China’s growing presence in Africa

There are some key forces both pushing and pulling China into Africa. First, China now has the world’s largest amount of foreign reserves, reaching $3 trillion, more than twice that of Japan and far larger than most other countries. Up to now a large portion of these reserves have gone into U.S. government debt but increasingly China is finding the necessity to diversify those reserves because of the growing precarious situation with the U.S. Dollar and concerns about U.S. government debt.

At the same time, China’s burgeoning economy is demanding more and more natural mineral resources whether it is oil, copper, nickel, gold, etc. Looking further into the future, the demands of China’s more sophisticated diets means that imports of food will be increasing as well. In both areas, minerals and food, Africa has great promise. It is well known that Africa is rich in a wide variety of minerals from oil to copper. Africa’s vast amount of land could fit the entire land mass of not only China but also India, the United States, Mexico, France, Italy and a number of other countries. Besides land, and more importantly, Africa has huge resources of water essential for bountiful harvests.

China’s attraction to Africa is clear. Africa is also attracted to China — China is a developing country demonstrating a successful growth model and this is an opportunity for African leaders to learn from them. China has the money to import Africa’s resources and the money to help build Africa’s urgent need for infrastructure: roads, railroads, ports, electric power systems, etc.

In 2000, the Forum on China-Africa Cooperation (FOCAC) was established to enhance economic and trade cooperation. Trade has expanded rapidly, moving from $12 million in 1950 to over $120,000 million now. China is now Africa’s largest trading partner and, surprisingly, China has a trade deficit with Africa, importing more than it exports to Africa. Visit any shopping center in any country in Africa and it is clear that China is flooding Africa with consumer goods and also machinery, automobiles and electronic items.

Africa’s exports to China are about 80% raw materials like oil but increasingly it is also manufactured and agricultural such as Egyptian oranges, South African wines, Ghana’s cocoa beans, Ugandan coffee, Tunisian olive oil and more. In order to promote that trade, China has bilateral trade agreements with 45 African countries, a number of which now have zero tariff preference with China.

In addition to trade, investment from China into Africa between 2003 and 2009 grew from $490 million to $9,300 billion in 49 African countries in mining, manufacturing, construction, tourism, forestry and fisheries. Part of the China’s efforts is to sign a bilateral agreement, now with 33 African countries, for protection of Chinese investments. A China-Africa Development Fund has already been created to invest in African equities. That fund has already reached $1 billion by investing in over 30 projects in agricultural machinery manufacturing such as electric power and mining. Plans call for the fund to expand to $5 billion.

China is also promoting economic and trade zones in Zambia, Mauritius, Nigeria, Egypt and Ethiopia where companies can establish manufacturing and trading operations with appropriate infrastructure and certain government concessions. So far over $600 million has been invested in such zones employing over 6,000 jobs.

As early as the 1970s China has helping to build infrastructure projects in Africa such as the 1,860 kilometer Tanzania-Zambia railway, the 58,000 square meter Cairo International Conference Center and over 500 other projects such as ha highway in Somalia, a harbor in Mauritania, a canal in Tunisia, a National Stadium in Tanzania and many others.

Preferential loans amounting to over $10 billion to finance projects for airports, housing and hydropower plants have been made.

The Chinese government has always supported African countries in their effort to reduce their debts, which have helped relieve their burden of debts to China. From 2000 to 2009, China canceled 312 debts of 35 African countries, totaling 18.96 billion yuan. That demonstrates China’s determination to help Africa develop, and to help Africa reduce the debt it owes to other countries.

With that kind of flow of money, banks have followed. The China Development Bank, Export-Import Bank of China, Industrial and Commercial Bank of China, Bank of China and China Construction Bank are all now active on the continent. China has also supported the African Development Bank and the West African Development Bank by injecting funds, cancelling debts and establishing funds for specific projects.

Tourism is growing as well, with over 300,000 Chinese tourists vesting Africa each year. African airlines have direct flights to China and a number of Chinese airlines have direct flights to Africa.

All of this trade and investment is not without problems. Like other countries around the world, there have been scandals, corruption and disputes such as a Chinese infrastructure project in Algeria mired in a bribery scandal or arbitrary seizure of property in Zimbabwe, among other issues.

There is no denying, though, that capital markets in Africa are developing rapidly. We have been investing in South Africa for many years and its stock market is one of the world’s most sophisticated. In our frontier market funds we have been active in countries like Kenya, Ghana, Mauritius and others. Nigerian companies now constitute the largest portion of those forfeiter funds which now have assets of over $1 billion and growing. We expect to expand even further in Africa and invest in many more countries. The future is certainly in Africa for investors from China seeking high growth and new opportunities.

[Source: By Mark Mobius, Reuters, 24May11. Mark Mobius is the executive chairman of the Templeton Emerging Marketing Group and has written several books including “The Investors’ Guide to Emerging Markets”]

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