Market commentators are divided in opinion about China’s increased investment in Africa in recent years.
Some are labelling their investments and loans as predatory practices aimed at relieving struggling countries of their resources. Others, and possibly now Eskom and SAA, see the Chinese as benevolent patrons who are willing to take on greater risk in return for greater reward.
However, regardless of China’s true motives, is it not up to us to protect our autonomy and resources, and use their assistance to grow the economy?
Public perception vs fact. What do the number show?
The perception exists that the Chinese government has committed vast sums to Africa, far outpacing the western countries in a new race for Africa. Yet while China’s investment in Africa has certainly gained momentum in recent years, the magnitude of their investments hardly lives up to public perception.
When comparing the numbers, the Chinese have provided $362bn foreign aid and loans to Africa between 2000 and 2014. America’s investment in foreign aid and loans during this time totalled $399bn, with other world powers following closely.
For the most part, China’s aid and lending practices are shrouded in mystery, and likely by design. It appears that China is strategically managing perceptions around their investments, where elaborate signing ceremonies are held to announce the investment amounts, but the intricacies of the agreements remain undisclosed.
Blurring the lines between aid and finance
Further complicating the separation between fact and perception, is China’s broad and, at times, ambiguous foreign aid policy. There are general parallels between its policy and the way in which the rest of the world applies it, but with some significant differences.
For example, the US provides over 90% of its aid in grants and the rest in loans, with the objective to develop the recipient countries’ economy and welfare. A quarter of these funds are pure grants, with no repayment requirement.
The Chinese, like their Western counterparts, employ three forms of bilateral aid – grant aid, interest-free loans, and concessional loans. However, only around 20% of its aid in is the form of grants. The lion share of their investments is provided as loans at or near current market rates, which makes these loans a compelling option for developing countries.
China retains control
Regardless of the form of grant however, the preferred disbursement is in kind, not in cash. In other words, while assisting the recipient country, the bulk of the funding remains within the Chinese system and the Chinese economy receives the demand stimulus for exported goods and services.
Additionally, while China consults with recipient countries in respect of aid-financed projects, which are usually of a turnkey nature, their scope and oversight remain at the discretion of the Chinese government.
While it is often assumed that these projects provide an entry point for Chinese labour, research indicates that the use of Chinese labour is dependent on the level of and availability of skills in the local market. Where the requisite skills are available locally, it is usually also available at lower labour rates. The preference is then to use Chinese labour in specialised and technical areas, to ensure that projects are delivered on time and within budget.
In cases where a concessional loan is extended, loans must be used for infrastructure (energy, transportation, telecommunications), social (health and housing) or industrial (manufacturing, mining) projects. Another caveat to the finance agreement is usually that Chinese contractors must be awarded the infrastructure contract financed by the loan.
This provides the Chinese companies with an entry point to set up a presence in host markets where they can bid for commercial contracts, independent of projects under the concessional loan agreements. Furthermore, the concessional loans are used for procuring equipment, materials, technology and services, with the bulk of the contract’s procurement coming from China.
China is not the enemy – poor debt management is
Aid from developed to developing nations, in whichever form, is generally driven by strategic intent on the part of the donor. Whether it is to access natural resources, cheaper labour costs or to forge political alignment, the donor may benefit as much as the recipient.
China has been criticized for entering into commodity-backed loans and accepting commodities in lieu of cash repayments and accused of stripping Africa of its resources.
The available data shows, however, that in the past, only 10% of China’s loans have been allocated to petroleum and mining, while transport, power, and telecoms projects for African governments and their companies account for 56%. It also shows that around 33% of loan finance is secured by commodities or exports of natural resources, which researchers at the Johns Hopkins University’s School of Advanced International Studies believe “is much less about locking up natural resources and more about reducing the risks of lending to poor and unstable countries.”
China has shown that is willing to invest in countries and sectors that have been overlooked by Western aid. The conditions of their aid and investment compare favourably to that of the World Bank and IMF for example and they are known to offer extended terms and grace periods. This, coupled with Africa’s historical experience with Western countries providing high-interest loans and the resultant default means that many countries prefer having China as a partner than the IMF or World Bank. The World Bank for one is endorsing this approach and is known to ease its loan covenants and conditions if a potential African borrower has existing Chinese debt. For every 1% of Chinese debt, the World Bank reduces requirements and covenants by 15%.
What lessons can South Africa learn from China’s foreign aid practices?
Since the early 1990s, economic growth in South Africa has been driven mainly by the tertiary sector – which includes wholesale and retail trade, tourism and communications – while the manufacturing industry has declined. Yet, manufacturing is a multiplier of GDP growth and associated with direct employment, as many services sectors are likely to increase their employment capacity on the basis of an increased GDP.
Earlier this week, Statistics SA reported that the Manufacturing sector has shed a staggering 105,000 jobs in the second quarter of 2018. National unemployment is at 37.2% and the NEET (Not in Employment Education or Training) rate for people aged 15 – 34 years is at 39.3%. These announcements have caused great concern among politicians, including the president, analysts and consumers alike.
However, like China, South Africa’s growth can be ignited by finding and creating demand for manufactured goods and providing stimulus to the manufacturing sector. Whether it is by investing in South African infrastructure development programmes, or through trade agreements with other African countries, growing this sector must be prioritised. Another avenue is to look to China as President Xi Jinping himself announced that China would take “active measures” to boost imports from South Africa to support the country’s development agenda and priorities.
This manufacturing demand stimulus can be further supported by China’s investment in South Africa. For example, to create a robust manufacturing sector, we need reliable energy and other infrastructure, which means the life lines to Eskom and SAA must be managed prudently and not to finance further state looting. In addition, both enterprises could benefit significantly from skills and technology transfer. Imagine the ripple effect in the economy of a 30% reduction in the cost of energy.
The governance surrounding funding arrangements is especially important considering China’s stringent debt-default actions. In 2017, Sri Lanka, unable to pay the debt it has accumulated, formally handed over its strategically located Hambantota port to China. It was a major acquisition for China’s Belt and Road Initiative (BRI) and a strategic loss for Sri Lanka.
The Chinese’s aid and finance terms certainly come with significant caveats. It is up to government to negotiate the best outcome for the country and to ensure that we do not get caught in debt bondage to China and risk losing the sovereignty of our most valuable natural assets. Instead government should be brokering mutually beneficial trade and finance agreements, which leverage the opportunities for growth and prosperity.
Terence Gregory is the CEO of Ecsponent Limited.