Africa's New AU Building: How Many Chinese Workers?

A couple of days ago, Yoon Jung Park at Howard University forwarded a very thoughtful article by Howard University grad Chika Ezeanya, reacting to the just-opened $200 million African Union headquarters building in Addis Ababa, a "gift" from the dragon. Her mixture of frustration and disgust at the symbolism of the African Union accepting the donation of this building was almost tangible and very nicely phrased.

But one thing about her article caught my eye: the statement that 90% of the labor on the building was Chinese.

I was in Ethiopia in February and November, and both times, it was clear to me that there were a lot of Ethiopian workers on the site. Other construction projects I visited overwhelmingly conformed to the usual pattern of Chinese managers and Ethiopian workers. But if this figure was firm, I wanted to add it to my collection of anecdotes-into-data on Chinese workers in Africa.

So I asked Chika about her source. She had heard the figure on the radio, but she directed me to two other news reports.

One, from The Global Post, said "Construction began three years ago by the China State Construction Engineering Corporation, using building materials largely brought from China, and a mix of Chinese managers and Ethiopian laborers." That's what I would have expected.

The other, from Voice of America, said the exact opposite: "It was built by the China State Construction Engineering Corporation, largely with Chinese labor." (This article also made the comment that "Industry experts say 70 percent of the continent's oil exports go to China." Ahem. The real figure is closer to 13% of African oil going to China (2009), compared with the US and Europe, each about 33%.) This put a twinge of doubt into my mind about the VOA author's credibility.

Agence France Presse said "Construction began in January 2009 and involved 1,200 Chinese and Ethiopian workers." No break down.

An Al Jazeera story that said it was "all" Chinese labor. (hat tip to Michael Lee for that one).

So, next step. What do Chinese sources say? Tang Xiaoyang did a quick search for me, and found two articles in the Chinese press. A Xinhua story of July 2010 said that there were "nearly 200 Ethiopians and over 200 Chinese" in July 2010, and another report in December 2011 said that 900 workers were hired at the peak, and that "the Chinese trained Ethiopian construction workers in a 1:1 ratio (一比一)."

Back to Michael Lee, who unearthed a China Daily story, which includes an interview with Zeng Huacheng, the Chinese project manager. Zeng said at the peak there were 1500 workers, normally they had around 1100, and that it was 1/2 Chinese and 1/2 Ethiopian. You'll see a lot of each on the video.

Why are there more Chinese working here than the norm I've seen, of about 20 Chinese to 80 Africans, on average? I imagine it has something to do with the political importance of the project, and the fact that it was financed as a grant, not a loan. The Chinese wanted to be sure it was done on time, and that it reflected a high standard of quality. And as it was financed by the Chinese as a donation, the Ethiopians probably waived their normally strict work permit requirements. Finally, as an aid project, it has to reflect "mutual benefit". Using Chinese materials and labor (half) provides some benefit to China ... not to mention the longer benefit of having the AU members meet in a stunning modern building donated by Beijing.

China and Conflict Minerals in the DRC

OK, it's not really all about China, but an excellent analysis, "What's Wrong with Dodd-Frank 1502?" commissioned by the Center for Global Development and written by Laura Sesay, Congo expert, professor, and aka blogger "Texas in Africa" uncovers the pitfalls of (ineptly) trying to legislate good things for the conflict torn eastern Congo. From the abstract:

Although its provisions have yet to be implemented, section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act is already having a profound effect on the Congolese mining sector. Nicknamed “Obama’s Law” by the Congolese, section 1502 has created a de facto ban on Congolese mineral exports, put anywhere from tens of thousands up to 2 million Congolese miners out of work in the eastern Congo, and, despite ending most of the trade in Congolese conflict minerals, done little to improve the security situation or the daily lives of most Congolese.

In this working paper, sponsored by Todd Moss, Laura Seay traces the development of section 1502 with respect to the pursuit of a conflict minerals-based strategy by U.S. advocates, examines the effects of the legislation, and recommends new courses of action to move forward in a way that both promotes accountability and transparency and allows Congolese artisanal miners to earn a living.

H/T to Duncan Green, at Oxfam UK's "From Poverty to Power" blog. 

