The Rise of Chinafrica: A Saga of Love, Hate or Betrayal?

Abstract Within the past decade, Chinese foreign direct investment into Africa has risen dramatically. These economic engagements have affected all sectors of the African economy; including manufacturing goods, machinery and equipment, and crude oil, with countries like South Africa, Nigeria, and Zambia seeing a majority of the investments. This paper aims to apply international trade theories and explain the current situation in Africa, as well as hypothesize some of the reasons behind the burgeoning Chinese-African relationship.

Introduction In the well-cited book African Development Prospects: A Policy Modeling Approach, Dominick Salvatore (1989) wrote about four interrelated crises that has afflicted African development: (a) a technical crisis in which erratic rainfall and stagnant technology have failed to preserve or enhance the physical environment; (b) a development crisis in which poor domestic policies have led to continued failure of relevant economic drivers to adequately fuel national economic development; (c) a global economic crisis in which Africas prospects for expanded international trade have been severely hampered; and (d) a political crisis within and among African countries where the legitimacy of governments has been challenged by continuing military conflicts. While in the past decade or so, we have seen formulation and implementation of several market oriented structural reforms addressing the development crisis, many African countries still need external assistance and internal political stability if the true potential of Africa is to be untapped. Commonly referred to as the second invasion of Africa, Chinese foreign direct investment into the African continent has been rapidly rising over the past decade. The rise of Chinafrica is a new and important phenomenon in international business and development that needs significant research attention. It may be argued that Chinese trade and investments with Africa impact both the external assistance and the internal political stability of African countries. While these have had positive outcomes, several aspects of this relationship have raised questions and concerns throughout the world. The purpose of this paper is to apply international trade theories and dissect the love, the hate and the betrayal in this new relationship between two rising economic giants.

Throughout the years, China has noticeably expanded its financing and foreign direct investment to Africa. The relationship has stimulated the political and economic interests of China while flourishing Africa with technology, infrastructure, and financial resources. Trade and federal direct investments have become a potent tool in China and Africas reinvigoration of

economic and development among both whom are emerging globally. China, a non-OECD (Organisation for Economic Co-operation and Development) country, and one of Africas largest trading and financial partners, has experienced a rapid economic and trade development which in turned has drawn attention from western countries and international society. The bilateral trade relationship has outpoured success and has increased both in volume and content and as a result some European and Western countries are losing ground to China. In 2009, the United States was overtaken by China as Africas major trading partner (www.oecd-ilibrary.org). The focal points of this paper highlight Chinas motives to invest in Africa, analyze relatable concepts from FDI theories, identify criticisms, emphasize win-win achievements from the partnership that impacted both parties, and pinpoint future predictions for China and Africas trading relationship. China in Africa African economies are successfully prospering beyond measures aiding from Chinas trading partnership. Africa, the worlds second largest and second most populous continent, welcomes China investors with many deals involved in natural resources in exchange for investing in infrastructure, telecommunications, transportation, and fisheries projects and also providing Africa with cheap loans to develop and flourish in the public and manufacturing sectors. These projects helped improved life of millions in Africa, created jobs, and reduced levels of poverty. China imports Africas natural rich commodity resources such as: oil, timber, copper, and agricultural potential, and diamonds. In addition, China also exports processed foods, household products, textiles, and other manufactured good to African countries. Moreover, unlike nations such as the United States who also is a trading partner with Africa, China does not associate trade with political reforms and has a strict policy for non-interference in the domestic affairs of other countries. Africa accepts that China has no political strings attached to the governmental loans and support received from trading negotiations consider this policy more attractive than Western deals since majority of those aids often is coupled with demands centralized with Africas political affairs (www.cnn.com). Chinas interests in Africa stems broader than economic opportunism based on gaining resources of raw materials to sustain Chinas growth than Western countries credit China for. Africa has allowed China to open new markets for export goods. Africa has benefited as well and Chinese trade and investment in Africa had helped spur consistently high economic growth. The International Monetary Fund estimated in 2012 a growth of 5.8 percent Sub Saharan Africa from outcomes of investments (www.mmegi.bw). According to an article in Africa Renewal, the author describes, The low level of the Yuan compared to the other major world trading currencies such as the US dollar, the Euro, and the Yen attracts African importers and African consumers like Chinese products because they are affordable. Chinese goods are cheaper than those from Europe and North America and price is very important. China and Africas giveand-take relationship plays out in many forms and continues to help African countries increase production capacity, boost the continents manufacture sector and small and medium-sized enterprises, and maintains to provide a source of hope for Africa for opportunities for foreign investors and economic development (www.un.org/africarenewal).

