The Peoples’ Republic of China’s transition toward a market economy over the past 30 years has been intimately bound to its global “going out” strategy.
The stratospheric rise of the Peoples’ Republic of China’s manufacturing industry during this period, coupled with domestic, state-led development in construction and infrastructure, has demanded massive quantities of raw materials.
During the Maoist period, the Peoples’ Republic of China (PRC) proudly touted a “self-sufficiency” strategy, using its oilfields in the North East of the country as examples of non-reliance on outside trade.
However, by 1993, the Peoples’ Republic of China had become a net importer of oil – a trend which was paralleled in a number of other commodity classes.
Since the mid 1990s, the PRC began to invest in African resources, starting in high-risk countries such as Sudan, where many other international investors had shied away.
This was followed by further engagements in mineral-rich countries such as Angola, Nigeria, Algeria, Zambia, the Democratic Republic of Congo (DRC), Guinea and South Africa.
Since 2009, the PRC has held the title as Africa’s largest trading partner, with a total trade volume of 220 billion (by way of comparison, in 1980, the total trade figure was 1 billion).
As with Africa’s other major trading partners, Europe and the US, the vast bulk of African exports are raw materials, while the lion’s share of Chinese imports are manufactured goods – a pattern considered problematic for African states insofar as it creates largely “jobless growth”.
In the wake of the recent global commodity slowdown and its impact on African economies, in what ways are the Chinese and African sides addressing the issue?
Official Chinese statements refer to the the PRC-Africa engagement as a “win win” arrangement, in which resources extracted are off-set by infrastructure implementation by Chinese companies.
This is often referred to as the “Angolan Model”, whereby oil extraction was packaged with road and rail infrastructure implementation, badly needed in then war-torn Angola, and bank-rolled by the PRC’s immensely wealthy, state-owned Exim Bank.
The relative speed at which infrastructure is implemented, the low cost and the fact that such assistance is not tied to political conditionalities (as practised by the World Bank and the International Monetary Fund) have made this model attractive to countries such as the DRC and Sudan.
Chinese companies, be they State-Owned Enterprises (SOEs) or private firms, tender for the infrastructure projects which are paid off by the host country, in the form of soft or commercial rate loans and sometimes in resources themselves.
Earlier this year, Chinese Premier Li Keqiang announced a new development fund in which tenders could be submitted internationally, rather than just by Chinese companies.
While this model has proved successful and popular in various parts of Africa which desperately need infrastructure to foster greater inter-regional trade, it does not address the underlying problem of sustainable growth in Africa, which can be achieved most efficiently through industrialisation.
In terms of Foreign Direct Investment (FDI), the PRC ranks only seventh on the African continent (with the US coming first, and South Africa second).
The Chinese government is aware of this and has adopted strategies to address the problem, such as the introduction of Special Economic Zones (SEZs) in countries such as Ethiopia, Mauritius, Zambia and Egypt.
More recently, the Chinese government has ushered in a new extension of its “going out” policy under the banners of the “New Silk Road” and “One Belt – One Route” initiatives – massive infrastructure and industrialisation projects to stretch across Central Asia, the Pacific and Indian Ocean regions.
As an extension of this, in March this year, the PRC announced a similar programme for Africa: the “Three Networks and Industrialisation” programme, which, in addition to further transport development, will also include the shifting of certain elements of the People’s Republic of China’s industrial base into Africa.
As the PRC’s middle class develops, and wages go up, the competitive edge of its industrial sector is waning, thus creating incentives to move such industries abroad.
However, at this point, there has been little movement in this regard, although the upcoming FOCAC (Forum on the PRC-Africa co-operation) meeting may initiate more concrete plans.
Additionally, Chinese actors are increasingly grappling with issues of Corporate Social Responsibility (CSR) – both domestically, where environmental degradation is a matter of great urgency, but also in Africa, where a heavy non-governmental organisation (NGO) presence puts pressure on international extractive industries.
The PRC’s industrial bank has adopted the equator principles for project finance.
Furthermore, SASAC, State-owned Assets Supervision and Administration Commission of the State Council, a state supervisory authority has developed a formal set of guidelines for SOEs’ engagement in CSR.
Other government agencies such as Exim Bank have also developed own standards for CSR, drawing on and adapting international approaches.
In countries such as Chad and Gabon, operations have had to come to a halt due to CSR concerns, signalling that standards in the extractive sector have become stricter.
The case of South Africa
Despite the necessity for such a transition, the PRC’s engagement in the African extractive sector will remain of crucial importance.
Even though the PRC’s current economic slowdown, which has led to a decrease in the demand for natural resources, coincided with a fall-off in global commodity prices driven by the PRC’s over capacity affected African commodity exporters, the PRC will still be the largest consumer of most commodities in future.
Thus African nations should reflect on the future and create a clear plan to follow.
Take South Africa as an example: the South African mining industry contributes 18% to the country’s GDP, and mining will continue to play an important role.
South Africa has tried to enhance primary beneficiation of raw materials for the past two decades through expansion of production capacity and attracting foreign investors among other measures.
At present, how to incorporate the isolated mining sector based on raw material extraction into the total industrial value chain is an urgent task for South Africa.
However, South Africa faces various challenges such as the high cost associated with logistics such as electricity supply and infrastructure, skills shortages, and the low level of R&D (which only accounts for 1% of GDP).
With its large natural reserves of gold, platinum-group metals, chrome ore and manganese ore among others, South Africa will remain attractive to outside investors.
The Chinese may potentially contribute to the sector through production expertise and capability, R&D activities.
The PRC-Africa Development Fund, an equity fund located within the the PRC Development Bank (CDB), financing various projects in South Africa, has already facilitated Chinese actors’ entrance into the country. It is crucial to ensure that the country maximises the benefits.
The PRC’s Hebei Iron & Steel Group (HBIS), for instance, announced its plan to operate a full-process iron and steel project in South Africa. However, it has not undertaken any activities related to beneficiation yet.
While many in the South African media, and Africa more broadly, portray the PRC as a bogey-man, the truth is that African economies would fair far worse if the PRC were to – hypothetically – withdraw from Africa tomorrow.
Africa is only a small part of the PRC’s global trade (less than 5%), with huge investments in Central Asia, South East Asia and South America.
What beneficial strategies have these regions adopted in their engagements with China?
One might turn to Australia for guidance.
Like South Africa, the PRC is also Australia’s largest export market for resources. Its engagement (direct exports) with the PRC, especially in the mining sector, has resulted in 72 000 jobs in Australia.
The PRC-Australia Free Trade Agreement (ChAFTA) signed in June 2015, seeks to improve trade prospects between the two regions, providing better market access.
Within Africa, the PRC’s assistance in industrialisation is a process which is yet to unfold.
On the other hand, the extractive sector will dominate economic engagement for a long time to come.
Thus, African actors need to think very strategically as how best to maximise engagement in this sector for the economy.
* Ross Anthony is Acting Head: Centre for Chinese Studies, Stellenbosch University, and Yejoo Kim is a Research Fellow: Centre for Chinese Studies, Stellenbosch University
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