Africa’s addiction to Chinese trade and investment is likely to worsen during the next few years, as China provides a lot of the cheap manufactured goods that Africans want and Chinese foreign investment comes with far fewer strings attached than Western investment.
Since 2003, annual flows of Chinese FDI into Africa have surged from a mere $74.8m (507.44m yuan) in 2003 to $5.4bn in 2018, according to the Statistical Bulletin of China’s Outward Foreign Direct Investment. Inflows to Africa declined to $2.7bn in 2019 but then – despite the Covid-19 pandemic – swung up again to $4.2bn in 2020. China’s FDI stock in Africa rocketed almost a hundred-fold, from $490m in 2003 to $43.4bn in 2020, peaking in 2018 at $46.1bn.
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By GlobalDataThe top ten recipient countries of Chinese FDI – such as the Democratic Republic of Congo (DRC) and South Africa – accounted for 63% of the total Chinese FDI stock in Africa. In November 2021, at the Forum on China-Africa Cooperation in Dakar, Senegal, China committed $10bn in private FDI to Africa over the next three years.
China is now the African continent’s largest trading partner, accounting for $282bn in commerce in 2022. It is also the main country of origin for African manufacturing imports, providing 16% of Africa’s total in 2018.
China has created 25 economic and trade cooperation zones in 16 African countries. The zones, registered with China’s Ministry of Commerce, had attracted 623 businesses with a total investment of $7.35bn at the end of 2020, according to the China-Africa Economic and Trade Relationship Annual Report 2021. China’s overseas economic and trade cooperation zones help boost local industrialisation in a range of sectors, including natural resources, agriculture, manufacturing, and trade and logistics.
Chinese companies operate across many sectors of the African economy. Almost one-third are involved in manufacturing, one-quarter in services, and about one-fifth each in trade and construction/real estate. In manufacturing, McKinsey estimates that 12% of Africa’s industrial production – valued at some $500bn a year in total – is already handled by Chinese companies. In infrastructure, Chinese companies’ dominance is even more pronounced and they claim nearly 50% of Africa’s internationally contracted construction market.
“The motivations for Chinese investments in Africa are both utilitarian and egalitarian,” says Dr Shirley Ze Yu, director of the London School of Economics’ China-Africa Initiative. “The most prominent factor is the security of natural resources. African countries that have received the highest percentage of Chinese outbound investments in absolute terms are inevitably resource-rich. However, measured on a relative basis, by a country’s GDP/African continental GDP, countries that are resource poor receive a higher than proportional level of Chinese investments. This indicates that Chinese investments aim to achieve strategic purposes beyond economics reasons. Chinese investments are more evenly distributed across Africa than what an economic rationale would suggest.”
She believes that China will continue to be a major backer of mining projects in Africa. “The reasons is obvious because China is the world’s largest energy importer and not resource-rich,” she says. “Africa will become increasingly crucial for China’s global trade, particularly in agriculture, energy and resources. China is already an investor in liquefied natural gas [LNG] and will surely be a buyer of LNG from Africa.
“[The most important sectors for Chinese investment] will continue to be energy and resources, infrastructure, but increasingly Chinese investments in middle-class consumption including healthcare, entertainment, real estate development and manufacturing. All sectors have seen increasing levels of Chinese investment.”
China opens up new markets for its goods in Africa
Tim Zajontz, research fellow at the Centre for International and Comparative Politics at South Africa’s Stellenbosch University, says: “Chinese investments across Africa serve various purposes. Accessing raw materials that are needed in China has been one of them. Think of crude oil and various minerals or so-called strategic resources such as cobalt, lithium and rare earths, which are globally needed for the production of batteries and chips.
“Other Chinese investments on the African continent are rather market-seeking in the sense that capital is strategically invested to open up new sales markets for Chinese goods. Chinese firms have, for example, managed to secure dominant market shares in Africa’s electronics and IT markets in less than a decade. Loan-debt investments in African infrastructure for their part have created demand for China’s cement, steel and construction sectors, which had piled up immense surplus capacities in the early 2010s.
“Chinese investors have early on recognised the potential and future demand on African markets, as Africa’s population continues to grow rapidly.”
Currently, more than 10,000 Chinese companies are operating throughout the African continent and, since 2005, the value of Chinese business there has amounted to more than $2trn, with $300bn in current investments. Africa has also passed Asia as the largest market for China’s overseas construction projects.
Around 90% of the Chinese companies operating in the region are privately owned, calling into question the notion of a monolithic, state-coordinated investment drive by ‘China, Inc’ into the region. In terms of the value of Chinese investments in Africa, 80% are from privately owned Chinese companies. However, it should be borne in mind that the definition of private companies is blurred owing to the state-private ownership fusion in China.
“Although state-owned enterprises tend to be bigger, particularly in specific sectors such as energy and infrastructure, the sheer number of private Chinese firms working towards their own profit motives suggests that Chinese investment in Africa is a more market-driven phenomenon than is commonly understood,” says Ze Yu.
In 2013, upon the initiation of China’s Belt and Road Initiative (BRI), China expanded its role as a direct contributor to Africa’s infrastructure building, prioritising power grids, special trade zones, ports, transportation routes and other prestigious projects. China provided a full range of capabilities including finance, construction, management and often equity partnerships. The infrastructure programme fundamentally remained physical during this period, only to pivot towards digital industries after 2015.
Mark Bohlund, senior credit research analyst at REDD Intelligence, says: “Africa and other developing areas have and continue to be seen as future growth markets where Chinese firms can get a foothold by offering a price advantage to developed market competitors, which have often reduced their presence due to perceived compliance risks. I would say [China’s] business-driven Go Out policy from 1999–2000 has been a more significant driver than BRI.
