan, repayment, and the projects that are projected to be financed.

Sunday, August 28, 2011

China, Libya, and Oil: Update

China is positioning the country to engage with the new Libyan government, despite comments from at least one Libyan rebel that China might lose out for not being part of the forces backing the rebels. I doubt that will happen, and I predict that Chinese companies, which had signed some $18 billion in infrastructure contracts, will be actively trying to restart those projects and others. They will succeed in a lot of this. Reconstruction after all the NATO bombing will mean lots of new business.

Here are a few facts on China & Libya from a recent news article. (I also recommend searching for "Libya" on this blog and reading some of the comments.)
...About 75 Chinese companies operated in Libya before the war, involving about 36,000 staff and 50 projects, according to early Chinese media reports. Many of those firms were engaged in building roads, buildings and infrastructure....
...China's top three state oil firms CNPC, Sinopec Group and CNOOC all had engineering projects in Libya, but no oil production yet, company officials said....
"China was unusually quick to support the [National Transitional Council] ...Relative to China's typical foreign policy response, that was quite important, but relative to what Europe and the United States did, that falls short. So I think they will struggle," said Ben Simpfendorfer, managing director of Silk Road Associates, a Hong Kong-based consultancy that specializes in business between China and the Middle East.
China shipped in roughly 150,000 barrels per day of crude oil from Libya last year through Unipec, the trading arm of Asia's top refiner Sinopec Corp that holds the long-term supply contract. That amounted to about one tenth of Libya's crude exports [and about 3 percent of China's].
A hat tip to Stellenbosch University's Center for Chinese Studies.

Tuesday, August 23, 2011

China in Africa: What Can Western Donors Learn?

photo credit: Deborah Brautigam
A new report of mine: China in Africa: What Can Western Donors Learn? has just been published by Norfund, Oslo, August 2011. Some excerpts:
...Many Western donors think they know what China is doing in Africa. They’ve seen the headlines: the Chinese arrived a few years ago in a desperate search for oil. They set up a huge aid program, propping up governments in resource‐rich, pariah states that the West won’t touch. Their companies bring in all their own workers and refuse to hire Africans. They’re leading the “land grab” in Africa, growing food to ship back to China. It’s an alarming story … but, on closer inspection, none of it is true. (p. 3)
...Chinese companies do have low costs but construction firms in Zambia and Namibia have documented unfair Chinese business practices: collusive bidding, low wages, and a tendency to hire contract workers in order to get around mandated labor benefits (paid holidays, sick leave, etc.) for permanent staff. (p. 12)
...Speaking at the World Bank/IMF Annual Meeting in April 2011, Dr. Situmbeko Musokotwane, the Zambian minister of finance, compared China’s business and aid model with that of the West. China used aid and other tools vigorously to encourage its companies to invest in Africa, he said, but that did not seem to be the case for Europe and America, whose aid programs were more paternalistic, and seemed to be designed as charity: “at least help them not to suffer, we can’t do much more than that. They’re not ready for investment.”
...We need a better understanding of just how countries like China are engaging in Africa. And once we have that understanding, we may be better positioned to accept the recommendations of thoughtful African officials like newly (re)appointed Nigerian finance minister Ngozi Okonjo‐Iweala: “China should be left alone to forge its unique partnership with African countries and the West must simply learn to compete.” Implicit here is a warning: we in the West no longer have a monopoly over development ideas, practice, and finance. China is rising, and with them, India, Brazil and others. If we don’t learn how to have “a new conversation” as African Development Bank president Donald Kaberuka put it, we risk finding that Africans are no longer interested in listening. (p. 16).
Continue reading here >>

Monday, August 22, 2011

Why I Speak to the State and Defense Departments on China and Africa

Angolan offshore oil rigs.    photo credit: Neftegaz.r
At the end of summer, when the Western world pauses, I am catching up on some China-Africa reading. One piece I missed dates from August 2010: an article in China Monitor by Jesse Salah Ovadia, a York University (Canada) Ph.D. student who did fieldwork in Angola. His comments on his interviews with US government officials in Angola were illuminating, and disturbing:
In an interview I conducted with an American diplomat in Angola – carried out as part of a wider research project - he repeatedly denigrated the quality of Chinese infrastructure projects in the country and argued that the Chinese "don‘t have any interests here other than resource extraction. ... It‘s plain and simple. They are just here for the resources. They are not interested in the country‘s well-being, only in extracting what they need economically." ...
...The diplomat went on to insist that the United States espouses a much more holistic set of interests than China: "Yes, Angola is the sixth largest supplier of oil to the U.S., but that is not the sum total of our relationship. We still promote democracy and human rights, and our goal is free, secure, and peaceful relationship with Iraq—I mean Angola."
Iraq? An interesting little slip, that.

