(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.