Trade between Africa and China has grown at an incredible pace. It was $10.5 billion in 2000, $40 billion in 2005, $166 billion in 2011, and $200 billion in 2012. Between the Sahara and the Kalahari deserts rest many of the raw materials desired by its industries. China recently exceeded The United States as the worlds largest net importer of oil. Almost 80% of Chinese imports from Africa are mineral products but it is not all minerals. Exports to Africa are diverse and machinery consumes 29%. Chart 1, from an article entitled, More than Minerals, in The Economist provides data from 2010 for minerals, metals, and machinery trade. Recently, China concentrated on a few big resource-rich countries, including Algeria, Nigeria, South Africa, Sudan and Zambia for trading (www.economist.com). Chart 1

Studies show that Chinese people are coming to Africa in great numbers and finding it a comfortable place to visit, work in, and trade. An estimated 1million people are now residents in Africa- increased from a few thousand a decade ago, and more keep arriving. Chinese people are the fourth most frequent visitors to South Africa (www.economist.com). Many Africa elites see China as the continents biggest contributing partner among the BRICS and the relationship has constructed jobs, transferred skill sets, technology, resources, and increased local economies in various sectors. Chinas investments significantly increased its FDI in Africa when Western companies, including the United States, were drawing back from Africa. China took advantage of opportunities and helped nourish Africa. There are wide discrepancies in the foreign direct investment (FDI) statistics for China with Africa and there is no consensus on a total cumulative number and depending on the source number will be different; furthermore, Chinese investments are often funneled through offshore entities registered tax shelters in locations such as Hong Kong and Cayman Island and statistics are scarce at sectorial level. However, from 2003 to 2008, a source identifies the leading recipients of Chinese investments were: South Africa, Nigeria, Sudan Zambia, Algeria, and Sudan. Chart 2 illustrates a breakdown from 2003-2008 below that was highlighted in the article Chinese Trade and Investment Activities in Africa in 2010 (Osei, 2010). Chart 2

Each continent in Africa has its own distinctive structure in terms of the attractiveness for Chinese investment in Africa. Others such as Guinea, Ghana, Democratic Republic of the Congo and Ethiopia have joined the list in recent years. In 2010, Ethiopia had, for instance, around 580 registered Chinese companies operating with estimated investment capital of $2.2 billion. Some of the new FDI is coming thru Chinese special economic and trade cooperation zones. China is partnering with African counterparts to establish seven zones: two each in Zambia and Nigeria and one in Mauritius, Egypt and Ethiopia (www.cnn.com). Moreover, an article in China US Focus from November 20012 stated: Chinas Minister of Commerce, Chen Deming, indicated in mid-2012 that as of the end of 2011 Chinas cumulative FDI in Africa exceeded $14.7 billion, up 60 percent from 2009. Also in mid-2012, Chinas ambassador to South Africa, Tian Xuejun, in a wide ranging speech on China-Africa relations, said: Chinas investment in Africa of various kinds exceeds $40 billion, among which $14.7 billion is direct investment and more than 2,000 Chinese companies have invested in Africa. Most of the investment has gone into energy, mining, construction and manufacturing. Chinas state-owned oil companies are active throughout the continent (www.chinausfocus.com). China will remain an important source of FDI in Africa for many years to come and Chinas role in Africas infrastructure, manufacturing, private, and other sectors are highly visible. ChinaAfrica relationship has affected multiple levels and generated positive light such as: the continents economic growth, government, poverty reduction, productivity, competitiveness, technology transfer, and employment. Also the partnership is trying to create a stronger and rich relationship at the level of people-to-people, business-to-business, students-to-students, and so forth to continue to enhance the relationship. FDI Theories China decided to invest abroad to Africa rather than to export or outsource production to national firms to exchange and gain favorable access to scarce resources. The traditional theory of international relates to China-Africa relationship and provides an international market entry mechanism for China and Africa to interchange products, technology, human skills, management, and other advanced factor endowments to strengthen both parties strategic position.

