Saturday, March 30, 2013

China in Africa: Really Rubbery Numbers

An article in the South China Morning Post "Rubbery Numbers Add Up to Big Role for China in Africa," (March 29, 2013) illustrates the pitfalls of journalists relying on "experts" who parrot the conventional wisdom but don't really know what's going on. Here are three examples:

According to "expert" #1:
the cumulative Chinese investment in sub-Saharan Africa totals US$220 billion.
I hope the reporter simply got this quote wrong. It's actually quite close to the figure for China-Africa trade for 2012. But FDI?! 

The Chinese official figures are around $16 billion for cumulative investment in Africa. This is certainly an underestimate, but the real figure is nowhere near $220 billion! Even the figures provided by Derek Scissors' China Investment Tracker at Heritage, who tracks the value of all deals at $100 million and above (i.e. the expected value, not the actual investment flows), has a value of about $40 billion. It's silly figures like this that continue to create a distorted image of a frighteningly enormous dragon hoovering up resources across the continent.

Then we hear from "expert" #2: "There had been anti-China sentiment in African countries like Zambia, because of the Chinese workers brought in for large construction projects."

Yes, there was anti-China sentiment in Zambia, but it was largely over labor and safety standards in Chinese mines (Zambian workers were protesting this) and the presence of Chinese traders. It was not about Chinese workers brought in for construction projects, because most of the workers on those projects are Zambian. The film "When China Met Africa" illustrates those conflicts beautifully.

The SCMP article ends with this quotation from "expert" #3:
"The problem for China is it prefers to cultivate relationships with African leaders who kowtow like deferential courtiers. When the people in these countries feel left out and vote out their disconnected leaders, what will China have?"
It's a good sound-bite. But what evidence do we actually have that "China" prefers to cultivate relationships like this? And what evidence do we have that regime change away from governments friendly to the Chinese leads to losses for "China" or its businesses? 

I'm not sure how we should measure the cultivation of relationships in Africa: frequency of visits by top leaders? Size of economic engagement? From frequency of visits, the top countries are Egypt, Tanzania, South Africa and Morocco -- they've each had four visits from China's top leaders (president or premier) since 1995. From the economic data, it looks as though China's largest economic relationships in Africa are with Angola, South Africa, and Algeria. These don't strike me as countries led by China's "deferential courtiers". 

And contrary to the assumption in this quotation, when governments viewed as friendly to the Chinese have been voted (or thrown) out, the Chinese do not seem to experience business losses. Zambia, Ghana, Niger, and Guinea are all good examples of this. On the other hand, the Chinese have had huge losses in Libya, but they had a very sour relationship with Gadaffi, so this doesn't fit the assumption either. Reporting that confirms prejudices rather than investigating the reality of a situation does no service to our understanding of this complex relationship.

Tuesday, March 19, 2013

China's Pledge of $20 Billion to Africa: Aid or Not?

At the fifth ministerial meeting of the Forum on China Africa Cooperation held in Beijing last summer, the Chinese announced a new pledge of a $20 billion line of credit "for Africa". Almost immediately, reporters began to call this pledge of credit "Chinese aid" to Africa. Jane Perlez at the New York Times probably influenced many when she called it "Chinese aid". Others confidently labeled the $20 billion in finance "concessional".

But was this aid? Was it concessional? I doubted it. But I was on vacation in the Olympic Penninsula National Park at the time, and kayaking in the San Juan Islands. I couldn't check it out, and then it receded as a hot issue.

Yesterday, for a paper I am writing, I went back to examine the Chinese discussion around this $20 billion. The very first source I found -- the Action Plan that summarizes the next steps for the FOCAC -- was very clear that this pledge is not about official assistance but business.  

Former President Hu Jintao made the pledge in his July 19, 2012 address to the Beijing meeting. The first of five priority areas was to "expand cooperation in investment and financing". Hu said "China will provide $20 billion dollars of credit" to African countries. This was followed by the second priority area, "to increase assistance to Africa." The new loans are clearly not being positioned as assistance. There is also no mention of their being concessional or preferential. 

