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The African boom: China and India investments and the implications for Australia

By David Dorward - posted Monday, 13 August 2012


Africa is in the midst of an economic boom. Foreign Direct Investment [FDI] in Sub-Saharan Africa grew from US$9bn in 2000 to over $62bn in 2008, with Ernest & Young capital investment forecast of $150bn by 2015.The number of African households with discretionary income is growing. It is being driven by investments from China and India that could bring Australia's mining boom to a close sooner than expected.

In 2002, China surpassed Britain as Africa's third largest trading partner. In 2006 is surpassed France to number 2 and in 2009 China supplanted America into first place, with trade of over $129bn. Bloomberg predicts China-Africa trade at $300bn by 2015.

The Export-Import Bank of China is the world's third largest export credit agency, providing more export credit in 2008 than the entire G7. Between 2001 and 2010, the China Export-Import Bank lent $67.2bn to Sub-Saharan Africa, $12.5bn more than the World Bank. In 2012 the China Development Bank lent $2bn to small and medium-sized enterprises in Africa; 24 projects in 25 countries.

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China's investment strategies in Africa are long-term, based on national security needs, not short-term commercial profit. In 2006 China provided an interest-free loan to Ghana to rebuild the main Accra to Kumasi road. In 2010 the Export-Import Bank provided an additional $16bn loan for infrastructure. In 2011 China funded the Bui hydroelectric project. In 2012 the China Development Bank provided $3bn for a joint Ghana Natural Gas Corp.- China Petroleum and Chemical Corporation natural gas project to be repaid in oil and natural gas from Ghana's offshore fields.

The China Export-Import Bank undercut the IMF in Angola, providing a 17-year $12bn infrastructure loan at 1.5% interest, with a 5-year no interest period, in part to rebuild the Benguela railroad across Angola to copper-rich Zambia. The state-owned China Petroleum and Chemical Corp has expanded its holdings in Angola, which has supplanted Saudi Arabia as a supplier of oil to China.

China's investments in Africa are largely focused on the resource sector: oil, natural gas and minerals. Africa contains 99% of known world reserves of chrome, 89% of platinum, 80% of manganese, 70% of tantalite, 53% of cobalt, to name but a few.

In 1998-99, China funded and built a 1,600 km oil pipeline across Sudan. By 2002, Sudan was supplying over 9% of China's oil imports. By 2009, 13 of the 15 largest foreign companies in Sudan were Chinese, with investments of over $8bn.

In Uganda the China National Offshore Oil Corporation is exporting in Lake Albert. The Export-Import Bank provided a $1.2bn loan to Tanzania for a gas pipeline and processing plant.

But China's investments are not just in oil. In 2007 the Industrial and Commercial Bank of China took a 20% stake in Standard Bank of South Africa, with its network of over a thousand branches in eighteen countries. In 2001, Sichuan Hongda of China bought an 80% stake in Tanzania's coal and iron-ore mining for $3bn. In 2011, Wuhan's WISCO, China's third largest steelmaker, paid $100 m for iron ore exploration permits in Madagascar. Shandong Iron and Steel offered $1.5bn for a 25% stake in the Tonkolili iron mine in Sierra Leone, with reserves of 13bn tonnes. China has major investments in iron ore mines in Guinea, Gabon, Cameroon and the Democratic Republic of Congo.

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In 2007 the China Export-Import Bank provided $8.5 bn loan to the Democratic Republic of Congo for joint venture infrastructure projects in exchange for 10m tonnes of copper and 600,000 tons of cobalt. Western mining companies were 'outraged' at the China state enterprise undermining 'free-market' capitalism- despite US and World Bank support for the Tenke Fungurume mining project on much less favourable terms. The IMF demanded re-negotiations of the Chinese loan, threatening to withdraw support for DRC debt forgiveness (mainly loans granted to the corrupt Western-backed former Mobutu regime).

The pace of China's Foreign Direct Investment has occasionally outstripped its managerial capacities. In 2006 China secured the $3bn development of the Belinga iron ore mine in Gabon from former Pres. Omar Bongo, but was slow implementing work. In 2012, BHP Billiton struck a $3.5bn deal with Pres. Bongo Ondima, son of the former president, to take over the Belinga mine.

The rise of China in Africa has been symbolised by the luxurious new African Union headquarters in Addis Ababa, built and financed by China.

The other big Asian player in African investment is India, which ranked 4th in Australian exports in 2009. African-Indian bilateral trade has grown from under $1bn in 2001 to over $60bn in 2011, dwarfing Indian-Australia trade. At the first Africa-India Summit in 2006, India granted duty-free status on 94% of Indian tariffs to the 33 Least Developed Countries in Africa. At the Second Africa-India Summit in 2011, Indian provided $5bn line of credit over three years, with numerous agricultural and technical aid projects.