China's Foreign Aid: The Economist still doesn't get it



credit: Derek Bacon for The Economist

The Economist still doesn't get it on China's foreign aid. They merrily mix apples and lychees in a new special report on state capitalism, writing:

"And government bodies such as Eximbank, China’s foreign-aid bank, have made no bones about their enthusiasm for tying foreign aid to commercial advantage. One of China’s favourite tools is oil for infrastructure. China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material. Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola."

What's wrong with this? Nearly all of it.

(1) "...Eximbank, China's foreign-aid bank..."

Eximbank is China's export credit agency, i.e. it finances trade deals like the 2009 deal where my old friend Mort Arntzen's American shipping company OSG bought a handful of Chinese tankers. Yes, China Eximbank also manages China's foreign aid concessional loan program, but this is a small part of Eximbank's total portfolio. Standard & Poor's credit rating review of China Eximbank in 2005 found that the concessional loan portfolio made up only 3% (three percent) of Eximbank's assets. 

(2) "...their enthusiasm for tying foreign aid to commercial advantage..."

Yes, China does tie its official foreign aid, while other countries have moved away from this (the UK led this move, but the US is a laggard here). However, tying export credits to your own country's exports is still the norm. Why else would countries have a government instrument to intervene in trade?

(3) "One of China's favorite tools is oil for infrastructure".

Not really. This kind of tool is relatively rare. If you consider all the transactions financed by Chinese banks in Africa, for example, oil-secured infrastructure loans that are unrelated to developing an oil asset (including refinery/pipeline) seem to be limited to Angola, the Congo-Brazzaville, and (in the works) Ghana.* Latin America has seen more deals like this: at very high interest rates. And coming right after a sentence about foreign aid implies that China's oil-secured infrastructure loans are "foreign aid" -- when they're not, by anyone's official definition.

(4) "China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China’s infrastructure giants) in return for a guaranteed supply of oil or some other raw material." 

This isn't quite how it works. This makes it sound as though the Chinese dangle a few hospitals in front of an African president and then say: you can have this if you guarantee us a supply of your oil!

Here's how it really works. The Chinese bank will offer to provide export-secured finance (these exports can be anything -- as I wrote recently in The Guardian, in Ethiopia, all of the country's exports to China were used to secure a loan). I'm not sure what a "soft loan" is technically, but all of these loans have been at market rates. The "guaranteed supply" of whatever export is already going to China is simply the mechanism for ensuring repayment of the loan (the proceeds are deposited into an escrow account). China doesn't dangle promises of schools, hospitals, etc. -- the proposals about what infrastructure to finance with the loan are made by the borrower. They might include schools, but they usually focus on productive infrastructure: roads, rail, electricity production.

(5) "Eximbank supplied a $2 billion low-interest loan to help China’s oil companies build infrastructure in Angola." 

No.  First, China's oil companies were not building infrastructure in Angola. The Chinese have world-class construction companies, and that's who got the business. Second, the loan was not "low-interest" but was made at LIBOR (London Interbank Offered Rate) plus a margin of 1.5% (this changed in later tranches). LIBOR is a market rate, and LIBOR plus 1.5% is actually a higher rate than some western commercial bank oil-secured loans given to Angola, as an excellent study by Global Witness makes clear.

For more detail than you probably want on how China's foreign aid really works, see some of my published papers here.
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* Nigerians proposed using this model, but it apparently never happened. Although there is some evidenced that an early suppliers credit to finance two power plants was secured by oil exports, the loans were never repaid. If this system was used, it broke down. In Sudan, this model was apparently used very early on in the mid-1990s, but I believe it was limited to the construction of a joint-venture oil refinery. In Niger and Chad oil-related construction (refinery /pipeline) is also being financed this way.

What do Africans Think About China?

Aubrey Matshiqi/CPS

Today I spoke with a reporter from Al Jazeera who asked me, as many do, what "Africans" think about "China". It's always hard to even begin to give an answer to a broad question like that. I tried to break down "Africans" and "China" into subcategories. I spoke about public opinion polls from the BBC and elsewhere. The truth is, there are many, many different views. Where you stand depends on where you sit, as they say.