Further evidence comes from the Action Plan issued by the FOCAC. Beijing's pledge comes under the heading 4.5 Cooperation in Banking and Finance. I quote it below:  
4.5.1 The two sides were delighted to see the steady progress in China-Africa financial and banking cooperation in recent years, which has played a positive role in supporting the growth of businesses from both sides and boosting China-Africa business cooperation.
4.5.2 China will expand its cooperation with Africa in investment and financing to help boost Africa's sustainable development. China will provide a credit line of US$20 billion to African countries to mainly support the development of infrastructure, agriculture, manufacturing, and development of small and medium-sized enterprises in Africa.
Later, under Section 5.1, the Action Plan focuses on "Development Assistance".  The Chinese pledge here is not specific and talks only of "scaling up" assistance and making "active use" of foreign aid instruments: grants, zero-interest loans, and concessional loans:
5.1.2 China pledged to scale up its assistance to Africa and to create new ways of assistance and make the assistance more effective.
5.1.3 China will make active use of the grants, interest-free loans and concessional loans to help the development of African countries.
So why did the pledge of $20 billion in investment and bank finance get interpreted as "concessional aid"? In the West, we are so used to seeing Africa as a place that needs our aid, rather than a place where our banks can do a rousing business. Africans are also used to big countries pledging big aid -- as urged by Bono and Jeffrey Sachs. The Chinese clearly see it differently. There are risks here -- a downturn in China, lower demand for African commodities, difficulties with repayment, a new debt crisis? So far, these remain hypothetical. Reporters and observers need to reboot their view of Chinese engagement in Africa. This is not about altruism. It's "mutual benefit" in intention: Chinese loans, Chinese companies doing the work, African infrastructure being built, and (probably) repaid by African exports.

Monday, March 18, 2013

China Eximbank and US Eximbank to Co-Finance?

I just came across this really interesting story of China Eximbank potentially co-financing a project in Ghana with US Eximbank.  Will follow up to see what happened.

MCC8-led Consortium secures US$ 47 million from US EXIM Bank for the Projects in Ghana
Date:2012-3-1   |   Read:1710

Washington, Accra, Hong Kong and Shenzhen--  On February 23, 2012, the Export-Import Bank of the United States (US EXIM Bank) confirmed the basic terms underlying a proposed US$ 47 million loan to finance Sunyani Water Supply System Expansion and Rehabilitation Project (Sunyani Water) and Western Corridor Oil & Gas Enclave Road project (Oil & Gas Road) in Ghana. MCC8 and its US partner—Lemna International, Inc, arrange the loan facilities.
According to the agreement between the Export-Import Bank of China (China EXIM Bank) and Ministry of Finance and Economic Planning, Ghana, this debt facility for Sunyani Water will be led by the China EXIM Bank committing US$ 93 million concessionary export buyer’s credit facility (85%) and US EXIM Bank to fund US$ 15 million (15%) with 18 years repayment period and the interest rate 3.17% per annum as counterpart funds. The Oil & Gas Road is one of Twelve (12) eligible projects which have been identified and confirmed for financing under the debt facility of US$ 3 billion approved by Ghana Government and China Development Bank (CDB) on December 16, 2011. CDB provides 85% of the project contract price with 10 years repayment period with 3 years Grace Period and the interest rate 6 month LIBOR plus 2.85% per annum. US EXIM Bank provides US$ 32 million with 15 years repayment period and the interest rate 3.17% per annum as counterpart funds.
Senior Vice President of US EXIM Bank, John A. McAdams, said, “Our review of the participant and product information in the application indicates that EXIM Bank is available for this transaction. If, however, the US exporter is facing foreign competition which is supported by foreign export credit facility agency offering more favourable financing terms, EXIM Bank may consider matching those terms.”
President of MCC8 International, Dr. He Yu, commented, “One of major factors hindering the execution of the two projects is the contribution of the counterpart funding by Ghana government. The US EXIM Bank loan facilities will help Ghana cover the 15 per cent and quicken the implementation of the two projects.”
On July 27, 2011, the Consortium consisting of China MCC20 Group Corp., Ltd. and MCC8 Group Company Limited, represented by Dr. He Yu, the president of MCC8 International, signed the Memorandum of Understanding (MOU) for a general contracting of Sunyani Water Supply System Expansion and Rehabilitation Project in Ghana with the Ministry of Water Resources, Works and Housing of the Republic of Ghana, represented by Kweku Botwe, the Managing Director of Ghana Water Company Limited. On August 2, 2011, the Government of the Republic of Ghana represented by Deputy Minister of Roads and Highway (MRH), Dr. Nii Oakley Quaye-Kumah, signed the Memorandum of Understanding for the Design and Construction of the Western Corridor Natural Resources Enclave Road Project with the MCC20-MCC8 Consortium.

Saturday, March 9, 2013

The Chinese-Congo Sicomine Project: New Analysis

Ph.D. student Johanna Jansson's new briefing, "The Sicomines agreement revisited: prudent Chinese banks and risk-taking Chinese companies," an analysis of the reportedly massive Chinese joint venture in the Congo -- Sicomines -- is right now available in an ungated version in a special issue at the Review of African Political Economy. Johanna is the world's foremost expert on this project, the focus of her Ph.D. dissertation. Her new analysis, based on earlier but also very recent research (December 2012) charts recent ups and downs of this project. To our surprise, after providing about $1 billion in finance for infrastructure, China Eximbank pulled out of the project. This may be a temporary step. Johanna points out that the risk of this project falls squarely on the two Chinese construction firms that are the major parties to the agreement. It's a fascinating story, highly recommended.