Indian investments are far more diverse, largely private sector, including many small and medium-size companies, and more difficult to document. There are over 150 Indian companies in Liberia alone. Arcelor Mittal of India, the world's largest steel company, has acquired the Liminco iron ore mine in Liberia and plans to ship 4 m tonnes of iron ore annually from 2012. In 2006, Apollo Tyres, India's second largest tyre manufacturer, bought South African Dunlop for $62bn. In 2010 Bharti Airtel of India bought Zain of Kuwait's African telecommunications operations for $10.7bn, its Sept 2011 quarterly profits being in excess of $1bn. Kalpa-Taru Power has built transmission infrastructure, while Tata Africa Holdings, an IT and engineering conglomerate, has been active in over a dozen African countries.

In 2004 Vedanta Resources, India's largest non-ferrous metal company, acquired 51% of the Konkkola copper mine in Zambia. In 2008 it opened a 311,00 ton direct-to-blister smelter, one of only a few in the world. China Non-Ferrous Metals Mining Corp. manages at least 4 major copper mines in Zambia.

In 2009 Katutori Global of Bangalore, the world's largest rose producer, leased 100,000 hectares in Ethiopia to grow food for Eastern and Southern Africa and flowers for the European market. Olam International has invested over $183m on 28,000 hectares of rubber plantations in Gabon, eventually planning for 50,000 hectares, producing rubber at a higher yield per acres than Asia.

African trade and investment by China and India tend to be complementary. Both have developed skills in developing enterprises within vast but impoverished domestic markets- how to make money in the midst of poverty. Together they provide a major challenge to historic commercial hegemony by the United States and former colonial powers, Britain and France.

Then there is BRICS, the forum for closer commercial cooperation between Brazil, Russia, India, China and South Africa. Together they constitute over 30% of new FDI in Africa. In 2012 in Mexico, BRICS chipped in $75bn to the IMF but demanded 'governance reform', in other words a greater voting power, loosing the U.S. control over the presidency of the World Bank and European monopoly of head of the IMF. BRICS has also demanded greater scrutiny of lax monetary policies by the European Union and the United States.

Vladimir Dmitriev of the Russian Development Bank had proposed BRICS 2013 meeting in South Africa discuss a wider BRICS currency swap, similar to the Russia-China currency swap. It would enable the Reserve Bank of India to offer cheaper loans to Indian businesses for financial deals in China through the China Export-Import Bank. In 2012 the Central Banks of China and Brazil signed a currency exchange pact to lessen Brazil's exposure to U.S. dollar fluctuations and move the Yuan closer to a role as an international currency of exchange.

There are talks of establishing a BRICS Bank, which could rival the Western-oriental World Bank as a source for Third World development funding.

Mozambique is seeking $1.5bn from China for a deep-water port as part of an iron-steel project with Vale Mining of Brazil, another aspect of closer BRICS cooperation. Oil had been discovered offshore in Liberia and Sierra Leone, with the head of the Liberian National Oil Company stating that Liberia should move beyond its historic links with America to focus on closer cooperation with the BRICS countries. By 2011, Indian FDI in South Africa exceeded $6.7bn.

For the United States, Africa's natural and mineral resources remain strategically important, hence the creation of AFRICOM, one of the nine US Department of Defence Unified Command, established by Pres, George W. Bush in 2007. American paranoia over loss of hegemony extends well beyond Asia, yet as Harry Broadman, former World Bank advisor, has noted, "Fundamental differences in the resource, labour and capital endowments of Africa and Asia make them complementary business partners-meaning that the trend will likely be sustained".

The world is changing. By 2020, China's GDP is projected to exceed that of the United States, India will supplant Japan as number 3, Russia will exceed Germany to number 5 and Brazil will rank above both Britain and France.

For Australia, the acceleration of mining investments by China and India in Africa could see iron ore prices fall to $80 per tonne, possibly even $60 per tonne, in the next seven years. However there are other, more important diplomatic, commercial and strategic dimensions that Australia must confront. The Industrial and Commercial Bank of China has called for increased FDI in Australia. Less than 2% of FDI in Australia is Chinese, dwarfed by the USA (28%) and Britain (24%), but politicians squabble over the sale of farmland and other real estate to China. Neither major political party appears to have the intellectual rigour to move beyond the simplistic solutions of the past.

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About the Author

Assoc Professor David Dorward (retired) is Honorary Associate in the History Program at LaTrobe University.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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