Right after we hung up, I received an email from Yoon Jung Park with a link to an interview with Aubrey Matshiqi, a senior research associate at the South African Centre for Policy Studies - an independent policy research institution that produces original studies on South Africa's and the rest of Africa's policies, governance and democratisation challenges.

He spoke about China, and this is what he had to say:

In December, I was part of a discussion during which an American warned that developing countries such as South Africa should be wary of China. He argued that China is a hegemon and that its narrow political and economic interests are the centre of its universe. Well, he did not put it this well, but I am certain you get my drift.

There is nothing original about these warnings. People warn us dim-witted Africans about China all the time.

What I find amusing – I no longer have the energy for anger – is the fact that these words of wisdom always come from Europeans and Americans and South Africans who are part of the Western sphere of influence. There are many ironies that are lost on these people. Because they are too numerous to mention, I will share just a few.

Firstly, it is extremely problematic that, as a man who has spent almost half a cen-tury on this planet, I thought, for most of that time, that the English-speaking parts of the West were the philosophical, cultural and economic centre of the universe. This is a product of centuries of cultural and economic domination which, in many cases, was imposed violently.

Secondly, I did not experience China as a hegemon. It is America and Europe that imposed themselves and their ways on us.

Thirdly, my experience of the hegemony of the West has largely been that of a gap between its liberal democratic aesthetic and the moral content of its relations with the ‘Third World’.

That said, as a democrat, I recognise the gap between China’s economic resurgence and its very deep democratic deficits. This article is, therefore, not about waving the Chinese flag in your face. As I have said before, the global economic crisis and shifts in the global system from West to East constitute an opportunity for us to reconfigure the content of global economic relations and work towards a less unethical or more ethical global cultural, environmental and economic order. If this does not happen, it is highly unlikely that sub- stantive democracy will become a reality for most people on this planet.
 
To continue reading, or to see the video interview, click here. H/T to Yoon Jung Park.

Making Sense of China's Development Finance and Aid

Below is a short article of mine published on Christmas Day when a lot of people were actively reading online, no doubt. It appeared in East Asia Forum (Crawford School, Australia National University), December 25th, 2011. Thanks to Denis Chainey for summarizing this out of a longer chapter.

Chinese Development Finance in Africa

Author: Deborah Brautigam, American University

Chinese development finance in Africa is unusual in that much of the financial flows from China do not constitute official development aid (ODA).

Instead, much of it comes in the form of export credits and strategic lines of credit to Chinese-related companies, among other mechanisms. In this sense, it is very similar to Japanese financial flows to China several decades ago, when Japan began its outward march with a large line of credit to China, which, at the time, was not credit-worthy either. Looking at the nature of Chinese development aid — and non-aid — to Africa provides insights into China’s strategic approach to outward investment and economic diplomacy, even if exact figures and strategies are not easily ascertained.

Chinese development finance in Africa involves two distinct types of financial flow: ODA and ‘other official flows’ (OOF). ODA as defined by the OECD refers to concessionary funding given to developing countries and multilateral institutions primarily for the purpose of promoting welfare and economic development in the recipient country. Funding must be ‘concessional in character’ (i.e. involving government subsidies) and loans must have a grant element of at least 25 per cent, using a 10 per cent discount rate.

While only concessional loans and grants qualify as ODA, governments also offer other official flows: funds for the donor country’s firms to subsidise or guarantee their private investment in recipient countries, military aid and export credits. These funds are reported as OOF. This category includes loans that are not concessionary in character, and official bilateral transactions — whatever their grant element — that are primarily export-facilitating in purpose.

China provides the equivalent of ODA through three instruments: grants, zero-interest loans and concessional (you hui dai kuan, or fixed-rate, low-interest) loans. These instruments finance Chinese government scholarships for African students; Chinese medical teams; ‘turn-key’ construction of stadiums, government buildings, telecommunications networks and other infrastructure; technical assistance teams in agriculture and other sectors; short-term training programs; youth volunteers; and material aid (the export of Chinese goods).

