Guest Post: China-Africa Development Fund in South Africa

This guest post is by Yuan Li, a master's degree student at Johns Hopkins University/School of Advanced International Studies. It is based on interviews she conducted in Johannesburg, South Africa, in January 2013.

China-Africa Development Fund in South Africa

The China-Africa Development Fund (CADFund) is a private equity fund established in June 2007. It was initiated by President Hu Jintao at the Beijing Summit of the Forum on China-Africa Cooperation, as one of the measures to forge a “new type of China-Africa strategic partnership, strengthening bilateral cooperation in more areas and at a higher level” (CAD-Fund, China Development Bank) and to encourage and support Chinese enterprises to invest in Africa. According to its promotional materials:

 “CADFund aims to promote economic cooperation between China and Africa and to advance Africa's economic development. CADFund works differently from economic aid to Africa in that it is not allocated by nation but independently operated and based on market economy principles, the Fund invests in projects and requires investment benefits. CADFund is also different from credits, it invests together with enterprises in projects and takes the risk, by that the CADFund not increases enterprises' burden but increases enterprises financial resources.  For the African countries, CADFund will not increase their debt. CADFund assumes sole responsibility for its profits or losses and at its own risk. Under a standardized corporate governance structure, CADFund will appoint a specialized team to manage CADFund.” (CAD-Fund, China Development Bank).

 Currently, CADFund manages about 60 projects in over 30 countries in Africa, of which eight are in South Africa. The Fund has five different areas of focus: agriculture, industrial parks, infrastructure, manufacturing, mining and resources. By the end of 2012, CADFund had seven projects in South Africa, the largest number of any country. Of the seven projects, five are manufacturing, two are mining projects. The total investment CADFund has made in South Africa exceeds US$ 400 million;  this is also the largest total CADFund investment in any African countries. Details of these seven projects can be found in the table below:

 

Table 1: Investment Projects Managed by CADFund in South Africa

Project	Year	Size US$ mil	CADF Invest.  US$ mil	CADF Equity	Sector	Project Description	Partners
Auto- mobile assembly	2010	100	45	45%	Manu- facturing	JV—FAW African Investment Co. Ltd. aims to produce annually 20,000 complete cars, 10,000 mini cars, 5,000 trucks. The project will start production in 2013 and will create about 700 local jobs. This is the largest automobile project led by CADFund	First Automobile Works
Bus- iness process reengineering of Super Group	2010	24.5	9	36.73%.	Manu- facturing	JV by CADFund, China North Vehicle Co. Ltd., Beiben Heavy Duty Truck Co. Ltd., and Super Group Trading (Proprietary) Ltd. The company imports parts in SKD from Beiben and assembles locally.	China North Vehicle Co. Ltd., Beiben Heavy Duty Truck Co. Ltd., Super Group Trading Ltd.
First Tractor Co. Ltd. Assembly Factory		4.54	2.04	45%	manufacturing	The factory will build assembling and sales center in Durban, and produce agricultural and engineering machinery	First Tractor Co. Ltd.
Cement factory	2010	100	20.4	20.4%	manufacturing	The project is aiming to build a production line that produces 2,500 ton of cement a day with a 5 MW power generating system. The funding of the project comes from both China and South Africa, and Chinese investment accounts for 51% of the equity. The project is expected to create 300 local jobs.	Tangshan Jidong Cement Co. Ltd., Continental Cement, WIPHOLD
Hisense Africa platform project	2012	100	45	45%	Manufacturing	This platform company will be the only one that manages all Hisense’s business in Africa and the Middle East. The project will include building fridge production base in South Africa, Egypt and Algeria.	Hisense
Gold One gold mining project	2011	635	190.5	30%	mining	This is an M&A deal of Gold One International Ltd., a double listed mining company in Johannesburg and Australia. The Chinese investors formed a JV and bought 89.17% of the equity	Baiyin Nonferrous Group, Changsanyue Capital Co. Ltd.
Acquisition of Wesizwe Platinum	2010	227	102	45%	mining	CADFund and Jinchuan Group Co. Ltd formed a JV and bought 51% of Wesizwe Platinum. It then applied for US$ 650 million loan from the China Development Bank. The project has 5 years of construction and 35 years permit to develop the mines.	Jinchuan Group Co. Ltd.

Source: CADFund

All the projects that CADFund has invested in in South Africa have at least one major partner that is  a Chinese state-owned enterprise (SOE). This is because most private enterprises from China operate on small scale in Africa, and their markets are usually limited at local consumption. CADFund looks for projects that are promising in return, and the minimum investment can be no less than US$ 5 million. Another strategy to control risk and maximize profit is to develop long-term partnerships with some major investors. For example, CADFund has decided to take Jidong Cement Co. Ltd. as its only partner for investment in cement projects, and will cooperate with Jidong in opening up more cement production lines across Africa[1].

South Africa is very different in terms of its investment environment in the African context. Unlike many other African states, South Africa has a stable government, well-established legal system, and the necessary infrastructure to produce and transport goods. At the same time, South Africa has already seen massive investment from all over the world, and has long been experienced in dealing with foreign investment, which makes it much more standardized and systematic to conduct international deals. While as these features of South Africa are appealing to Chinese investors, they receive much less preference or favorable offers on the other hand. As Mr. Li Shenglin, the Executive Director of CADFund pointed out, in countries where there is not vibrant interest of foreign investment, the government usually approaches Chinese investors quite actively and pledges with a lot of preferential conditions, such as lower tax. “We never receive such treatment in South Africa.” Mr. Li said. 

Another attractive fact about South Africa is its rich mineral resources. South Africa is one of the largest mineral resource-rich countries in the world. It ranks first in the reserves of gold, platinum group metals, manganese, vanadium, chromium and aluminosilicate; second in vermiculite, zirconium, titanium and fluorspar; fourth in phosphate and antimony; fifth in uranium and lead; eighth in coal and zinc; ninth in iron ore; fourteenth in copper. China has a strong demand in these minerals. This drives capital to flow into resource-rich areas. 

Besides the mining projects supported by CADFund, some central SOEs from China also have mining projects in South Africa. Sinosteel entered South Africa in 1996 and formed a joint-venture, ASA Metals Pty., Ltd with Limpopo Economic Development Enterprise of South Africa. Its wholly owned subsidiary, Dilokong Chrome Mine (Pty) Ltd, manages and develops the Dilokong Chrome Mine. Minmetals First Chrome Mining Co., established in 2009, is a wholly-owned subsidiary of China Minmetals Corporation in South Africa. The company’s major business focused on developing two chromite projects it acquired in South Africa. Earlier in 2013, CADFund together with Hebei Iron&Steel Group (the biggest steelmaker in China) invested over US$ 600 million and acquired Palabora Mining Co. from Rio Tinto and Anglo-American, making it the eighth project of CADFund in South Africa[2].

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[1] Information obtained through interview with official, CADFund SA Rep Office

[2] Ibid.