The theory suggests that companies/countries share similar markets and the involvement typically starts in the form of indirect and direct exports and afterwards they increase their commitments. The impact of international trade on development is observed in areas that play a major role on effects on growth, income distribution, poverty, and employment. Trade and FDI are important stimulus to rapid economic growth by promoting greater utilization of labor and capital resources, increasing foreign exchange earnings, and expanding access to technological knowledge (www.wps.aw.com). China and Africas relationship shaped a comparative advantage and expanding trading and investments initiatives without public control and low tariff barriers has designed beneficial opportunities and development strategies to boost China and Africas economy as emerging markets. This theory has also allowed China and Africa to experience resource based growth by China exporting technology and manufactured goods while receiving primary commodities from Africa that were needed for production. This strong exchange rate emerged business ventures with low risk, labor force, and competitive advancement for China and Africa. Another theory, the transaction theory presents Africa the opportunity to receive low loan rates from China for infrastructure projects as well as China has provided free of charge infrastructure developments eliminating Africa to bear any associated costs. This allowed both parties to build without owing of the economical responsibility. The eclectic theory has three advantage components-ownership, internalization, and locational. The theory provides a competitive advantage and China and Africa have benefited this relationship. The exchange of resources, technology, and financial capital has allowed the ChinaAfrica to gain trading power and eliminated high transaction costs. This theory has provided resource, market, strategic, and efficiency capabilities between China and Africa (www.wps.aw.com). This theory has been likened to a three-legged stool metaphor; each leg is supportive of the other, and the stool is only efficient if the three legs are evenly balanced. Ownership, internalization, and locational plans have to be aligned that reflect both parties not to lose value, no high transaction cost, saving transport cost, low risk, and wining in both countries. China and Africa have coupled their strengths to enhance the transfer of resources, technology, economic benefits and social advantages. China has contributed significantly to African economies and the relationship has opened opportunities for both parties (www.wps.aw.com). Western Criticism China has endured ongoing Western and European Union criticism and they have summarizes Chinas investments as neo-colonialism. People concluded that the investments are meant to remove natural resources oil in particular from the continent in order to meet Chinas infinite need for energy (www.mmegi.bw). US Secretary of State, Hillary Clinton, in June 2011, during her visit to Zambia, warned against a new colonialism in Africa, in which it is easy to come in, take out natural resources, pay off leaders and leave. Clinton also expressed, The days of having outsiders come and extract the wealth of Africa for themselves, leaving nothing or very little behind, should be over in the 21st century (www.ethiopianreview.com). Clintons words voiced strong views about how China has come into Africa and taken advantage of its resources and are

