16 March 2015

The changing face of Chinese investment in Africa

This article was written by Jin Xiong (Partner), Rui Sun (Associate) and Tom Coles (Associate).

Last year was undoubtedly a significant turning point in Chinese overseas direct investment (ODI). Overall investment volumes reached approximately US$130 billion, and for the first time Chinese ODI surpassed foreign direct investment (FDI) into China. This truly signals China’s transformation from a major beneficiary of investment into a global investment powerhouse. Nowhere is this trend more apparent than in Africa, where the total value of China’s ODI stock is set to quadruple to approximately US$100 billion between 2014 and 2020.

This turning point, however, was apparent not only in overall investment growth, but also in a number of more subtle trends. Not least of these is the increasing diversification of China’s ODI investments. Although this trend is being played out globally, it is perhaps most stark in Africa, where the traditional energy and mining sector has long dominated. While that sector will continue to play a central role in the China-Africa story, as outlined below, substantial Chinese investment is now also flowing into Africa’s banking, agriculture, railways, clean energy and telecommunications sectors. 

This diversification is arguably driven by a combination of ‘push’ and ‘pull’ factors. Regarding the former, in recent years, Chinese leaders have made much of their so-called “Go Global” strategy. This strategy is aimed at promoting the export of Chinese goods and services by national champions at a time when the domestic economy is slowing; diversifying China’s US$4 trillion in foreign exchange reserves; and increasing the competitiveness of Chinese companies globally.

Regarding the latter, Africa faces a severe infrastructure deficit that without substantial investment will hamper pan-continental economic development. Coupled with this, the sub-Saharan economy as a whole is set to grow 5 per cent annually for many years to come. With a growing middle class and an educated youth, this represents a unique investment opportunity for Chinese companies who can offer high-end technology at a relatively low cost.

Energy and Mining

Africa’s energy and mining sector has long been the most important sector for Chinese investors (particularly state-owned enterprises (“SOEs”)). As reported in Issue 12 of Made in Africa, this reflects China’s national strategy to secure long-term access to natural resources (both oil and minerals) through the so-called ‘Angola Model’. 
Increasingly however, this model is coming under challenge. Allegations of resource nationalism are leading to stricter regulation of Chinese investment by host countries. China is facing increasing competition from other developing economies (not only the other ‘BRICs’ but also the ‘MINTs’ (Mexico, Indonesia, Nigeria, and Turkey) for natural resources. More fundamentally, the gradual transition of China’s economy from a high-growth, capital intensive model to a medium-growth, consumer-based and qualitative model, is depressing demand for certain African commodities.

Notwithstanding these developments, as demonstrated by the following recent investments, Africa’s energy and mining sector is (and will likely remain) the primary target for Chinese investors: CNNC’s purchase of the Langer Heinrich uranium mine in Namibia for US$190 million; China Aluminium Corporation’s co-investment, alongside Rio Tinto and the IFC, in a US$20 billion Guinean iron ore project; Beijing Haohua Energy Resources’ US$100 million investment in South Africa’s Coal of Africa; and Hebei Zhongbo Platinum Co.’s purchase of Eastern Platinum’s assets in South Africa for US$225 million.

Banking

Propelled by their adoption of the “Go Global” strategy, Chinese financial institutions are accelerating their overseas expansion, particularly into Africa. Presently, these institutions consist largely of major SOEs, namely Bank of China, Industrial & Commercial Bank of China (ICBC), China Construction Bank and China Development Bank (CDB). China’s insurance and export credit institutions (e.g. Sinosure and C-EXIM) are also key players.

However, despite active lending to a small number of very large energy, mining and infrastructure projects, China’s penetration of Africa’s banking sector remains low. 
This is changing, however, as Chinese banks begin to enter the banking sector itself (albeit indirectly via developed financial centers). For example, in 2014 ICBC agreed to purchase a 60% stake in the global marketing business of Standard Bank PLC from South Africa’s Standard Bank Group for US$765 million (the transaction closed early this year). This shortly followed the CDB’s entry into strategic cooperation agreements with the UK’s Barclays Bank PLC and France’s Societe Generale whereby, the CDB will receive banking services (including advice on targets and financing structures) to assist it with acquiring loan assets in Africa.

Such deals will allow Chinese banks to expand their African networks and gain a broader asset portfolio. This in turn will allow them to provide financial services and support to Chinese investors as they enter the African market.

Agri-business

In early 2014, the Chinese government issued the “Document No.1” guidelines. These guidelines seek to comprehensively deepen domestic rural reforms and accelerate agriculture modernization. They also seek to support the agricultural element of China’s Go Global strategy. As rising incomes and richer diets have coincided with shortages in farm land and water, China is increasingly building global supply chains to feed its huge population.

In response to these guidelines, large foodstuffs SOEs including China National Cereals, Oils and Foodstuffs Corporation (COFCO), China Agricultural Development Bank, Bright Food Group and Chongqing Grain Group have taken important steps to expand overseas, including in Africa. For example, COFCO (which is mandated to invest US$10 billion overseas by the end of 2015), recently entered into a joint venture with the Hong Kong-based Noble Group, a leading global supply chain manager of agricultural commodities, that holds sizeable oil-seed operations in South Africa. Under this arrangement, the Noble Group will become COFCO’s principal international origination and trading platform. 
Beyond this, given the strategic importance of food supply to both China and African economies, we are also witnessing many government-to-government initiatives. As of 2015, the Chinese Ministry of Agriculture has signed 31 co-operation agreements with 17 African governments or organisations. It has built 22 agriculture demonstration centers, dispatched hundreds of senior agricultural experts and trained over 5,000 agricultural, economic and technical personnel in Africa.