What about our holistic set of interests? In 2009, according to budget documents, the US allocated $56 million in aid to Angola -- mainly global health and child survival. We gave nothing under "feed the future" for agriculture and food security, $2 million for basic education, $4 million for family planning/reproductive health, $14.7 million for HIV/Aids, $30 million for malaria, $2 million for micro-enterprises, $300,000 for trade capacity building, $3 million for water funding, and apparently nothing for general infrastructure (roads, electricity). I didn't see anything specifically for democracy and human rights, either.

That same year, according to the International Energy Agency, the US imported about $10 billion in petroleum from Angola, and $18 billion in 2008.

China's official aid to Angola has also financed malaria initiatives, and health, but has been modest. Where the Chinese make the difference is in using a portion of their oil imports to secure major infrastructure loans that have built massive reconstruction infrastructure in Angola. Between 2004 and today, this has amounted to $10 billion (mainly oil-backed), with another $1.5 billion line of credit to be focused on development in agriculture, from China Development Bank, and $2.5 billion from a commercial bank, ICBC (the latter two are not oil-backed).

None of this Chinese finance should be considered "official development assistance" as it is offered without subsidies, at LIBOR rates. But it does support development. So a lot of China's oil imports from Angola are used to finance Angolan development, but that's not the case for us. (Of course there is the Hong Kong-based syndicate that controls the China International Fund which is doing far less development and reaping far more profit from its cozy relations with Angolan elites. This was covered pretty well by the Economist in a recent article). But that is a separate issue.

What about the impact of this infrastructure finance? Ovadia said:
China‘s new role in Angola has brought the financing needed for the country‘s reconstruction and significant investment has been made in key sectors of the economy. Journeys that once took most of a day can now be completed in a few hours and neighbourhoods are being connected to national power grids for the first time... there is little doubt that the projects are having a major impact on the country.
 In a footnote, Ovadia adds:
The diplomat‘s comments were somewhat contradicted a few weeks later at a public forum in Luanda on the role of China in Angola when an American defence attaché from the embassy commented publically that China was trying to create "a new slave empire in Africa,"* demonstrating that the 'extreme-China threat‘ position is still alive and well.
This is why I speak to the State and Defense Departments whenever they invite me (I regret expressing some hesitation to speak to the CIA when one of their officials approached me informally -- they never followed up with an invitation). Washington: I'm ready to present a different, empirically based, a bit wonky, but, I hope, more balanced perspective, if you're ready to hear it.

*Perhaps he was simply quoting the title of a newspaper article published by Peter Hitchens a few years ago in the UK?

Friday, August 19, 2011

The Economist on China International Fund

credit: Reuters, as used by The Economist
As readers of this blog know, I've been compelled to (as Owen Barder once Tweeted) "fisk" some of The Economist's fact-challenged articles that deal with topics I follow fairly intensely: China in Africa, and Chinese aid. But this week I was, in general, impressed by a lot of Oliver August (and team)'s investigative reporting on China International Fund and the 88 Queensway syndicate.

Here's what is important about this report:

1.  It's the best analysis yet of the evidence that points strongly to a conclusion that China International Fund (or the 88 Queensway group) is not some secret tool of Beijing:
 Although the Queensway syndicate has sometimes been suspected of being an arm of the Chinese government, there is little evidence of that.
As I have also argued, the evidence points instead to CIF's role as a broker -- like Pierre Falcone -- with high level Africa contacts involved in making deals in Africa's often nasty and money rich resource sector. (See my posts on CIF: March 20, 2010 "Was Guinea Bought by Beijing?" June 2, 2010 China International Fund's New Bellzone-Kalia Guinea Deal," July 27, 2010 "China International Fund in Africa: Another Failed Project"). 

But why did The Economist relegate this portion of Oliver's excellent analysis to Baobob's blog rather than the print edition?

2.  It contends that "China" is probably paying market prices for Angolan oil, even if the company China Sonangol (a joint venture between the Hong Kong based CIF and Angola's state-owned oil company Sonangol) may pay a lower price. This is consistent with what I have seen elsewhere.
The terms under which China Sonangol buys oil from Angola have never been made public. However, several informed observers say that the syndicate gets the oil from the Angolan state at a low price that was fixed in 2005 and sells it on to China at today’s market prices.
3.  It makes clear that although earlier predictions by The Economist and others that "China" (i.e. CIF) would prop up the military junta in Guinea, were not accurate. Whatever funds the Queensway group transferred had little impact on the junta, which honored the promise to hold elections.

4.  It reports that Angola's state-owned oil company Sonangol now owns shares in China International Fund.
First, the Angolans, including Mr Vicente, seem to have gained a significant hold on the syndicate. Recent company fillings in Singapore show that China Sonangol now owns China International Fund, the original vehicle.
China Sonangol (which does not involve any mainland Chinese companies) is a joint venture between Sonangol (30%) and Dayuan International Development, Ltd. (70%), part of the infamous Hong Kong group known as "88 Queensway". According to the 88 Queensway study, Dayuan owned 99 percent of China International Fund.  If this report is correct, China Sonangol now owns CIF, in other words, Angola's Sonangol itself would now have about 30% of CIF. So when we read about "China International Fund" doing something in Africa, we should be thinking "Angola" as well as "Hong Kong".

