---- by Edward Wang , The Beijing Axis----

Africa is critically important to China’s global strategy, for a number of reasons: the continent’s geopolitical importance; its large, untapped market; and its abundance of natural resources. And as more Chinese companies feel the need to enter new markets and seek more resources, Africa will only see increased Chinese business and investment activity.

A brief history

China’s relations with Africa can be traced as far back as the 1950s when the two countries were engaged politically. 

In fact, for almost half a century before the 1990s, China’s relations with Africa were politically rather than economically motivated. For about two decades after 1978, when China’s economy started to open up, its relations with Africa remained largely dormant. Then, as China’s economy developed exponentially in the late 1990s, its relations with Africa entered a commercial phase, marked by the Asian giant’s ever-increasing demand for resources to match its rapid pace of economic growth.  

Today, China’s strategy of engagement with Africa involves more than just economic or commercial considerations. The Chinese way is essentially to separate political issues from commercial ones, a policy by which has allowed China to prosper economically, but also for which it has drawn much flak.  

Nevertheless, with its track record of economic aid to Africa, China has developed close ties with many African nations and hence fostered favourable conditions for Chinese investment in Africa. As a result, Chinese investment on the continent has grown very rapidly in the last few years. While outward foreign direct investment (OFDI) flows into the continent only amounted to US$74.8 million in 2003, this figure had jumped to an impressive US$1.574 billion by 2007. 

The impetus to invest

While Chinese investments in Africa have been heavily skewed towards natural resources: Nigeria and Sudan for oil; Congo and Zambia for copper, China has also diversified its investments in the last few years, with the Industrial and Commercial Bank of China (ICBC) acquiring a 20 per cent stake in South Africa’s Standard Bank for US$5.6 billion in October 2007.  

The shift from raw materials contracts to infrastructure projects is one strategy China has used to make further inroads into the African continent. For example, in September 2007, China signed a deal to lend the Democratic Republic of the Congo (DRC) US$5 billion to develop its infrastructure and mining. In exchange, China obtained rights to the DRC’s extensive natural resources.  

These activities, however, have been panned by some critics and even some Africans as a new form of colonialism which has again put China under the spotlight.  While the statistics don’t lie, clearly illustrating rapidly rising levels of Chinese investment in Africa, the lack of substantive knowledge on the African business environment has left many Chinese investors in Africa with a less than optimal experience in the continent.  

There is, however, a group that does succeed, the Chinese investors who have strong government support and who also possess a highly entrepreneurial spirit.   

Supporting investment in Africa

To continue to encourage investment flows into Africa, the Chinese government, as well as government-owned companies, have adopted a multi-pronged approach that includes high-level visits by top Chinese officials,  implementing policies and measures preferential to Africa, providing economic aid and financial support to Africa, and cultural influence. 

As a goodwill gesture, China has written off the debt of 33 African nations. It also reduced import tariffs on hundreds of items from 32 of the least-developed African countries to promote business development between China and Africa. And to support Chinese investors, China has set up the China-Africa Development Fund as a source of finance.  

Nevertheless, going global is still a relatively new endeavour for Chinese companies. As international standards and processes are essential, Chinese companies will face hurdles such as communication with foreign partners, the availability of managers with the right competencies, to name a few.  

Looking ahead

With this in mind, the Chinese government and Chinese companies are expected to be active in a few key areas to advance their Africa strategy. 

First, the Chinese government will continue to strengthen high–level political relations with African countries. It will also enhance its support for Chinese companies to do business and invest in Africa.  

In seeing the potential for market development and investment opportunities in Africa, more Chinese companies will be compelled to explore new business opportunities on the continent. However, although China has taken advantage of its historically strong relations with Africa to gain economic advantage, China’s foothold in the African business environment has not been as stable compared to that of Western countries. 

Finally, Chinese companies will continue to apply various tactics, such as low-cost loans to gain access to strategic resource assets in Africa. 

With the Forum on China-Africa Cooperation scheduled to be held this November in Egypt, there remains little doubt that China will use the meeting as an opportunity to strengthen further its relations with Africa. Likewise, Africa should not be surprised to see increased Chinese business and investment activity, and in many more sectors.

Edward Wang

First published: July 9, 2009

Last updated:  July 9, 2009