Grants and zero-interest loans were the primary instruments of China’s ODA until 1995, when concessional loans were introduced. According to the Chinese white paper on aid released in April this year, approximately 40 per cent of China’s aid is financed through grants. Zero-interest loans are also a mainstay of China’s aid. The debt-relief program launched by Beijing in 2000 targeted overdue zero-interest loans for cancellation, with RMB25.58 billion worth (US$3.76 billion) cancelled, and of this, RMB18.96 billion (US$2.79 billion) was cancelled in Africa.

Only large projects with a value of at least US$2.4 million, and that make a minimum 50 per cent use of Chinese goods and services, may be funded with concessional loans. China’s concessional-loan program in Africa has grown rapidly. At the end of 2005, China Export-Import Bank had cumulatively funded only about US$800 million in concessional loans in Africa, for 55 projects. Two years later, the number of African projects had risen to 87, and the cumulative value was about US$1.5 billion. And the government recently pledged US$10 billion in concessional /preferential credits for Africa, to be committed by 2012.

China also supplies other official funds that do not qualify as ODA. Three categories of loans are relevant here: export buyers’ credits, including preferential buyers’ credits (you hui mai fan xin dai) and commercial-rate, export commodity-secured or ‘mutual-benefit’ credits (hu hui dai kuan); official loans at commercial rates; and strategic lines of credit to Chinese companies.

For Africa, the OOF category provided by OECD members has normally been well below the level of funds provided on ODA terms. But this is not the case for China. China’s government-provided finance to Africa falls primarily into the OOF category, rather than ODA. As noted above, China’s official finance in Africa consists of grants, zero-interest loans, debt relief and concessional loans (which would all qualify as ODA), as well as preferential export credits, market-rate export buyers’ credits and commercial loans from Chinese banks (none of which would qualify as ODA).

In Africa, as elsewhere, Chinese aid agreements seem to follow diplomatic ties. China’s ODA does not appear to be given in larger amounts to resource-rich countries, as can be seen in flows to Nigeria and the Democratic Republic of Congo. Grants and zero-interest loans are distributed fairly evenly around the continent, while concessional loans fit a country’s ability to pay, either because it is middle income or because it will finance an income-generating project.

China’s economic push to ‘go global’ is coordinated by many policy instruments, including development aid. In this way, China’s strategy resembles Japan’s outward march more than it resembles the experience of other OECD countries. Chinese banks have developed instruments they believe can link Africa’s riches — its natural resources — to its development. Because they regard these resources as a source of wealth, they generally do not offer mutual-benefit loans (hu hui dai kuan) at concessional rates. And to the Chinese, even resource-poor countries like Ethiopia — whose balance sheets might not look good — sometimes have untapped capacity to service a future debt, if borrowed funds go toward productive projects. It remains to be seen whether fears about the sustainability of this debt are borne out.

Deborah Brautigam is Professor at the School of International Service, American University, and Adjunct Professor at the Department of Comparative Politics, University of Bergen. Professor Brautigam’s research was presented at China Update 2011. The annual China Update conference is hosted by the China Economy Program, in collaboration with the East Asia Forum, at the ANU in July. This article is a digest of a Professor Brautigam’s chapter ‘Chinese Development Aid in Africa’, in Jane Golley and Ligang Song (eds.) Rising China: Global Challenges and Opportunities. This book is the latest publication in the China Update Book Series, launched at the China Update conference every year.

"The Zambezi Valley: China's First Agricultural Colony?" Fiction or Fact?

More than four years ago, Loro Horta, then a Ph.D. candidate at the S. Rajaratnam School of International Studies (RSIS) in Singapore, posted a series of stories including "The Zambezi Valley: China's First Agricultural Colony?" (1) on the website of the Center for Strategic International Studies (CSIS), repeated in "Food Security in Africa: China's New Rice Bowl," at the Jamestown Foundation China Brief (2) making strong claims about Chinese interests in Mozambique agriculture: "China" wanted to grow rice in Mozambique to ship back to China, use Chinese farmers to do it, and had pledged $800 million toward this goal.

I read that commentary, as did many other people. It is regularly cited as a key example of Chinese interest in "land grabbing". It appears in an oft-cited review of land-grabbing published by the International Food Policy Research Institute (3) and was cited by an authoritative study of land-grabbing in Africa by a joint FAO-IFAD-IIED (4) team and a new study by two Standard Bank researchers (5). It is a major contributor to the belief that "China" wants to grow food in Africa to ship back home.

