From Sandton to Shanghai

(Shanghai’s impressive skyline viewed from the lofty heights of the Jin Mao Building Photo:Laurette Moolman)

Time to Return the Compliment

For too long, South Africa has viewed China as a nation of cheap textiles and import quotas. There are much bigger opportunities and threats to grapple with on the very near horizon. China has a pragmatic view of its relationship with Africa and it is time we returned the compliment.

When Standard Bank issued a recent cautionary that a transaction of material nature was soon to be announced, it was clear that a big shake up was headed the way of the South African banking industry.

A big deal was afoot. For it to be material, the imminent investment had to be over 25% of Standard Bank’s R150 billion market capitalization. The money market soon provided further clues. Since the notice was publicized, the Rand had strengthened considerably. It was a sure sign that the market was already pricing a foreign purchase into Standard Bank.

Standard Bank and ABSA have the largest African footprint of South Africa’s Big 4 banks, but ABSA had already been snapped up by Barclays. Most American and European banks were still recovering from the sub prime mortgage debacle and were in no mood for international acquisitions. It looked like a Chinese bank was in the running.

Since ABSA was already under foreign ownership, the Competition Commission loomed as a large obstacle for any company braving a majority purchase in Standard Bank. Chinese suitors have access to money and not international management expertise, so a minority stakeholding was most likely.

Armed with these facts, 2 days before the official announcement, it would have been possible to make an informed prediction that a Chinese bank was buying a minority stake in Standard Bank.

A Lesson in Pragmaticism

In a similar lesson in pragmaticism, any rudimentary analysis of mining opportunities in the DRC would have pointed to the fact that it would have had to be high on China’s wish list. After all, the DRC has the largest untapped mineral resources in the world and had a complete lack of infrastructure to mine it.

This was the perfect situation for an increasingly risk averse China with regards to exploiting mining situations in Africa. Given that China already has significant oil and raw material investments from Sudan and Zimbabwe to the most unstable parts of Nigeria and Ethiopia, a sizable investment in the DRC was only a matter of time.

Again, when China announced a USD5 billion mining development and infrastructure package to the DRC, the world seemed to have been caught off guard.

Rather than be astonished by China’s foreign investment strategies, it is essential for South African decision makers to step back and look at the situation from a rational perspective.

China’s first wave of investment in Africa was state-driven around national interests and focused on developing sustainable supply lines for oil and energy extraction. South Africa was largely left out of this investment loop as Chinese money flowed into Nigeria, Angola, Sudan and Zambia. In many ways China was a direct competitor to South African mining and construction companies with an African agenda

China has a very comprehensive investment plan for Africa. It has already invested heavily in continent-wide mining, construction and infrastructural projects. China’s assumption is that this will also equate to a bottom line impact on the economic development of the countries being invested in.

As it is, Africa’s recently strong economic growth rate is riding the wave of a largely Chinese-fueled commodity boom. Higher growth rates are supporting increased household spending on goods and services. South African companies boast a significant African footprint and are in a prime position to benefit for this. From China’s viewpoint, they make for attract investment vehicles.

The Second Wave is just Beginning

The second wave is just beginning. Massive Chinese state owned enterprises are listing for the first time. In the space of 5 years, the global capital market has shifted from New York to Shanghai and Hong Kong, buoyed by a rampant Chinese stock market.

Make no mistake of the size of these Chinese companies. Their market capitalization might be propped up by over exuberant mainland investors, but Standard Bank’s new partner – ICBC – is 60% larger than its closest USA banking rival. Keep in mind that China has 1.3 billion consumers to tap into - 400 million of whom own cell phones and another 100 million who surf the internet.

These huge enterprises are cash flush from recent listings. They have capital to burn and global ambitions to pursue. While most companies still have significant government ownership, the second wave of Chinese investment is driven by business opportunities.

For shrewd local investors and local business leaders, it is crucial to weigh up two important facets. Firstly, keeping tabs on big Chinese IPOs is important as this will inform the source and sector of future global and South African investments.

Prophetic Insight

Secondly, an analysis of South African service sector companies with a large African presence is essential to predict future Chinese investment patterns. Linking these companies and their sectors to their respective listed Chinese counterparts will provide prophetic insight.

ICBC’s investment in Standard Bank was the biggest international investment China had ever made. If Sasol’s USD6 billion Coal to Liquids programme sees the light of day in China, it will be the single largest FDI into the country. As a relatively small economy, South Africa has the scope to play a surprisingly influential role attached to the coattails of an emerging economic giant.

We do however need to get closer to the action and be less surprised by the possibilities that are emerging from China. A rather large second wave is already hitting our shores.

DRC’s sun rises in the East

Julian Hewitt
05 October 2007

China’s recent announcement of a $5-billion loan to the Democratic Republic of
Congo to develop national infrastructure and mining interests seems to have taken
the world by surprise.

International mining companies and institutions such as the World Bank,
International Monetary Fund and African Development Bank have been scrambling
to find out more details of the Chinese deal that might have severe repercussions on
their own activities in the country.

China’s move, however, is far from unexpected. In fact it makes complete sense
from a Chinese perspective. The DRC is one of the most mineral-rich countries in
the world. It has an abundance of raw materials, such as copper, cobalt, diamonds,
uranium, manganese and gold. Of these copper, uranium and manganese occupy
top spots on China’s hit list of minerals that have strategic national value. The loan repayment terms will be primarily in the form of mining concessions to
Chinese companies.

China missed out on the first scramble for Africa and has had to settle on riskier
environments to satisfy its voracious mineral appetite. It took only two years after the
dust settled on Angola’s protracted civil war before Chinese oil companies were
setting up shop in the country. Further examples of China’s risk aversion include significant oil interests in Sudan and the recent purchase of a ferrochrome mining company in Zimbabwe.

What counts massively in China’s favour is the high-level diplomatic support that
accompanies its mineral and energy investments in Africa. Having direct government
backing helps to decrease the vulnerability of doing business with unstable regimes.
China has another ace up its sleeve that is unmatched by global mining companies.
This is the huge infrastructural backing it can lend to countries such as the DRC.
Instead of benefiting from its enormous mineral wealth, the DRC has been racked by
a 30-year-long civil war, leaving its economy in tatters and the country lagging near
the bottom of the world’s poorest nations list.

A 2005 Organisation for Economic Cooperation and Development country report
says 80% of the DRC’s population lives on less than $0,2 a day. Only 5,7% of the
population have access to electricity and less than 5% of the country’s 57 700km
road network is tarred. What mineral wealth the DRC has is being whisked out the
country’s porous back doors.

Although only 1% of the country’s arable land is under cultivation, the agricultural
sector was responsible for a staggering 50% of the country’s GDP in 2003.
As part of the loan agreement with China, $3billion will be allocated to infrastructural
projects. These include a 3 400km highway, a 3 200km railway link with Matadi on the Atlantic Ocean, 31 hospitals, 145 health clinics and two universities. One has to
wonder how much more favourable the global reaction would have been if it was the
World Bank announcing these terms rather than China.

The other major value add from the Chinese perspective is that the Zambian
Copperbelt cuts a swathe through the southeastern corner of the DRC. China has
invested more in Zambia’s mineral resources than in any other African country. The
Zambian Copperbelt is the location of China’s first special economic zone in Africa.
In addition, China’s proposed highway will link up to Zambia, which puts the DRC and
its mineral reserves in easy grasp of the TanZam Railway to Dar es Salaam.
Despite institutional misgivings about all things Chinese in Africa, China’s forays into
the DRC can only add value to a country that has been going nowhere slowly for
three decades. In fact, it is hard to imagine a better lifeline coming from anywhere
else.