In this section, we present a series of stylized facts using the data we just described, which helps to put China’s engagement in Africa in the context of China’s overall engagement with the rest of the world. China’s economic engagement with the rest of the world including Africa started to accelerate rapidly soon after China joined the WTO in December 2001. Broadly speaking, China’s economic engagement with the rest of the world can be classified into the following four categories: international trade; foreign direct investment (FDI); loans; and construction projects (“economic cooperation”), part of which overlaps with Chinese loans to and FDI in Africa.
While not all of these channels of economic engagement entail investment per se, to fully understand Chinese investment abroad, we need to put it in the context of these other channels of economic engagement. To see this, consider Chinese FDI in the mining and construction sectors. These types of FDI have often been accompanied by loans from the Chinese government to African governments which in turn contract Chinese firms to extract resources or build infrastructure. In turn, the repayment of these loans is often tied to commodity exports from African borrowers to China. We do not consider humanitarian and grant-based development assistance from China to the rest of the world for two reasons. First, it has not been a big part of China’s economic engagement with the rest of the world and second, it would not fall into the traditional categories mentioned above (Brautigam, 2011). A summary of the different channels of China’s engagement with Africa is presented in Table 1.
Trade
In US dollar terms, the most important channel through which China has engaged with the rest of the world is international trade and Africa is no exception in this respect. As can be seen in Figure 3, China’s international trade started to accelerate just after China joined the WTO in December 2001. By 2015, China’s share of world exports had grown from just 4.6 percent in 2001 to 15.4 percent in 2015. China’s share of world imports also grew rapidly from just 3.9 percent in 2001 to 9.9 percent in 2015. Figures 4a and 4b show that China’s trade with Africa follows similar patterns; its magnitude increased rapidly after China joined the WTO in 2001. However, trade with Africa accounts for a very small share of China’s global trade. China’s imports from Africa started at around 1 percent in 1998 and peaked at almost 6 percent in 2012. The share of China’s imports from Africa fell to only 3.5 percent in 2015, possibly as a result of the downturn in global commodity prices. China’s exports to Africa continued to grow after 2012 (Figure 4a). Figures 4a and 4b also clearly show that China ran a trade deficit with Africa in all of the years up to 2014.
Foreign Direct Investment
Like trade, China’s global FDI has increased rapidly over the past 16 years but FDI annual flows still amount to less than 10 percent of the value of Chinese exports (Figure 5a). Since 2001 the Chinese government has pursued what is known as the ‘go out’ policy, which encourages Chinese investment abroad. The main reasons for encouraging domestic investment abroad are the large amounts of foreign reserves accumulated by China, Chinese industry’s need for raw materials, and a desire to make Chinese firms competitive with mostly Western multinationals. The Chinese government together with the China Council for the Promotion of International Trade (CCPIT) has introduced a number of incentives which are intended to encourage domestic firms (both public and private) to invest overseas.
Figures 5a and 5b show that African countries account for a very small share – roughly 2 percent of flows and 3 percent of stocks – of China’s global FDI. There was a one-time spike in Africa’s share of Chinese FDI flows in 2008 but this was a result of China’s acquisition of 20 percent of the shares of Standard Bank in South Africa. However, China’s FDI outflows to Sub-Saharan Africa continue to make up a very small portion of its total FDI outflows, and the share of FDI outflows to Sub-Saharan Africa has not been increasing relative to other regions. For example, in 2015, FDI from China to Africa comprised only 2.5% of China’s FDI flows. The majority of Chinese FDI (58.3%) still goes to Hong Kong, although Europe, South America and the rest of Asia all continue to receive more FDI than Sub-Saharan Africa.
However, when we disaggregate the data, we get a slightly more nuanced story. Figures 6a and 6b show the amounts of Chinese FDI to Africa going to the five largest recipients as a group – Democratic Republic of the Congo (DRC), Nigeria, South Africa, Sudan and Zambia - and the rest of Africa. Figure 6b shows that Chinese FDI stocks in Africa have increased rapidly from $840 million in 2004 (in current terms), which is the first year for which we have comprehensive data, to $31.2 billion in 2015, corresponding to a 38-fold increase[1].
