Under B&R initiative, Chinese firms changing how they invest in continent

Source:Global Times Published: 2017/5/17 18:33:39

China fast-tracks funding in Africa


Chinese companies have been rapidly increasing investment in Africa in recent years thanks to the China-proposed Belt and Road (B&R) initiative. The initiative has brought about significant changes in the investment and financing models used in projects in the region. In addition, production capacity has emerged as a highlight of cooperation between China and African countries. However, experts also warned that Chinese firms need to be aware of risks such as foreign exchange controls and political instability.



 

Workers stand along a railway in March during the groundbreaking ceremony for the Lagos-Ibadan rail line in Lagos, Nigeria. The railway will be constructed by China Railway Construction Corp. Photo: CFP





Graphics: GT



Amid the Ngong Hills in Kenya's Kona Baridi area, China's State-owned Sinohydro Corp is building the 14-megawatt OL-Ndanyat wind farm to help the African country meet its growing demand for electricity.

The deal for the wind farm was sealed on September 14, 2015. It is just one example of how Chinese investment in Africa has grown over the last few years, according to a report by Caixin Weekly on Monday.

From 2007 through 2015, China's aggregate foreign direct investment (FDI) in Africa grew nearly sevenfold to $3.5 trillion, accounting for 3.2 percent of China's total global FDI, the Caixin report said, citing a report published jointly by the Ministry of Commerce (MOFCOM), the National Bureau of Statistics and the State Administration of Foreign Exchange.

In 2016, China's FDI in Africa also surged, specifically outside the financial sector, such as in construction, mining, manufacturing and retail. China's FDI outside Africa's financial sector jumped 14 percent in 2016 to $3.3 billion, the report said, citing data from MOFCOM.

The number of Chinese-invested projects on the continent nearly doubled in 2016, making China the third-largest foreign investor in Africa, according to a report released by consulting firm EY.

"Africa's economy still struggled in 2016, and the reason why China has fast-tracked investment in the region in 2016 is apparently because of the Belt and Road initiative," Henry Chan, EY's managing partner for tax, was quoted as saying by Caixin.

Echoing the Belt and Road initiative proposed in 2013, Chinese President Xi Jinping announced at the Forum on China-Africa Cooperation in December 2015 that the country would pledge $60 billion of funding to support Africa's development. Xi also promised that China would cooperate with African countries in areas including industrialization and infrastructure construction.

Building up capacity

In October 2016, the first fully electrified cross-border railway line in Africa began operating. The 750-kilometer line runs between Ethiopia and Djibouti, linking Ethiopia's capital of Addis Ababa with the Red Sea port of Djibouti City.

The Export-Import Bank of China (EIBC) provided 70 percent of the financing for the $4 billion project. The railway was designed by China Railway Group (CREC) and built by one of the company's subsidiaries. It was considered a landmark project of the B&R initiative.

"China's infrastructure capacity, not only for construction but also for operation, is globally competitive," the Caixin report said, citing Chan, the EY managing partner. Chan also noted that Chinese firms maintain a large comparative advantage in Africa over US and Japanese companies.

China has the longest high-speed rail system in the world, with more than 20,000 kilometers of track, according to a Xinhua News Agency report in December 2016.

But as the market for high-speed rail shrinks in China and potentially grows in Africa, the time is right for Chinese companies to take their manufacturing and operational expertise to countries where there is demand, according to the Caixin report.

In Africa, many projects could expand their capacity if they had additional investment.

For example, CITIC Group has invested $40 million in an aluminum and steel plant in Angola, according to the Caixin report, citing Zhang Zujun, president of the China-Africa Production Capacity Cooperation Fund.

"The investment is small by Chinese standards, yet the project is the largest one of its kind in Angola," he told Caixin, estimating the plant will create 500 local jobs.

Accompanying the transition from investing in natural resources to production capacity cooperation, Chinese companies are changing the way they invest in Africa, the Caixin report said.

In the past, most Chinese firms provided only engineering, procurement and construction (EPC) services, "but now they are playing more roles: EPC, project financing and operations," as in the case of the Ethiopia-Djibouti electric rail line, Fan Bing, general manager of the Chinese business division of Standard Bank of South Africa, was quoted as saying in the Caixin report.

"There is a very pressing issue in Africa… Even if a Chinese contractor builds a road and hands the operation rights to locals, some of them [the locals] lack the ability to run the project well," Zhang said. "In such a scenario, it would be much better if Chinese companies participate in the management and gradually train local employees who are capable of managing the project after the Chinese firms leave."

Financial evolution

The financing model of Chinese projects in Africa has also evolved, Caixin said, citing a report by the Chongyang Institute of Financial Studies at Renmin University of China.

In contrast to the government-led funds or infrastructure-for-resource loans that were so prevalent over the last decade, the current financing model of Chinese companies emphasizes development finance, according to the Chongyang academic report.

Development finance is a model that serves national policy, said Zhou Xiaochuan, governor of the People's Bank of China, the country's central bank. It is based on credit support but doesn't use government subsidies. It is operated in a market-oriented way and focuses on long-term investment and sustainability.

The two Chinese financial institutions that provide development financing to African countries are EIBC and China Development Bank (CDB). EIBC focuses on infrastructure investment and CDB focuses on manufacturing.

Fan predicted Chinese commercial banks will soon participate more.

"Compared with policy banks, commercial banks have stricter risk controls, which would be an advantage for Chinese companies looking to invest in the African market, which is full of uncertainties," Fan said.

Forex, political risks

Foreign exchange restrictions are one of those uncertainties, Zhang said. "African countries have foreign exchange controls, which means Chinese investors may not be able to exchange local currencies for US dollars," he said.

"Meanwhile, Chinese companies have also struggled to deal with volatile local exchange rates with the dollar," Zhang added. "There are virtually no financial tools to reduce these risks."

Political risks also pose potential threats to Chinese investments, Caixin noted.

The report quoted Xue Li, a senior research fellow with the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, as saying that Chinese companies are advised to invest in African countries with stable governments, such as Ethiopia, Rwanda, Tanzania and Uganda.

But because of certain political risks in some African countries, US and European companies may be reluctant to invest in them, Xue said, noting the situation presents opportunities for their Chinese competitors.



This story is based on a report in Caixin Weekly.



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