“The big investment projects – with backing of banks such as China Eximbank, China Development Bank and ICBC – are generally state-owned companies, but they are often followed by smaller private companies becoming involved, generally in retail and restaurants and so on.”
China has lent African governments and state-owned companies $160bn
According to the Chinese Loans to Africa database, Chinese financiers signed 1,188 loan commitments valued at $160bn with African governments and their state-owned enterprises between 2000 and 2020, predominately in transportation, power generation, mining and telecommunications. The top loan recipient countries over that 20-year period included Angola, Cameroon, Ethiopia, Kenya, Nigeria and Zambia, and most recently the largest recipients included Ghana, South Africa and Côte d’Ivoire. The biggest African debtors to China include Angola (which owes $42.6bn), Ethiopia ($13.7bn), Zambia ($9.8bn) and Kenya ($9.2bn).
“Chinese lending to Africa has been falling since 2013, coincidentally the year the BRI was announced, if one excludes a bail out package for Angola in 2016,” says Bohlund. “This has been driven by a fall in commodity prices – of oil in particular – reducing the perceived need in Beijing to secure long-term access to these goods.
“A number of countries such as Cameroon, the Republic of the Congo, Ethiopia and Zambia are highly indebted to Chinese policy banks, but in general the indebtedness is higher to multilateral and commercial lenders. Countries such as Angola, the DRC and Sudan were among the first countries in Africa to get large loans from China in deals to secure oil and mineral supplies.
“The Chinese investment strategy [is towards] more equity investment, particularly in the DRC, and this is likely to continue – although China also imports a lot of minerals from Western mining companies active in Africa, such as Ivanhoe Minerals [a Canadian mining company] in the DRC.”
Ethiopia and South Africa have a clear strategic posture towards China, along with a high degree of economic engagement in the form of investment, trade, loans and aid. For example, both countries have translated their national economic development strategies into specific initiatives related to China, and they have also developed important relationships with Chinese provinces and Beijing.
In the case of Angola and Zambia, the engagement with China has been quite narrowly focused. For Angola, the government has supplied oil to China in exchange for Chinese financing and construction of major infrastructure projects, but market-driven private investment by Chinese companies has been limited compared with other African countries. Only 70–75% of the Chinese companies in Angola are private.
Chinese companies are producing in Africa for Africa
In 2020, China’s per capita gross domestic product (GDP) hit $11,000, solidly placing it in the upper band of a high middle-income country. Consequently, it no longer has the labour cost efficiency essential for middle to low-end global supply chains. By contrast, sub-Saharan Africa’s GDP per capita was $1,596 in 2019. Considering China’s relatively high labour costs and logistics expenses, it is much more appealing for a Chinese company to produce in Africa for Africa.
“Africa is still an important source for the import of copper, coltan and other minerals vital for China’s industrial output,” says Bohlund. “The development of LNG in Mozambique is mainly focused on supplying Asian markets such as China, Japan and Singapore.
“The main pattern of importing commodities such as minerals and oil from Africa and exporting cheap consumer goods is likely to prevail over the medium term. However, there are efforts to increase agricultural exports from Africa to China [with a financial support package passed at the Forum on China–Africa Cooperation in 2018] and also Chinese investments in lower-value-added manufacturing in Africa [with a focus on the African market] as wages in China keep on rising.”
Zajontz says: “Africa’s extractive industries will remain important for China, especially considering growing geo-economic competition for access to strategic resources such as cobalt and lithium,” says Zajontz. “At the same time, we will see continuous investment in agriculture as Beijing has pledged to assist African governments in boosting their countries’ export capacity in the agricultural sector. E-mobility is another market where Chinese firms will try to secure a competitive edge over their pricier Western competitors.
“IT and digital infrastructure are other sectors that China will continue to target to ensure that Chinese technology and services are used across the continent. Africa’s tourism sector had been a growth sector for Chinese investment before the Covid-19 pandemic. We can see Chinese FDI flowing into tourism and hospitality across Africa bouncing back in the near future, as the country leaves behind its ‘zero-Covid’ strategy and eases travel restrictions.”
Recently, the slowdown in Chinese lending for BRI projects has cast doubt on the future of an East Africa railway project linking the Kenyan port of Mombasa with Uganda, Rwanda and South Sudan.
In January 2023, frustrated after eight years of Chinese financing delays, Uganda cancelled its $2.3bn deal with China Harbour Engineering Company to build a 273km rail line from the capital city, Kampala, to the Kenyan border town of Malaba. The Ugandan authorities said the Export-Import Bank of China had yet to respond to Uganda’s latest request for funding nearly two years after it was submitted, after previously responding immediately to Kampala’s proposals.
Around a decade ago, Kenya, Uganda, Rwanda and South Sudan agreed to build a high-speed railway to carry freight and passengers between Mombasa and the South Sudanese capital Juba, via Malaba, Kampala and Kigali. Kenya received $5bn from China Exim Bank to build the first phase of the railway, from Mombasa to Naivasha in the Central Rift Valley, which was completed in 2017.
However, it is understood that plans to extend the line to Malaba on the border with Uganda floundered amid accusations that China was engaged in ‘debt-trap diplomacy’ in Africa. In 2018, Beijing expressed reservations about the financial viability of the extension and asked for a new feasibility study before it would release funding.
China’s economic influence in Africa is only likely to become greater in the future. During the past 20 years, China has turned to the continent for many of the natural and energy resources that it itself lacks. However, during the next decade, China will invest a great deal more in African-based businesses that serve the fast-growing African markets.