The problem: very little of what was written in this sensational commentary appears to be real.

Intrigued by the story, I made sure to include Mozambique in my field research for The Dragon's Gift. I went to Mozambique in the summer of 2009. Apparently, Horta did no fieldwork for this research (and mentions none in his references). None of the Mozambique experts I interviewed had been contacted by him. Horta provided no references to interviews in Mozambique or any news stories supporting these claims. I later wrote to Horta and asked him if he could provide any actual evidence for his claims. He replied that he couldn't find his source material or notes.

After I returned from Mozambique, I wrote about the lack of evidence for Horta's claims in a 2009 article for China Quarterly, and in The Dragon's Gift (6) Sigrid Ekman, a Norwegian researcher, later went to Mozambique to research this story for her master's thesis (7). She came up with the same conclusions: a lot of this story appears to have been fabricated -- or to put it more kindly, woven together out of rumors, mistakes, and a grain of interest.

Yet myths created in the internet age have a life of their own. Today, I received peer review comments on a small piece I wrote for IFPRI on China's agricultural engagement in Africa. One reviewer wanted me to be sure to take account of "Horta's research" in my piece. I only wish I had enough space to do so adequately in an IFPRI publication.

It's embarassing to take apart a student's paper in public. Usually we have the chance to do peer review in a more professional and discrete way before something makes its way to print. CSIS never had the Horta paper peer-reviewed. Nevertheless, this blog posting is way overdue.

First, Horta comments on China's "growing demand for food stuffs from Africa," providing as evidence China's increased general consumption of "seafood, rice, soybeans, sugar, cereals and other crops." However, between 2000 and 2009, no African country exported rice, soybeans, sugar or cereals to China (some did export seafood and sesame seeds). This doesn't seem to be very robust evidence of China's demand for food from Africa.

"China’s search for new land has led Beijing to aggressively seek large land leases in Mozambique over the past two years, particularly in its most fertile areas, such as the Zambezi valley in the north and the Limpopo valley in the south."

Did this really happen? Sigrid Ekman's study, summarized in a recent Mozambique political bulletin by Joseph Hanlon (8), "notes that the now abolished Zambeze valley office (Gabinete de Promoção do Vale de Zambêze, GPZ) tried hard to get Chinese investment and failed." So rather than China "aggressively" seeking large land leases, the Zambeze valley investment promotion office was aggressively courting Chinese investment.

"Chinese interest in the Zambezi valley started in mid-2006, when the Chinese state owned Exibank [sic] granted $2 billion in soft loans to the Mozambican government to build the Mpanda Nkua mega-dam on the stretch of the Zambezi in Tete province."

In fact, although discussions were underway on Chinese financing (China Eximbank) for the Mpanda Nkua dam, this project did not go forward. No Chinese bank has ever granted a loan for Mpanda Nkua.

"Since then, China has been requesting large land leases to establish Chinese-run mega-farms and cattle ranches. A memorandum of understanding was reported to have been signed in June 2007, allowing an initial 3,000 Chinese settlers to move to Zambezia and Tete provinces to run farms along the valley. A Mozambican official said the number could eventually grow to up to 10,000. However, the reports of this deal caused such an uproar that the Mozambique government was forced to dismiss the whole story as false."

Maybe it was false. In a 2007 story, Horta put the figure at 20,000. I tried to find out more about this in Mozambique. However, no one I interviewed in Mozambique recalled such an uproar. I could find no reports on the alleged memorandum of understanding or an "uproar" in the press (I hired a university student to go through four years of newspapers looking for any stories on Chinese engagement in land or agriculture) or in the memories of the dozens of people I interviewed across civil society, think tanks, journalists, the donors, and academia. The whole story began to sound fishy to me.

If Chinese investors wanted large land leases, they clearly could have signed some. After all, as a 2012 Oakland Institute study (9) showed, "Mozambique granted concessions to investors for more than 2.5 million hectares (ha) of land between 2004 and the end of 2009" almost entirely to European and South African investors -- there were no Chinese investors in their list.

"One thing seems to be certain: China is committed to transforming Mozambique into one of its main food suppliers, particularly for rice, the basic element of Chinese diet. An analysis of China’s activities in the valley in the past two years provides some strong indication of China’s long term intentions.