Early FDI by China in Africa was intimately linked with China’s demand for natural resources and was primarily done by China’s State Owned Enterprises (SOEs). This explains why Chinese FDI in Africa was primarily concentrated in the top five countries, which are predominantly resource rich economies. Figure 6a shows that the flows of FDI to the top five countries have been declining since 2011, an indication that Chinese FDI in Africa has started to diversify away from resource rich countries into other economies in Africa. Moreover, while the top five countries possess significant natural resources, these are not necessarily the main reasons for their Chinese investment presence. For example, the surge of Chinese FDI flows to South Africa was driven by the one-time purchase of shares in Standard Bank as described above, while Chinese investment in Nigeria is not limited to oil, given that the majority of Nigeria’s oil investment is from Dutch, Italian and American companies and the diversity of Chinese investment activities described by Chen et al (2016).
Figures 7a (FDI flows) and 7b (FDI stocks) are consistent with the idea that Chinese FDI to the world is becoming more diverse in terms of sectoral structure. In 2004, the mining sector accounted for one third of Chinese FDI flows but by 2015, mining accounted for less than 8 percent of total FDI flows. Instead, business services, which includes leasing and potentially investment going into offshore financial centers, has become the most important sector for Chinese FDI rising from 14 percent in 2004 to 25 percent in 2015. In terms of Chinese FDI stocks, Figure 7b shows that mining accounts for a relatively stable share of total Chinese FDI and never becomes dominant in total FDI. At the peak in 2006, mining accounted for 20 percent of Chinese FDI stocks, falling to 13 percent in 2015. In fact, in every year since 2004 – the year when data became available - the share of business services in China’s overall FDI stocks is the highest, possibly driven by FDI going to Hong Kong, where more than half of China’s FDI has gone in every year since 2004.
There are only three years of data (2013-2015) for China’s FDI stocks in Africa at the sector level and these data only represent the top five sectors.[2] In contrast to the global sector structure of Chinese FDI stocks presented in Figures 7a and 7b, Figure 8 shows that the majority of Chinese FDI in Africa was still in mining in 2013, 2014 and 2015. However, Chinese FDI in manufacturing is increasing. The sectoral structure of FDI stocks are also available for other regions, but of course the top five sectors vary by region. In Figure 9 we show the relative importance of the five sectors by industry and region for 2015. Although we only show the breakdown for 2015, in total these sectors capture 70-80 percent of the Chinese FDI stock in all three years. Within sectors we rank the regions from high to low according to their share of the Chinese FDI stock in that sector. Only four of the five sectors that comprise the majority of China’s total FDI stock are important in Africa; African countries have received so little Chinese FDI in the business services sector that it shows up as missing in Figure 9. This may relate to the lack of tax havens in Africa, apart from Mauritius.
Consistent with Figure 8, Figure 9 shows that the Chinese FDI stocks in Africa are more concentrated in mining and construction, each of these sectors accounts for 27 percent of total Chinese FDI stocks in Africa in 2015. Notably, Africa is the only region where construction is one of top five sectors in terms of the share of FDI stocks. However, Figure 9 shows that mining is important for Chinese FDI not only in Africa, but also in Oceania and Europe; in Oceania more than 60 percent of Chinese FDI stocks are concentrated in mining. Manufacturing appears as a top five sector for Chinese investment only in three regions: Africa, Europe and North America. In fact, the shares of manufacturing in Chinese total FDI stocks in the two developed regions are higher than in Africa, where manufacturing accounts for around 13 percent of Chinese FDI stocks.
Construction
As noted above, the China Annual Bulletin of Statistics of Contracted Projects and Labor Cooperation with Foreign Countries records the annual value of engineering projects won by Chinese firms. Africa accounts for a significant share of Chinese overseas construction projects, relative to its share of Chinese trade and FDI. In 2004, Africa’s share of these projects was 16 percent and rose to almost one third of the value of global contracts engaged in by Chinese companies in 2015 (Figure 10). Given Africa’s infrastructure deficit, this is perhaps not surprising. The fact that the value of fulfilled (as opposed to planned) contracts outnumbers FDI stocks in construction by 4 to 1 means that the vast majority of infrastructure built by China in Africa is not financed by Chinese FDI. However, according to data on Chinese loans from SAIS-CARI and ICA (2016), about a quarter of African infrastructure project value is financed by Chinese loans, many of which include clauses requiring the purchase of goods and services from China (Brautigam and Gallagher 2014).
