Wednesday, February 21, 2018

Guest Post - China in Africa: Much Ado about Investment - Part 2

This guest post, the second of three, is by Dr. Thierry Pairault, research director at France's Centre National de la Recherche Scientifique (CNRS).[1]

Real Trends in China's African Investment

Chinese official overseas FDI data has its problems, as this blog has pointed out. For example, the two largest investment destinations in Latin America are the Cayman Islands and the British Virgin Islands, two offshore financial centers. Yet it's likely to be more accurate than the data put out by The Financial Times. Here we look at trends and comparisons, which are less likely to be affected by the Chinese affection for offshore financial centers. The trends in the MOFCOM data suggest that Chinese investment in Africa is not only modest, it is falling. According to official data, the amount of Chinese FDI in Africa for 2016 was $ 2.4 billion, a decrease of 19% compared to 2015 ($ 2.9 billion), itself falling by 7 % compared to 2014 ($ 3.2 billion), itself in 5% fell compared to 2013 which was the second-highest year from 2003 to today.
Fig. 1: China's OFDI compared (2003-2016) Sources: MOFCOM, UNCTAD

China's FDI in all of Africa is equal to:
  • 14.1% of what China invests in the US
  • 83.6% of what China invests in Canada
  • the same as what China invests in Germany
While the share of China's total outward FDI has increased steadily since 2003 to 13.5% of the World's total FDI, the share of China's FDI in Africa has declined consistently since 2011 and is now only 1.2% of China's total outward FDI and 0.2% of World's total FDI (see Figure 1).

According to Figure 2, Chinese FDI in Africa seems to have peaked, while that in the EU and the US has been steadily rising.

Fig. 2: China's OFDI destinations compared (2003-2016) Sources: MOFCOM, UNCTAD
Investing, Financing, or Providing Services?

Then, the question: how to reconcile the feeling that China is investing heavily in Africa with factual data showing the precise opposite?
Once again, we are confronted with a classic confusion between investing, financing and providing services. International bodies (IMF, OECD ...) gave a clear definition of what should be considered as an investment; it is a definition to which China adheres and which is recalled in the MofCOM's last Statistical Bulletin:[2]
FDI is an activity in which an investor resident in one country obtains a lasting interest in, and a significant influence on the management of an entity resident in another country. This may involve either creating an entirely new enterprise (so-called "greenfield" investment) or, more typically, changing the ownership of existing enterprises (via mergers and acquisitions). Other types of financial transactions between related enterprises, like reinvesting the earnings of the FDI enterprise or other capital transfers, are also defined as foreign direct investment.[3]
China does not invest in infrastructure in Africa but builds and finances African investments in infrastructure.

In order to make the confusion more obvious and give investment its exact role, I shall compare the amount of FDI to the value of services provided. I shall take the turnover of overseas construction contracts completed in one year as a proxy for services.[4]

Figure 3 shows that the turnover achieved by Chinese construction companies in 2016 was more than 25 times higher than the amount invested by China in Africa.

Fig. 3: China in Africa: FDI vs Completed contracts. Sources: MofCOM, National Bureau of Statistics.
This was not an exception but the rule. It must be perfectly clear that China's FDI in Africa is an expense for China but not an income for the hosting African country. On the other hand, payment for services is an expense (and at the same time an investment) for the client African country AND a revenue for China.

Keeping in mind this difference, these two activities each illustrate, in their own way, China's presence in Africa; they show clearly that China is a services provider rather than an investor, that Africa is rather a customer than a partner. This conclusion would be even more evident if the services were to be added to the Chinese goods bought by African countries or, more accurately, to the growing African merchandise trade deficit with China.

In my final post, using examples from Algeria, I will explain how the many kinds of "Chinese" enterprises in Africa further complicate efforts to understand Chinese FDI.

[1] Dr. Thierry Pairault is research director at France's Centre National de la Recherche Scientifique (CNRS) and at the Center of Studies on Modern and Contemporary China at the École des Hautes Études en Sciences Sociales (EHESS - School of Advanced Studies in Social Sciences). Please see http://pairault.fr/sinaf/ for more information about his work.
[2] Notes 1 and 2, page 3 (see http://fec.mofcom.gov.cn/article/tjsj/tjgb/201709/20170902653690.shtml).
[3] Moreover, to be considered as a direct investment, an investment must represent at least 10% of the shares; otherwise it is a portfolio investment (speculative therefore most often). OECD Economic Outlook, Volume 2003, Issue 1, p. 158 (Box VI-I).
[4] Chinese statisticians use the terms "Contracted projects", chengbao gongcheng, and "Value of Turnover fulfilled", wancheng yingye'e. We are taught, "Overseas Contracted Projects refer to activities of contracting overseas construction projects by Chinese enterprises".

3 comments:

  1. I thought this was very interesting. How did you calculate the Completed Contracts on Figure 3? I am trying to verify the MoFCOM data by I cannot access it.

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  2. The value of completed contracts is published every year in the China Commerce Yearbook under International Economic Cooperation: "China's International Project Contracting and Labor Service Cooperation in 2016 by Host Country/Region".

    ReplyDelete
  3. For further information, please contact the guest post author, Dr. Pairault (see [1] above.

    ReplyDelete