Following this statement, Horta has put together real facts about China's aid program and interest in building dams, roads, and modernizing harbors, and surmises that this interest "is clearly designed to maximize production and facilitate the rapid export of foodstuffs to China".

That's quite a leap. Chinese are interested in building infrastructure all around the continent, but I don't think one can conclude that this is evidence of a masterplan to feed China!

Horta then makes what I believe to be his most egregious claim:

"In early 2008, the Chinese government pledged to invest $800 million in modernizing Mozambican agriculture ..."

I have seen no evidence, anywhere, in Mozambique or outside, of this pledge. People were baffled when I asked about it. No one knew anything about it, even as a rumor. While I can often find the source of big mistakes, I haven't been able to track this down (11). The trail starts with Horta.

"...with the goal of boosting rice production from 100 000 tons to 500 000 tons a year in the next five years."

The goal of boosting rice production was Mozambique's goal, not China's. The amount mentioned here represents the gap between local demand and local production, at the time filled by imports. Which makes Horta's next statement all the more surprising:

"Mozambique’s increased rice production is clearly destined for export to the Chinese market, since the staple accounts for just a tiny fraction of the Mozambican diet."

Clearly, Horta didn't look up consumption and import statistics for rice in Mozambique (12).

"With this objective in mind, China is funding the establishment of an Advanced Crop Research Institute and several other small agricultural schools throughout the country."

Horta here uses as "evidence" for Chinese plans to make Mozambique into its rice bowl a real project -- the Umbeluzi/Boane agro-technology research and demonstration center, one of 20 China is building across Africa as part of its aid program.

"Over 100 Chinese agricultural specialists are currently in Mozambique, including teams from the Hunan Hybrid Rice Institute, China’s top institution in the field."

There is no evidence that I could find that China ever sent 100 agricultural specialists to Mozambique. I suspect Horta was mixing up China's pledge to send 100 agricultural specialists to Africa. It’s true that the Hunan Hybrid Rice Institute did send a team to Mozambique (13). They later decided to bid to run China's foreign-aid funded agro-technology demonstration center in Liberia, not Mozambique (14). I suspect their visit was connected to a decision about which project to bid on.

"Other major projects include the construction of numerous irrigation and canal networks in the valley."

I’m not sure what Horta was referring to here, but possibly it is the modest project in Gaza province operated by Hubei province (15), which also provided the company associated with China’s foreign aid-funded agro-technology demonstration center (see below). Hubei province has a twinning arrangement with Gaza province to develop 300 hectares to demonstrate the potential of irrigated rice to Mozambicans. As of 2009/2010 they had developed 35-40 hectares, and in 2010 they applied for more land (16).

"The lifting by the Chinese government of import tariffs for 400 Mozambican agricultural products, including rice, will further facilitate food exports to China."

China has lifted import tariffs on 400 products not for Mozambique alone but for all of Africa's low income countries. Rice is not on the list (17).

"The idea of moving thousands of Chinese settlers into the valley has caused great outrage locally, with many fearing the repetition of the dias negros (black days of oppression)."

Again, my research assistant and I could not find any Mozambican news reports on this "great outrage" nor did people I interviewed during my fieldwork recall any.

"The Chinese are now linking the implementation of major projects such as dam construction and the funding for the Catembe Bridge – an important project that will link the capital, Maputo, to the district of Catembe across the bay – to concessions on the land lease issue ... Instead of thousands of Chinese settlers, it’s now more probable that a few hundred or perhaps 1,000 Chinese will move into the valley in coming years. The Chinese will manage the large farms, operate and maintain the advanced agricultural equipment, and maintain the canals, while Mozambican labor will do most of the manual work."

These appear to be pure conjecture. No evidence is provided or references to interviews or new stories that would support these claims. And so on.

My point in writing this is not to argue that there has been no Chinese interest in Mozambican agricultural investment. There has been. In March 2006 a delegation from China did tour agricultural areas of Mozambique, although it’s not clear whether this was to look for investment or to find a suitable site for a promised agro-technology demonstration center (18). Maybe both.