A year ago, I interviewed one of the early participants in the negotiations over this project, an expert in project finance and coordination who was then working for the China Railway Engineering Corporation (CREC), one of the major participants in the Sicomines project. His observations add new light to the origins of this project. It appears to go back further than we had thought. In around 2004, he said, the Chinese focus in Africa shifted toward infrastructure for resources packages. He was part of a special team focused on the DRC, Southern Sudan [yes, that's right, they were thinking ahead], and Angola.

"The Sicomines project idea came from the Congolese," he told me. In the 1990s, we [CREC]  approached them, to suggest that we build things for them. But they had no money. They said:  'we have a lot of copper." They also didn't want only Western miners in the country. They wanted to kick start the old mine, but this needs investment and infrastructure. So they needed something to secure the package." CREC invited Sinohydro. This was based on the project's needs, but also on who was already active in the DRC. Other Chinese companies can be competitors or cooperate. If we didn't bring them in, they might have competed with us."

"The negotiations started in late 2003. The breakthrough was in 2006. There was a temporary lull because of the civil war, also the copper price was lower until 2005. As the asset value went up, the amount of infrastructure it could finance went up. Angola was also good timing with oil prices."

Doing these packages is "complicated," he said. "You have to involve Sinosure, MOFCOM, the Ministry of Finance. It's like running, running in circles. That's on the Chinese side. On the African side, it's the same thing. Back and forth. My job was to make sure each side understood how the other worked. You have to present a bankable feasibility study to the banks."

"Why do this complicated kind of project?" I asked.  He said: "You can generate the revenue to pay for the construction; this creates business for us in the DRC. It also helps with diversification of our company. To have mining assets makes us more attractive. And you are leveraging policy bank money. The policy banks have to use their funds. For them, short term trade finance is less important because Chinese commercial banks, Hong Kong banks will do that."

What about the terms of the finance? "Some of the DRC projects carried out by CREC and Sinohydro can be financed by concessional loans (you hui dai kuan) but these are not part of the package, they are not repaid from the mining project. Loans at LIBOR plus a margin have become very popular over the last five years. They can be bigger, they do not qualify for interest rate subsidies. The profit margin is low for the bank, but there is still a little spread [over their costs]. It has bigger potential."

"The mining loan was to be provided by CDB," he said. (This is also something I had heard from another Chinese analyst but I haven't seen this elsewhere and can't confirm it.). He thought that some of the other finance was coming from supplier credits to the companies involved.

One final point of interest: guanxi. CREC had a very useful person on their staff, someone they had hired from MCC (the China Metallurgical Corporation). This guy's father had a relationship with Joseph Kabila, the president of the DRC, from when he studied in China at the People's Liberation Army National Defense University in Beijing. This guy had also worked in Zambia. "He understood the technical, the economic, and the African perspective. This is rare."

photocredit:  China Africa Project.

Wednesday, March 6, 2013

Recent Setbacks in Chinese Engagement in Africa

A "snow day" here in Washington -- our universities have closed in anticipation, although outside our home, there's nothing but rain and sleet. Still, not complaining about a day of meetings being cancelled and time to read and write.

The China Africa Project has a nice summary of recent setbacks in Chinese engagement in Africa.

First, the Zambian government finally closed down the outrageously abusive Collum Coal Mine (this is the privately run mine where at least two Chinese managers have been murdered by their workers, and several Chinese managers have blasted protesting workers with bird shot. A really bad situation).

Also in the discussion: Botswana president Ian Khama complains about the quality of Chinese construction in a major power plant.

A hat tip to Henry Hall. 

Tuesday, March 5, 2013

US Eximbank $5 Billion Loan ... for Saudi Arabia

US companies active in Africa complain that they can't get support from the US government's official export credit agency, US Exim Bank, the way Chinese exporters and firms appear to get support from China Eximbank. Well, now I see why. While China Eximbank has been lining up billions for Chinese firms to get business in some of Africa's oil rich countries (Angola, Sudan), the US Exim Bank was apparently arranging a $5 billion loan for a joint venture between US firm Dow Chemicals and Saudi Arabia's state-owned oil company. (We know the Chinese provide finance with no strings attached. I wonder what kind of governance conditions we put on our mega-loans to this authoritarian dictatorship?  I also suppose this wasn't viewed as "giving 'aid' to get access to oil" on our part?)  With Saudi Arabia soaking up $5 billion, it's no wonder US exporters had to make due with far less  when they wanted to do business in Africa.  US Exim Bank provided only $1.4 billion for all of Africa in 2011.