invasive to Africa. However, Rwandan Finance Minister John Rwangombwa disagrees with the criticism and praises the flow of Chinese into his country- quoting, We are a country that is in the development and we value the investment of China to our country (www.crienglish.com). Other backlash such as referring to China-Africa relationship to, The dragon eating the eagles lunch symbolizing China has rapidly penetrated Africa and its rich resources to support Chinas own economic wealth and growth in the energy sector where Chinese national oil companies have spent big dollars to get a foothold in this sector. However, China has argued that Chinese investments in Africa are far more diverse than just natural resources and is focused on providing personnel training and expertise to people in Africa (www.crienglish.com). China continues to express its respect to African countries and the continents choice in political system and development path suited to their own national conditions and supports them in their just struggles for safeguarding their independence, sovereignty and territorial integrity (www.ethiopiareview.com). Chinas policy of non-interference and its nonchalant actions in regards to human rights issues that affect some African counties have caused controversy due to Chinas lack of public recuse. However, China indicated that the country has stepped when it was appropriated. China believes that their relationship with Africa has made Africa stronger and a blossoming economy. China in the heart of Africa- A Win-Win Despite the criticism, China and Africas relationship is a win-win situation and Chinas investments have allowed Africa to promote economy growth. The development of The Forum of China-Africa Cooperation which was jointly set up by China and Africa in 2000 serves as an effective mechanism for China increasing the economic assistance for Africa. Chinese FDI in Africa increased form 0.05 billion US dollars in 2001to 1 billion US dollars annually. 2009, the amount of FDI was 1.439 billion US dollars and FDI in South Africa and Nigeria was 3.333 billion. By 2009 China supported to construct nearly 900 plants and equipment in Africa that included agriculture, livestock, fishery, textile, light industry, transportation, broadcasting communication, water power and electricity, mechanical industry, education, health industry, and etc. In addition, China also was involved in training African professionals (Li 118-123). With this relationship, Africa has become a hot spot of international investment and is the second largest overseas labor and project contracting market of China. 2009 contracts were valued at 28.436 billion US dollars and accounted for 33.02% of the total foreign economic cooperation value. China and Africa developed a deep and strong strategic partnership of political equality and mutual trust, economic win-win cooperation, and culture exchanges (Rucai). China understands and values Africa relationship and former President Hu Jintao said the Chinese and African peoples have always treated each other as equals we will forever be a good friend, good partner and good brother of the African people (www.bbc.co.uk). Chinas gift to the African Union, the new AU Headquarters, a $200 million state of the art complex that China directly paid for in Addis Ababa, Ethiopia. AU Headquarters is Ethiopias tallest building and was completed in December 2011. The gift prompted Ethiopias late Prime Minister Meles Zenawi to refer to Africas current economic boom as a renaissance, due partly

to Chinas amazing re-emergence and its commitments to a win-win partnership with Africa and his words signified that Chinas relationship enhances Africa (www.ethipiareview.com). China has contributed substantially to African economies from energy and commodities purchases to generate foreign exchange, offers competitive source of development assistance, and employs and trains African workers. In addition, to continue to sustain a strong, flourishing relationship China, will continue to invest more in African factories and businesses. Future Sustained economic growth in African has formed a broad middle class and consumer demand to increasingly rise; establishing powerful economic engine for Africa (Wonacott, 2011). The middle class is expected to continue to grow and is described as the key to Africas future prosperity. Over the past decade, Africa has been growing and developing its economy and consumer spend is projected to reach $1.4 trillion in 2020 according to the McKinsey Global Institute, from about $860 billion in 2008 (Juma, 2011). This new found emergent stems from business relationships with China, globalization, and economic growth. However, many developmental problems still exist in Africa- but growth is still predicted and hopefully with change will follow. China and Africas partnership has provided a source of opportunity grow for each and with new transferred knowledge, technology, improved infrastructure, and more has helped promote innovation and increased the economy. This is a win-win situation and as the old African proverb states, if you want to go fast go alone- but if you want to go far go together has summarized the strong relationship of China and Africa. References www.bbc.co.uk. Chinese Colonialism. July 19, 2012. www.chinausfocus.com.Chinas Investments in Africa. Ambassador David Shinn. November 2012. www.wps.aw.com.Economic Development. www.un.org/africarenewal.China in the Heart of Africa. Kingsley Ighobor. Jan 2013. Page 6. www.economist.com. More than Minerals. March 23, 2013. www.ethipianreview.com. The Dragon Eating the Eagles Lunch in Africa. March 25, 2013. www.crienglish.com. China becomes Africas largest Trading Partner. December 22, 2012. www.mmeghi.bw. The Monitor. China Largest Trading Partner with Africa. August 6, 2012. www.cnn.com. China: Trade with Africa on Track to New Record. October 15, 2010. www.oecd-ilibrary.org. OECD Factbook 2011-2012: Economic, Environmental and Social Statistics. June 01 2013.

Osei, Barfour. Chinese Trade and Investment Activities in Africa. Volume 1, Issue 4. July 29, 2010. Li, Bin. Circumstance and Future of the Economic and Trade Cooperation Between China and Africa. Contemporary Logistics. June 2011. Pages 118-123. Juma, Calestous. Africas New Engine. Finance & Development. December 2011. Rucai, Lu. Expanding China-Africa Cooperation. China Today. September 5, 2012. Wonacott, Peter. World News- Africa Raising: A New Class of Consumers Grown in AricaNumbers on Par With China and India. Wall Street Journal. May 2, 2011.