How many Chinese workers are employed on construction projects in China? This is an important question because public works projects are typically a way for governments to boost employment and because jobs are a top priority for every government in Africa. The numbers in Figure 11 provide some insight into this issue and suggest that it is unlikely that the Chinese government is using infrastructure projects in Africa to export surplus workers. Figure 11 shows the number of Chinese workers in Africa by year since 2009 broken down by workers who are under labor service arrangements and workers who are tied to contracted projects. Workers under labor service agreements are workers who have gotten visas similar to the H1-B visa in the U.S, which allows foreign workers to legally be hired in the U.S. Workers who are tied to contracted projects are workers who work in foreign countries for the Chinese firms with whom the projects have been contracted. These workers are almost all engaged in construction projects. Figure 11 makes it clear that the vast majority of Chinese workers in Africa are attached to contracted construction projects, rather than labor service arrangements.
Recall that Figure 10 shows that African construction projects account for one third of the value of global contracts engaged in by Chinese companies. We can see from Figure 11 (the red line) that Africa’s share of Chinese workers in contracted projects reflects its share of Chinese construction projects (as shown in Figure 10). By contrast, the share of Chinese workers in Africa who go abroad through labor service arrangements is very small, at around 5-6 percent in 2011-2015 (the green line at the bottom of Figure 11). The implication is that the ratio of the number of Chinese workers to the number of Chinese construction projects in Africa is similar in the rest of the world. Moreover, the number of Chinese workers has been relatively stable over the past few years despite the rapid growth in the value of overseas contracted projects. Currently, there is a ratio of 3-4 Chinese workers per million dollars of project value, suggesting that any displacement of potential African workers on these projects would not be large. This corresponds to Sautman and Yan (2015), who cite findings that 87% of employees in Chinese projects in Africa were local.
Loans
The size and influence of China’s banks have increased rapidly in recent years. The two major banks in operation are the China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM). China has also played a major role in establishing the Asian Infrastructure Investment Bank as well as at least 13 smaller regional funds. Together, CDB and CHEXIM hold more than $2 trillion in assets, which is more than twice the assets of the major Western-backed multilateral development banks combined. $684 billion of these assets are invested overseas. Their capital base is also growing much more rapidly, putting China on track to become the largest lender to developing countries. China’s international lending has a major focus on energy, with $117.5 billion in energy financing provided between 2007 and 2014. (Gallagher et al 2016).
In comparison, Chinese governments, banks, and contractors extended loans totaling $86.9 billion to African governments and state owned enterprises between 2000 and 2014. Of this, $24.2 billion was for transportation, $17.6 billion for energy and $9.0 billion for mining (Hwang et al 2016). 54 percent of Chinese loans in this period were made to five countries: Angola, Ethiopia, Sudan, Kenya and the DRC. Lending to Angola is heavily tied to the country’s oil, with about half of loans being made to the state-owned oil company and the other half being oil-backed infrastructure loans, while the loan portfolio in Ethiopia is spread out across transportation, communications and energy (hydropower), among other sectors (Hwang et al 2016). About 56 percent of China’s loans to Africa from 2003 to 2011 were backed by commodities (Brautigam and Gallagher 2014). This has exposed their portfolio to serious risk in the face of falling oil prices and may prompt them to diversify their loan portfolio away from commodity – especially oil – backed lending (Gallagher et al 2016).
While some of China’s loans can be considered concessional or preferential, those backed by commodities are typically made at rates similar to those in global capital markets (Brautigam and Gallagher 2014). Nevertheless, at the Forum on China Africa Cooperation (FOCAC) in December 2015, China pledged to provide $35 billion in concessional and preferential loans and non-preferential export credits along with an additional $5 billion in interest-free loans and grants to African countries (Hwang et al 2016). However, given the slow realization of past commitments, China’s economic slowdown and falling commodity prices, there are some doubts about if or how this funding will be made available.
Summarizing, we can say the following about Africa’s relative importance to China. African countries make up a very small share of China’s global trade and FDI. Put differently, if growth were to slow down in Africa, the impact on the Chinese economy would likely be minimal. This has implications for African countries’ bargaining power vis a vis Chinese investors, although a discussion of these issues is beyond the scope of this paper. On the other hand, a slowdown in Africa would be a blow to Chinese construction companies who did roughly 30 percent of their business in Africa in 2015. This could have repercussions for Chinese banks heavily invested in infrastructure lending but again, these loans make up a tiny share of China’s financial portfolio.
