From Sandton to Shanghai

Africa’s New Colonialists

Julian Hewitt
Published 5 April 2008

“India and China have become Africa’s new colonialists,” declared respected international financier, George Soros, during a Reuters interview earlier this year. More recently, the Economist ran with a cover story titled “The new colonialists”, which detailed China’s huge appetite for acquiring global resources.

The real question is whether there is any fire behind this talk of “colonialist” smoke.

While Beijing has gone to great efforts to play down any comparison with Africa’s former colonial masters, this tag will probably not be far from the surface of the Africa-China debate as China’s substantial financial and political investment on the continent starts to show dividends.

One only needs to take a look at recent trade and investment numbers between China and Africa to tell that something significant has happened within a really short space of time.

China’s bilateral trade with Africa has gone from a negligible $12-million in 1956 to $73,6-billion in 2007, making China Africa’s third-largest trading partner in the process. Forecasts predict that this figure will surpass $100-billion by 2010.

Further signs have been profound. Last year was a watershed year for Chinese investment into Africa. Firstly, a $9-billion financial and infrastructural package was signed with the mineral-rich Democratic Republic of Congo. This would be China’s single biggest country-to-country investment to date.

Then, a few months later, China’s largest bank, ICBC, bought a 20% equity stake in Standard Bank for $5,5-billion — which, at the time, was one of both Africa and China’s largest transactions and clearly signalled the fact that the Chinese powers that be were embarking on a holistic investment approach to Africa.

However, to really get a sense of China’s unfolding relationship with Africa and whether it warrants “colonialist” warning bells going off, it is worth unpacking the key drivers that have given rise to the present situation.

Firstly, the timing perspective is important to comprehend. When China emerged on the global scene through its “Go-Out Strategy” in 1991, it saw Africa from another viewpoint to the basket case of poverty, corruption and violence that Africa had largely been written off as by the rest of the world.

The continent that China saw was one that was emerging from decades of post-colonial chaos to a period of increased socio-political stability. Most importantly, though, Africa was also home to the world’s largest untapped oil and raw materials that China so desperately needed to meet its vast industrialisation requirements.

With the most accessible and economically viable natural resources already sewn up by the developed world, China had few other places to turn to.

Secondly, it is important to keep in mind that China’s foreign policy has been virtually unwavering from its stand of “non-interference” in an external country’s domestic issues. This stance distances China from the traditional definition of colonialism that involves political, territorial control. The flipside, though, is that China is not morally selective about which regimes it has dealt with.

There is, however, a definite political element to China’s African relations. Most Chinese companies that have invested in Africa are still state-owned and are pursuing national resource mandates. To a large degree, China’s heavy government to government involvement has been essential in limiting the risks of investing in some of Africa’s most unstable countries such as Sudan and the Democratic Republic of Congo.

But it is probably the scale of Chinese commercial infrastructure in Africa that should be the biggest cause for colonial unease. China is building almost 5 000km of rail network to connect mines with harbours, while also investing heavily in port facilities in many African countries along the Indian and Atlantic seaboard.

Furthermore, Chinese sources are already projecting that 40% of its oil and gas imports will originate from Africa, and countries such as Sudan, Nigeria and Angola have all seen heavy investment in oil-related infrastructure.

Over time, it is logical to assume that as China’s economic interests in Africa deepen, so too should its political impetus. This is where the lines with neocolonialism get blurred.

Nevertheless, China’s current ambitions clearly do not involve the same institutionalisation of political and economic jurisdiction that countries such as Britain, France, Belgium and Portugal exerted in days gone by.

To its credit, China has been ultra cautious about ensuring it projects a relationship of equals with its African partners. While it is definitely the chief instigator in China-Africa affairs, keep in mind that it was not too long ago when China itself was at the receiving end of colonialism’s darker side.

No nation in the world can truly claim to be void of self-interested tendencies and this is very much how China’s relationship with Africa should be described. Painting China with broad colonial brush strokes does not accurately assess its current role on the continent.

Still, a note of caution is needed. When Mao Zedong was once asked what he thought of the French Revolution, he famously responded: “It’s too early to tell.” In a similar vein, maybe the same can be said for the merits of China’s relationship with Africa.

After ICBC opened Chinese and South African eyes to a new world of investment possibilities, there must to be a number of large Chinese companies taking a closer look at South African service sector companies with a large African footprint.

There is not a huge amount to choose from that satisfy these criteria while allowing for a significant level of investment , but here are two companies to keep eyes your on:

MTN

MTN’s name has already been bandied about by the South African press as a possible target for Chinese investment. It has the widest coverage of any cell phone company in Africa, its making a lot of money on the continent and has a strong presence in countries where China has already invested significantly. These countries include Nigeria, Zambia, South Africa, Angola and the DRC.

Sanlam

(Click here for the a report on Sanlam’s Developing Markets prospects)

Sanlam is another interesting prospect. It has a presence in Botswana, Kenya, Ghana, Tanzania, Zambia and is looking at expanding into Nigeria. While Sanlam’s Africa strategy is not yet properly developed, it does have the potential for African expansion to suit a Chinese emerging market focus. The Chinese insurance sector has also recently seen the IPO of two massive companies and this has given them capital to burn. Of course, the Chinese sector has much room for development, but China’s insurance heavy weights will already be contemplating international strategies.

(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.