Roughly 1 million Chinese nationals are working or doing business in Africa, from Egypt’s Mediterranean shore to the Cape of Good Hope.
Theirs are the faces behind China’s soaring direct investment in Africa, which, according to the Ministry of Commerce of the P.R.C., rose 87 percent to US$1.1 billion during the first three quarters last year compared to the same period 2010.
More than 2,000 mainland companies are running mines and factories, building roads, operating telecom networks, and selling Chinese-made goods across the continent. Many of these companies have only recently started pouring manpower and money into African projects. Many more are expected in coming years.
China’s Ministry of Commerce said the value of all China-Africa trade between January and September last year topped US$122 billion—a record amount that was equal to total two-way trade for all of 2010.
Central to China’s success and ambitions is South Africa, where mainland companies run textile mills and mining operations. Industrial and Commercial Bank of China owns 20 percent of South Africa’s Standard Bank Group Ltd. Moreover, South Africa is often a starting point for Chinese businesses that plan to expand into less-developed countries to the north.
Much of China’s investment push into Africa through South Africa came during the tenure of Zhong Jianhua as the Beijing government’s point man in Pretoria. Zhong worked as the Chinese ambassador to South Africa from 2007 to 2012, and currently serves as his government’s special envoy for African affairs.
In an interview with Caixin, Zhong said Chinese investment in Africa has only begun. The continent’s market potential is huge, given its population of more than 1 billion, growing per capita income level, and natural resources. And China’s goal to internationalize its currency, the yuan, may well hinge on Africa.
Zhong admitted, however, that Chinese trade and investment practices have generated controversy. African communities with Chinese investors, as well as the international community, have often found fault with how mainland companies handle labor relations, treat the environment, or bend the law.
Even stable Chinese companies with years of experience in Africa occasionally struggle with labor and social issues, given the wide gap between Chinese culture and the varied cultures of Africa’s diverse population.
Speaking in Pretoria, Zhong described these challenges and how Chinese investors —especially state-owned companies—are addressing critics and moving ahead with business in Africa. His remarks follow:
Caixin: How is the African market unlike those in Southeast Asia and Latin America for Chinese companies?
Zhong Jianhua: Africa has a population of more than 1 billion and huge market potential. Africa’s latent demand in terms of population size and room for expansion is much higher than in Southeast Asia or Latin America.
When you start from a lower starting point, there is more room to move up. In Latin America, per capita GDP has reached US$6,000 to 7,000. It’s even higher in Southeast Asia. This is a lot different than the room for growth in per capita GDP in Africa, which is between US$300 and 3,000. This is the significance of Africa.
South Africa is to the rest of Africa as Hong Kong was to the rest of China before (the Chinese economy’s) reform and opening up. South Africa has well-established commercial market mechanisms, banking, and legal systems. The political situation is relatively stable, and communications and transportation are relatively developed. Moreover, South Africa has many experts familiar with African affairs.
At the same time, South Africans have many investments in the rest of the continent. Moving into the African hinterland from here provides space for maneuvering. In the past, many Chinese companies went directly to other areas in Africa, such as Congo and Angola. The trend now is to first establish a headquarters in South Africa and then radiate outward. This reflects a transformation from short-term awareness to long-term strategy.
Caixin: In what areas do you think Chinese companies are lacking when they move into Africa? What do Chinese companies need to be aware of?
Zhong: If the Western way of operating in Africa can be compared to a large formation of regular army soldiers, then Chinese companies are still at the guerilla stage. Some large, state-owned enterprises are, too.
For instance, a Western company might first invest US$20 million and assemble a staff for a mine worth US$1 billion. It would start with technical considerations, researching geology, technology, financing, legal protection, and local sentiments, and have experts do feasibility studies. Then it would form a comprehensive plan for how to operate the mine, liaise with the local government, communicate with locals, and follow the law. It would even form a thirty-year action plan.
A Chinese company usually brings a bag of money to the table. It would send three people, maybe two of whom can’t speak English. This makes all the difference. People first pay US$20 million to do feasibility studies, and this money may never be returned. Chinese companies might think US$300,000 for this is too much. Some Chinese entrepreneurs think bribing a South African government official is enough.
The reason is connected to differences in corporate culture and the degree of openness to the outside world. Multinational corporations have been seizing global market share for many years and have rich experience. Chinese companies always take domestic business practices with them. Thus, the “going out” road for Chinese companies is very long. It requires a lot of learning, and failures are hard to avoid. This is also a process of improving culture (through) internationalization, industrialization, and normalization.
You can’t over-politicize this learning process. Companies are trying to survive, trying to make a profit. While they might have some government backing, it isn’t necessarily a lot. Even if they have political backing, they can only use economic means to resolve (problems). Companies need to be economic animals with a good sense of smell, with sound bodies and brains.
I’m most concerned that our basic research in Africa is inadequate. Since reform and opening up, we’ve focused research on the most attractive places, or those that constitute major threats. Research on developed countries has been the main focus for a long time, while research on Africa has been on pause. Generally speaking, there isn’t enough, and it’s not deep enough. State investment is also limited.
Caixin: How are Chinese companies competing with European and American companies in Africa?
Zhong: American and European companies cannot monopolize the African market. But this isn’t the impression they gave in the past. Take platinum, for example. South Africa has 60 percent of the world’s platinum reserves and 80 percent of its production capacity. But the platinum trading market is in London, and the market price is manipulated by London.
Now China, a large user, has appeared. China’s cooperation with Africa is all about ensuring that for the next, however many years China will buy however many things. Whatever others don’t buy, we buy. Because of this demand, investment risks are lower. The West can manipulate prices, but they can’t block China’s entry.
The hope China brings is a lot of potential demand. Africa’s own future needs are also enormous. This is all hard for the West to manipulate. This is also the reason why the West feels threatened by China’s entry into Africa. The West’s control over Africa has been broken, not because of political willingness, but because of the rigid demands of the market, which are difficult to defy.
Caixin: How do you see promotion of the yuan’s internationalization on the African continent?
Zhong: Many Chinese have high expectations for the internationalization of the yuan, even political expectations, thinking the globalization of the yuan is a sign of China’s rise. This is not what I want to see. I don’t think the internationalization of the yuan has such great political value and significance, not to mention that the internationalization of the yuan is still at a very early stage.
Making the yuan market-oriented may be a larger challenge for us. Getting the yuan accepted by more countries probably depends on the extent of its market orientation. Is it floating according to demand? Or is it changing at the will of the Chinese government?
As long as it is thought that the yuan is changing according to the will of the Chinese government, its degree of acceptance in other countries will be very low.
If economic stability cannot be reflected in the stability of the value of the yuan, or if China’s economic development cannot be reflected in the appreciation of the yuan, the internationalization of the yuan will be impeded. The more thorough the market orientation, the higher the yuan’s degree of acceptance among other countries.
The more complete the withdrawal of the Chinese government’s influence over the value of the yuan, the easier it will be for the yuan to be accepted globally.
Han Wei and Shen Hu are Caixin staff reporters.