One Belt One Road and East Africa
Last year, Chinese ODI declined for the first time since 2003. While there are domestic reasons for this decline, as the Chinese government is concerned about potential capital flight, there are also geopolitical reasons resulting in increasing scrutiny and regulatory hurdles to Chinese ODI, especially in developed countries and in sectors thought to be strategic and sensitive, and where the Chinese investors are seen to be state related and investing for strategic reasons rather than financial.
At the same time, there is greater awareness that Chinese ODI has historically had below average returns compared to other major ODI countries. To counter both increasing scrutiny from Western countries and to increase financial return, the policy direction for Chinese ODI is increasingly focusing on making sure that the investment decisions are made based on solid commercial reasons and financial returns, and that investment entities not be seen to be linked to the Chinese government. Though that is always difficult to do when it comes to Chinese SOEs.
As a result, one of the new focuses for Chinese ODIs is to encourage leading companies from Chinese manufacturing and service industries to expand overseas, exporting manufacturing knowhow, extending sales networks, and reshaping the global supply chain. The New Silk Road Economic Belt connects China to Europe via either Near East and Russia, or Near East, Middle East and the Mediterranean Sea. The New Maritime Silk Road connects via the Indian Ocean and the Mediterranean Sea and links in Eastern Africa. Both are also referred to as “One Belt, One Road” (OBOR) and have become a key development strategy for China, anticipating cumulative investment in the next decade of up to US$1 trillion.
For all OBOR aligned countries as a whole in 2017, Chinese exports amounted to US$774bn, an increase of 8.5%, representing 32% of Chinese exports, while imports increased at a more impressive 19.8% to US$666bn, representing 39% of total Chinese imports. This is the first time that imports from OBOR countries increased faster than exports. This trend is expected to continue resulting in a declining Chinese trade surplus with OBOR aligned countries, as transportation infrastructure improves to allow China to increase imports of raw materials and the resources to ensure security of supply in an age of ongoing trade tension between China and US.
Africa a major beneficiary
Africa is one of the most significant beneficiaries of this OBOR initiative. Between 1992 and 2011, trade between China and Sub Saharan Africa rose from US$1bn to a colossal US$140bn. FDI has grown at an annual rate of 40%. China has recognized the potential of building business relationships with a continent that has 15% of the world’s population but accounts for only 3% of global world trade.
From the Chinese perspective, there is a huge opportunity for companies to work with African countries. Compared to China’s ageing demographics, Africa is projected to have 50% of the world’s newly added working population by 2050. This aligns well with the needs of Chinese industries looking to export manufacturing knowhow, management skills and particularly funding that an industrializing Africa will need. In addition to the traditional resources and energy sectors, Chinese companies are increasingly finding success in infrastructure, labor intensive manufacturing, telecommunications and financial services such as mobile payment services. Chinese investments in Africa are moving from general merchandise trade to setting up manufacturing facilities, from EPC infrastructure projects to building and operating and financing infrastructure, and industrial parks.
According to McKinsey there are 10,000 Chinese firms operating in Africa today and 12% of Africa’s industrial production (cUS$500bn) is already handled by these firms.
It is in East Africa that we can see tangible evidence of the success of OBOR. Countries such as Ethiopia, and Kenya are an integral part of OBOR, primarily due to the established port infrastructure at Djibouti, the manufacturing capability available in Ethiopia and the regional connectivity via road, rail and energy within Kenya. Already, Chinese imports to East Africa via Djibouti averaged at a growth rate of 33% from 2009 to 2017, from a few hundred million dollars to US$2.2bn today, serving the East African hinterland. This is not about mineral extraction, the networks that are being forged provide an outlet for Chinese goods.
African investment across all sectors
Major investments so far have been transactions within transport and infrastructure.
In Djibouti, Chinese investments included four port development projects and a 752km railway link to Ethiopia that will dramatically increase Ethiopia’s access to maritime trade, and a US$4bn project with PetroChina to develop its natural gas reserves. Another example is the 472 km standard gauge railway in Kenya completed in 2017 that links its capital with its port city Mombasa. At a cost of US$3.8bn, its 90% funded with financing from China’s Exim bank with the rest from the Kenyan government. The railway uses Chinese know-how, Chinese equipment and Chinese project and operational management.
By putting in place the infrastructure and transport networks, China is attempting to open up Africa to (Chinese) investment. Of the 54 countries in Africa, 15 of these are land-locked and with 90% of global trade being carried by shipping, the importance of regional integration to give all countries access to trade zones is pivotal to this strategy. Kenya’s ability to provide import/export routes to Uganda, Rwanda, Burundi and the Democratic Republic of Congo have improved as a result of the Nairobi-Mombasa railway.
It’s not only transport networks. An example of Chinese leveraging of the manufacturing potential of Ethiopia can be seen in the “oriental industrial park” located an hour drive from Ethiopia’s Addis Ababa, where companies in the steel and textile industries have set up shop there, attracted by tax incentives by the Ethiopian government to attract ODI – copied from China’s own rulebook for attracting FDI. Over 15,000 people work in the park for over 30 companies.
Leveraging the distribution potential of the port capabilities, China’s exports of smartphones continue to expand and in 2017, Transsion Holdings, the Chinese smartphone manufacturer, overtook Samsung as the number one smartphone by sales in Africa, selling more than 50m phones in the first half of 2017. Manufacturing is moving to the same industrial park as mentioned above in Ethiopia.
Chinese EPC (engineering design, procurement and construction) contracts have also grown dramatically in Africa. One of the largest US foreign direct investments in Kenya was the Kipeto Energy Wind Farm, providing 102MW of energy for an investment of US$323m. CMEC, the China Machinery Engineering Corp is providing the EPC, responsible for the design, construction, installation and implementation of the facility for a contract value of US$221m.
One of the largest Chinese EPC companies, Sinohydro was responsible for the construction of the Actis funded Garden City shopping mall in Nairobi. China has also made large apparel investments in Ethiopia, highlighted by the US$250m investment to develop Hawassa Industrial Park that is aiming to employ 20,000 Ethiopians by 2019.
Finally, a Chinese private enterprise, Twyford Ceramic Company has become the largest ceramics manufacturer in East Africa producing 30,000m2 of floor tiles every day with production capacity expected to double in 2018.
With Chinese government increasingly emphasizing its OBOR initiative at the center of its foreign policy agenda, this can be a Win-Win for both Africa and China, a true marriage of convenience. Africa’s infrastructure and industrial development deficit is neatly plugged by Chinese investment, providing China with a critical geopolitical axis, access to African markets and natural resources and linkages to western markets.
One Belt One Road