The authors of the 2009 FAO/IIED/IFAD report (4) interviewed Chinese state-owned grain and oilseed trading company, COFCO, who told them they were "involved in discussions for a major land concession to grow rice and soybeans in Mozambique, though at present this deal has not progressed." This interest was real, if far more modest and ordinary than it appears in Horta’s writings. Another Mozambican researcher, Sergio Chichava, showed that between 2000 and 2009, five Chinese agricultural investment projects received approval from the Mozambique authorities (19). Among these was the aborted COFCO project, approved in 2005 at $6 million. The average size of the other four approved projects was only $615,000, and one of these was Hubei Lianfeng’s approved project, for just over $1 million (20).

None of this, however, supports the idea that “China” was intending to create an agricultural colony in Mozambique, or make the Zambezi Valley into China’s rice bowl. My take on this is that Horta, who was then a student, wove his paper out of bits of real things on the internet, spiced up by rumors and gossip. But if anyone has another take on this, or evidence (either way), please post. I'm interested in seeing it.

update: This blog post has been translated into Flemish on the Chinasquare.be website and appears also at the Flemish site Mondiaal Nieuws.  H/T to Frank Willems.

Horta has published a response to this story at the same CSIS website. For a deconstruction and critique of that response, see this posting by Sigrid Ekman, a Norwegian researcher who did months of fieldwork in Mozambique for her master's thesis.

Rather than respond point by point to Horta, I'll just note one thing. Horto begins by saying that he was not the first to circulate a report that "China" wanted to acquire land in the Zambezi Valley, but rather that a Chinese paper made this claim in May 2008. In fact, as I wrote above, it was Horta who first made this claim, writing in August 2007:  "In 2006, Beijing and Maputo signed a memorandum of understanding concerning the creation of a massive agricultural project in the Zambezi river valley area. Under this agreement, as many as 20,000 Chinese settlers may move into the valley to run large- to medium-scale farms destined to supply the ever more affluent Chinese market."

Horta promised to elaborate on his rebuttal of this critique in a longer article to be published by the South African Institute of International Affairs. No article has yet appeared, as of October 2014. Sigrid Ekman and I published a more elaborate version of our findings in May 2012 in African Affairs: Rumours and Realities of Chinese Agricultural Engagement in Mozambique.


Notes:

(1) http://csis.org/publication/zambezi-valley-chinas-first-agricultural-colony May 2008. Horta first made some of these claims in 2007: http://www.isn.ethz.ch/isn/Current-Affairs/Security-Watch-Archive/Detail/?id=53470&lng=en. Then, he said that "up to 20,000 Chinese" might move to the Zambezi Valley.

(2) http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=35042 May 2009.

(3) http://www.ifpri.org/sites/default/files/bp013Table01.pdf April 2009.

(4) http://www.ifad.org/pub/land/land_grab.pdf 2009.

(5) https://m.research.standardbank.com/DocumentReader?docId=1671-E1AFB8F7AF0747A98326A4419C169FE0-1 November 2010.

(6) http://www.american.edu/sis/faculty/upload/Brautigam-Tang-CQ-final.pdf December 2009.

(7) Sigrid-Marianella Stensrud Ekman, “Leasing Land Overseas: A Viable Strategy for Chinese Food Security?” unpublished master’s thesis, Department of Economics, Fudan University, Shanghai, 2010.

(8) http://www.gg.rhul.ac.uk/Simon/GG3072/2011-67-3.pdf February 11, 2011.

(9)http://www.oaklandinstitute.org/sites/oaklandinstitute.org/files/OI_country_report_mozambique_0.pdf December 2011.

(10) I’ve often seen a figure of $55 million associated with the Chinese agrotechnology demonstration center in Mozambique. According to a copy of the contract given to me by the Ministry of Agriculture in Mozambique in June 2009, China's agricultural center in Mozambique would cost 55 million RMB (about US$6 - 9 million depending on the exchange rate), not dollars. Such a typical mistake, but an important one. China is building 20 centers around Africa, all at the request of local governments that will be using them for their own agricultural purposes. Mozambique’s was the first built. All the centers I've seen have a big agricultural training component (labs and dormitories, for example). All the centers appear to have been budgeted at around 40-55 million RMB. They follow in the footsteps of China’s failed projects in the past. See http://www.american.edu/sis/faculty/upload/Brautigam-Tang-CQ-final.pdf December 2009.

