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Friend and foe

Financial Mail, South Africa

Friend and foe

By Amarnath Singh

6 March 2006

How should Africa respond to this friendly - but robust - competition?

China is muscling its way not only into the global economy but also into Africa, a world that SA companies might have thought was their oyster after the walls of apartheid came down a decade ago.

Encouraged by Beijing, about 750 Chinese enterprises are operating in Africa, largely in the energy and extractive industry sectors. They have made a total investment of US$1,5bn (in 2004), according to figures by the Centre for Chinese Studies at Stellenbosch University.

Beijing has investment protection agreements with 26 of Africa’s 53 countries and bilateral agreements with 47 (which thus squeeze out recognition of Taiwan). The Chinese ministry of commerce reports that Sino-African trade has grown from $10bn in 2000 to more than $37bn by the end of 2005. Its exports to Africa rose in value from $6bn in 2001 to almost $19bn in 2005, and imports from $4,9bn to $36bn.

Products of high added value such as machinery and electronic equipment made up nearly 50% of China’s exports to Africa last year. Beijing is committed to increasing its trade with Africa to $100bn in the next decade. Some goods from the poorest African countries have since last year been given zero-tariff treatment by China in an effort to boost trading links.

There has also been a wave of small Chinese firms, not tied to the state, which are altering the retail industry in Africa - and making it cheaper.

This of course means vigorous competition for the continent’s own established and emerging firms, and raises the question of how Africa should respond, says Martyn Davies head of the Centre for Chinese Studies .

As the awarding in December of a R400m Mpumalanga water project (and others) to a Chinese construction company demonstrates , China is able to undercut local bidders - from construction to telecommunications, textiles to the retail trade - and will gradually make inroads in the services sector, say observers. The Asian giant has within a few years come to dominate the construction sector in a growing number of African countries . In 2005 alone, Chinese construction companies won $6,34bn worth of contracts in Africa.

Though SA firms saw the challenge five years ago, competing against the Chinese was never going to be easy, given the nature of the Chinese model, which is based on preferential lending rates from state banks and their own cheap and efficient labour.

"My concern is that the little manufacturing we have in Africa and SA could be destroyed and local trade displaced," says Emerging Market Focus director P J Botha. He says the presence of China is double-edged, and that some African countries have a starry-eyed view of its role, which naturally is largely driven by self-interest.

Another concern is the lack of skills transfer. Chinese companies bring in their own labour and simply leave on completion of a project. African governments should ensure there is skills transfer, he says.

A bigger concern is this: "How do local firms compete against contractors which are still state-owned enterprises, relatively unencumbered by cost of capital and labour considerations?" For such enterprises, the bottom line is not a major factor, says Botha .

China’s interest in Africa is obviously driven by its economic growth and its need to ensure a steady supply of commodities, he says. Over the past 10 years, Chinese state companies such as the China National Petrochemical Corp (Sinopec) have entered into a number of deals in oil-rich countries such as Nigeria, Angola and Sudan.

On the export side, China needs markets for its manufactured goods. Though the quality of its products is improving, China has found it difficult to sell into established markets of the developed economies, so Africa and the emerging markets, where quality control may be less strict, present an alternative outlet.

Though China’s entry "undoubtedly provides low-cost development solutions for Africa, at the same time it clashes with the interests of SA [and other African] firms," says Davies.

He says there needs to be coherence from government and the private sector on how to respond to China’s thrust into Africa, which is becoming Beijing’s sphere of influence.

Garth Le Pere, director of the Johannesburg-based Institute for Global Dialogue, says there are both threats and opportunities in the relationship.

"A big problem for me is that just when many African states are starting to diversify their economic activities, China’s entry could push them back into dependence on commodity-driven exports," he says.

SA, he says, is better placed to compete than many other African countries because it has a more sophisticated skills base and infrastructure.

"The adjustment must be made on the African side. We need to be more vigilant in terms of an appropriate regulatory framework, to check unbridled Chinese entry into sectors which could have a negative effect on certain countries’ development, pushing them back to dependency on one product or sector."

Any concerns SA may have about local industry survival will be part of the next binational committee agenda. On textiles, for example, the Congress of SA Trade Unions has pressed strongly for Chinese voluntary export restraint and other countervailing measures to cushion local manufacturers.

There has been an agreement in principle between SA and China to ensure a voluntary cutback in Chinese exports to SA but details have not been agreed upon. The two countries have also agreed to start talks on a possible free trade agreement, but sources at the department of trade & industry indicate that even the agenda for such negotiations is still a long way away.

In a diplomatic attempt to dispel its image as a predator, Beijing, in its first position paper on Africa in January, spelt out its policy as one of mutual benefit, based on five principles of peaceful co-existence, and pledged greater solidarity and co-operation with Africa in various fields.

In the economic field, it promised to facilitate African commodities’ access to the Chinese market and grant duty-free treatment to some goods from least-developed African countries. It will also negotiate free trade agreements with Africa "when conditions are ripe". China will favourably consider reducing African countries’ debts to it and "do its best to provide and increase economic assistance . . . with no strings attached".

The paper follows the establishment of the Forum on China-Africa Co-operation (Focac) in Beijing in 2000 as a vehicle for expanding Sino-African links. At its triennial meeting in Addis Ababa in 2003, Beijing wrote off $3,5bn of African debt. This year Focac will meet in Beijing in late October.

An indication of Africa’s growing importance to Beijing is that the first visit by its foreign minister each year will now be to an African country. In January, foreign minister Li Zhao Xing visited six countries including Cape Verde, Senegal, Liberia, Nigeria and Libya.

A spokesman at the Chinese embassy in Pretoria, Wang Yue, says the embassy is pushing for a high-level visit, possibly the number two leader, Wu Bang Guo, head of the legislature, to visit SA later this year. The last high-level visit to Pretoria was by vice-president Zeng Qing Hong, in June 2004, when the China-SA Binational Committee met.

Wang says China and Africa have a traditional friendship. "We have more and more areas of co-operation and common interest." This is natural, he says, as both belong to the developing world and face common issues . They co-operate in bodies such as the UN and World Trade Organisation, Wang says.

In view of the size of its economy, it is only natural that China, which Wang describes as "the peaceful giant", imports some of its commodity needs. "But 94% of our primary energy supplies is met domestically." Chinese customs data shows that in the first 11 months of 2005, China bought more than 765 000 barrels of oil a day, or 30% of its imports, from African countries.

According to the department of foreign affairs in Pretoria, SA welcomes China’s interest in Africa, since it represents "a major commitment to Africa’s development and the realisation of Nepad goals". As a developing country, it says, China understands the challenges faced by the African continent.

Foreign affairs also points out that China’s economic dynamism has generated "tremendous business opportunities for Africa and more specifically SA" .