Railways

Having nearly completed one the world’s largest and most advanced rail networks, and having created a number of national champions with unparalleled experience in railway construction, China is now encouraging its railway construction and locomotive companies to ‘go global’. With its low railway penetration, large populations and need for heavy freight capacity, Africa is an ideal platform on which to achieve this.

Recent examples of major railway investments include: South Africa’s Transnet Group’s purchase of a record-breaking volume of electric locomotives from China South Locomotive & Rolling Stock Corp; China Roads and Bridges Company’s investment in the US$3.6billion Nairobi-Mombasa standard gauge railway line and China Railway Construction Corporation’s investment in Nigeria’s US$11.97 billion coastal railway project. 

However, notwithstanding these impressive plans, China’s ambitions extend even further. The railways listed above are of an ordinary speed. However, China also has a long-term goal of building a pan-African high speed rail network. This network would link major cities, mineral resources and infrastructure outlets (e.g. ports). Aside from promoting pan-continent development, it would also promote Chinese exports (including labour) and provide China with a route to export for many of its African mineral resources (which tend to be located in remote areas and therefore costly to transport). The first sign of these plans came when, during a recent diplomatic visit, Premier Li Keqiang announced that China will establish a high-speed railway R&D center on the continent.

Clean Energy

In response to huge energy demands, limited energy security and ambitious emission reduction targets, China has recently become a world leader in clean energy. Indeed, China’s 12th five-year-plan calls for it to invest US$473 billion in clean energy (mostly hydro, wind and solar) between 2011 and 2015.

As with railway technology, having created national champions such as Sinohydro and Goldwind, China is now encouraging its renewable energy companies to ‘go global’. With its severe energy shortage, abundant renewable resources and need for rurally-based, decentralized energy supply, Africa is again an ideal platform on which to achieve this.

An example of how China is tapping into this demand is the renewable energy technology transfer agreement that it recently signed with Ghana, Zambia and the United Nations Development Programme. Under this agreement, Chinese companies will transfer technology in exchange for access to the Ghanaian and Zambian markets.

Other recent renewables investments include: Guangdong Hanneng Photovoltaic’s acquisition of a 70% stake in Ghana’s Savanna Solar for US$ 1.1 billion; Hareon Solar Technology’s South African joint venture with Amed Energy; and the opening by Jinko Solar Holding Company (a Chinese photovoltaic module manufacturer) of a factory in Cape Town – the first such Chinese factory in Africa.

In respect of nuclear, China’s plans are even more ambitious. Already with 23 plants in operation and another 26 under construction, by 2020 China plans to have over 80 GW of installed capacity (rising to 200 GW by 2030). Having adapted western technology, China has become largely self-sufficient in reactor design and construction, as well as other aspects of the fuel cycle. Its policy is now to export both nuclear reactor technology and construction services (including labour).

China’s nuclear companies are currently eyeing the largest tender in South African history – the US$93 billion contract to build six new nuclear reactors by 2030. This nuclear new-build program will involve the construction of 9.6GW of new capacity, broken into three stages of 3.2GW each. Chinese companies who have expressed interest (alongside a raft of French, American, South Korean and Russian nuclear giants) include State Nuclear Power Technology and China General Nuclear. The latter is seeking to promote its ACPR1000 nuclear reactor design, which is based on French technology. 

Telecommunications

One of China’s greatest African success stories in recent years is its foray into the potentially vast African telecoms market. The background to and model for this strategy closely resembles that described above. Telecoms is another one of China’s ‘strategic sectors’ in which national champions such as Huawei Technologies and ZTE Corp, having supplied a domestic market of over one billion customers, are increasingly searching for new markets overseas. In turn Africa, which is the world’s fastest growing mobile phone market, still faces a severe lack of network coverage and the high costs of establishing networks across a vast and underpopulated territory.

Chinese telecoms companies have already contributed significantly to bridging the ‘telecoms divide’, developing telecoms infrastructure and providing low-cost handsets to millions of rural inhabitants. Indeed, Huawei has recently launched new networks in South African and Nigeria, while ZTE Corp is overseeing a 4G mobile infrastructure expansion in Kenya. As Africa’s urban middle class grows and farmers increasingly realise the benefits of mobile communications, these investments are only likely to grow. 

Conclusion

Chinese investment in African has entered a new era. Although Chinese interest in the traditional energy and mining sectors will remain strong for the foreseeable future, it is likely to diminish (at least in relative terms) in favour of other sectors. 

Owing to China’s ”Go Global” strategy and the slowdown of the domestic economy, a much broader range of Chinese companies are entering the African market. Further, rather than concentrating on the exploitation and export of raw materials, they see huge market opportunities in the rising consumer class of sub-Saharan Africa. 

This demand for export and ODI markets fits well with Africa’s needs. Given the scale of Africa’s infrastructure deficit and growing consumer class, Chinese investments are likely to represent a vital contribution to the continent’s development. As a result, we expect to see increasing trade and engagement across an ever widening range of sectors.

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A Guide to Doing Business in China

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