(11) Could it be related to a request the Mozambicans made for China to help fund the Moambe Science and Technology Park, a pet project of the Minister of Science and Technology? Together with the agricultural research center in Umbeluzi/Boane, the two projects would have cost $700 million (the Chinese agricultural center itself was projected to cost 55 million RMB, about US$9 million) (10). The Chinese did say they would help out with Moambe, but not fund the entire thing. Mozambique later received a mixed grant/credit of $15.8 million from China to support distance education and "science and technology" See:  http://www.clubofmozambique.com/solutions1/sectionnews.php? secao=social_development&id=22558&tipo=one

(12) http://www.riceforafrica.org/card-countries/g1/mozambique/353-mozambiques-rice-statistics

(13) http://www.macauhub.com.mo/en/2006/03/31/786/

(14) http://www.american.edu/sis/faculty/upload/Brautigam-Tang-CQ-final.pdf December 2009.

(15) http://allafrica.com/stories/201112272506.html

(16) http://www.macauhub.com.mo/en/2010/05/14/9086/

(17) http://www.chinaafricarealstory.com/2010/04/list-of-zero-tariff-products-is-now.html

(18) http://www.agroportal.pt/x/agronoticias/2006/03/24.htm

(19) http://www.iese.ac.mz/lib/noticias/2010/China%20in%20Mozambique_09.2010_SC.pdf

(20) I haven’t been to Mozambique since 2009, but in 2010, I interviewed a Chinese agricultural specialist who knew about Chinese engagement in Mozambique. She told me that Hubei Liangfeng, the company from Hubei province that is managing China's foreign aid research station in Umbeluzi, Boane, Mozambique experimented with growing hybrid rice and soybeans for profit. "They experimented first on a small scale, but found many problems. The land was too dry. They needed to water two or three times a day. It was very costly. Also, mice destroyed the plants."

Ethiopia's Partnership with China: Feedback

Chinese-built Ring Road, Addis: Flicker-Pougala

On December 30, The Guardian's Global Development, Poverty Matters blog published a short article they had requested from me on China and Africa as part of their end of the year wrap up of development news. I decided to write on China and Ethiopia. Having just spent several weeks there looking into Chinese engagement for an IFPRI study, I was fascinated by how many different instruments shape the activities in this cooperation. And how different it is from the West's engagement in Ethiopia, most of which is based on aid and NGOs. To read the article, click here.

In my article I noted that Chinese state-owned oil companies had explored for oil but left empty-handed. I'd concluded this, as "everyone knows" that "China" was exploring for oil in the Ogaden in 2007 when they were attacked by the ONLF. Here's a comment I received from the Ethiopian chairman & CEO of a Hong Kong-registered company, Southwest Energy (HK) Ltd.

I thoroughly enjoyed reading your blog in the Guardian about Ethiopia’s Partnership with China. I have also purchased your book and I am looking forward to reading it.

Regarding your comment on China exploring for oil in Ethiopia and leaving empty handed, that is not entirely accurate. Until recently, no Chinese companies have actually acquired exploration licenses in Ethiopia. They have only worked as sub-contractors for other oil companies. I know because we were one of the companies which hired them. 

In general, I very much agree with your thesis.

It's great to have first-hand feedback on the real story from participants.

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.

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.

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.

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:
http://www.oecd.org/dataoecd/15/47/39085836.pdf
http://www.oecd.org/dataoecd/13/59/39787191.pdf
More generally:
http://www.oecd.org/statisticsdata/0,3381,en_2649_34169_1_119656_1_1_37431,00.html

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.

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.

 

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.

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.

  

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.


Endnotes:
 
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: www.imf.org/external/NP/LOI/2000/ago/01/index.htm (accessed May 22, 2009); Government of Angola, “Memorandum of Economic and Financial Policies,” February 7, 2001, available at:
www.imf.org/external/NP/LOI/2001/ago/01/INDEX.HTM (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,” Bloomberg.com, 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: www.atimes.com/atimes/China_Business/IC27Cb01.html (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.