5. It is the first place I've seen to break a story that one of the key "88 Queensway" people, Wu Yang, has broken from the group and actually sued them. I would have loved to hear more about this.

OK, so I do have some criticisms of the article.

1. Let's start with the title and subtitle: "The Queensway syndicate and the Africa trade:  China’s oil trade with Africa is dominated by an opaque syndicate. Ordinary Africans appear to do badly out of its hugely lucrative deals."

As I know with The Dragon's Gift: The Real Story of China in Africa, authors don't always get to choose their titles or subtitles: editors often do this for them. Nevertheless, this article is about China's oil trade with Angola, not Africa. And as campaigns like "Publish What You Pay" and research on the "resource curse" have shown us, the subtitle one could easily be rewritten as "The West's oil trade with Africa is dominated by opaque multinationals. Ordinary Africans appear to do badly out of their hugely lucrative deals." 

Sadly, there is nothing unique about that.

2. Some fact-challenges on timing:
In 2002, after decades of commercial isolation, China started encouraging entrepreneurs to venture abroad.
No: not decades of commercial isolation preceding 2002. I devoted an entire chapter of The Dragon's Gift, "Going Global," to showing how this process of "going out" began around 1979 in Africa and evolved gradually.

3. Do Chinese companies' have no ownership of Angola's oil assets?. The Economist writes:
By contrast, China’s state-owned oil companies have no direct interest in Angolan oilfields, one of their two biggest sources of crude. Their names do not show up on the map of concessions.
I don't have time to explore this in depth -- I'm trying to write a scholarly journal article this week! -- but I doubt this is true. Sinopec sent out a press release in March 2010 that they had acquired 55% of the shares of Block 18 in Angola, from Sinopec Sonangol (SSI, the joint venture that also involved China Sonangol), saying "This transaction is Sinopec’s first acquisition of overseas upstream assets. The assets are also the best-ever overseas assets of Sinopec." A March 2011 report in the invaluable investigative newsletter China-Africa Confidential stated:
In February, China Sonangol won three deep-water pre-salt oil (equity) concessions in Blocks 19, 20 and 38, adding to its existing shares in Blocks 3, 31 and 32. Meanwhile Sonangol Sinopec International (SSI), a joint venture between China’s state-owned Sinopec and China Sonangol, has equity stakes in blocks 15, 17 and 18.
4. The article mentions enormous CIF "pledges" and "rights" in Zimbabwe without commenting that these have been as vacant as other enormous "pledges" made by CIF in places like Guinea.
Sino-Zimbabwe Development Limited (a CIF-linked company)... received rights to extract oil and gas, and to mine gold, platinum and chromium. In return, the company publicly promised to build railways, airports and public housing. These pledges were valued at $8 billion by Mr Mugabe’s government.
5. The article insinuates that the CIF oil-backed infrastructure finance deal in Angola (which may amount to some $2.9 billion) is somehow a trade of infrastructure for all of Angola's oil exports.
In return for Angolan oil, the syndicate promised to build infrastructure, including low-cost housing, public water-mains, hydroelectric plants, cross-country roads and railways, according to the government. The country desperately needs such things, to be sure. But their value is unlikely to exceed several billion dollars. That looks like a poor deal for the Angolan people.
I'm sure that all the international oil deals in Angola are not doing much for the Angolan people (nor did they all during the Cold War, when Western firms were the only beneficiaries). But these deals should not be seen as a "swap" of Angolan oil for infrastructure, but rather oil-secured finance. I'm not sure how large the CIF infrastructure deals actually are in Angola, but they are small in comparison with the $20 billion annual value of Angola's oil exports to China.

Several points the article didn't make, but could have:

6. CIF's officials may have deliberately tried to camouflage their company by adopting a name similar to conventional corporations in China: CIF is similar to CIC, China Investment Corporation and CICC China International Capital Corp. Both of these are large, legitimate companies, and CIC in particular is involved in long-term overseas investments. 

7. The Bright Connection.  Along these lines, the name of a key CIF-affiliated company, New Bright International, is similar to the Chinese Everbright* group (one of the 88 Queensway gang, Wang Xiangfei, was formerly an executive director and CEO of an Everbright subsidiary) and Sinopec's 100% owned subsidiary Century Bright Capital Investment Ltd. Is this also done for camouflage, or does it mean that these "Bright" companies are affiliated?

I've been contacted by several groups doing research on CIF, including Global Witness and some student researchers at Columbia University. I hope they were able to sort more of this out and I look forward to their findings.

*Is the financial services corporation China Everbright a front for Chinese military intelligence, as the famous 88 Queensway Group report alleged (while noting in a footnote on its source: "information from this source has not been corroborated")? Could be, but if so, that hasn't stopped companies like Citicorp from partnering with Everbright: see, for example, Citicorp's Hong Kong-based investment fund Citicorp Everbright China Fund