Close this search box.
Africa Update

Firm Details

No data was found

China in Africa: have Chinese investors become more cautious? – October 2014

China in Africa: have Chinese investors become more cautious? – October 2014

Does China think Africa is still a good return on investment? Recent coverage by the financial press has cast doubt about the vigor of the China-Africa relationship, pointing to a new skepticism among Chinese banks and investors for projects in Africa.

The Wall Street Journal ran a piece in May addressing this cautiousness, China Takes Wary Steps Into New Africa Deals. In June, Bloomberg had a similar article observing less bravado by Chinese business going to Africa as did the South African Business Day newspaper.

Trade growing but not surging
There is data to suggest this conclusion. The growth of trade is slowing between China and Africa, or at least growth is below that of expectations from several years ago.  Trade grew from 198.5 billion USD in 2012 to 210.2 billion USD in 2013, an increase well short of the big year on year jumps of the past.

Back in 2010, Africa focused Russian investment bank Renaissance Capital had projected trade would reach 400 billion USD by 2015.

Now projections are more modest with a recent one from Standard Chartered putting trade at 280 billion USD by 2015.

Although these are trade figures and the focus of attention is level of investment, trends in trade are a bellwether for investment.

Lower mineral prices and growth in demand
What is behind the slowing growth of trade figures?  The main culprit is the falling price of minerals, which with oil is one of two major exports from Africa to China as well as to the US and Europe. Prices for minerals like iron and copper are down by 1/3 or more from highs in 2011.

The dampened contribution of minerals to trade will be made up in part by oil with China importing more every year.  African oil exporters like Angola and Nigeria are launching relationships or increasing sales to China on the delegation agenda.

However, with most developing economies stuck in slow growth, mineral prices are predicted to stay low in the long term.  Since minerals have been driving the growth of China-Africa trade, soft prices for hard commodities will be a brake on fast moving engagement.

But even with mineral prices in the long term doldrums, there is bound to be growth in the China-Africa relationship because China has yet to peak in consuming commodities.

China is still growing at 7% annually and based on historical patterns of Japanese and South Korean industrialization, steel intensity will not peak until the 20s.  There will be a desire to engage Africa to meet a piece of this huge expansion requirement.

Same challenges elsewhere
Reporting on China-Africa has tended not to focus on mineral prices but more weight is given to tensions from project delays or cancellations from difficulties with approvals, operations, and labor relations along with increased cautiousness of Chinese decision makers.

But these project challenges are not unique to Africa.  In the context of the large numbers of projects China has in Africa, the difficulties encountered on the continent as a whole aren’t overwhelming.  In China’s resource drive, these kinds of problems must also be put in the context of global disappointments for Chinese companies outside of Africa that share challenges. The toughest cautionary lesson for a Chinese policy bank was in Australia in the development of the Sino-Iron mine.  CITIC Pacific had at first planned on it costing 2.5 billion USD but in the world’s biggest blowout 10 billion USD has been spent after years of delays to export the first shipment, and still plenty more is needed to get to designed production.

Any reassessment caused by delays and cost blowouts in African investments is more clearly put in the context of hard lessons and reevaluation for projects done by China everywhere, whether in other developing countries or even the first world.

Troubled relations with many Sahel countries, thriving engagement with Ghana and Zambia
In certain countries like several states in the Sahel and surrounding countries, the relationship with China is under painful stress that goes beyond simply falling mineral prices.

There is more of a realization of conflict risk with the eruption of civil war in South Sudan in 2013. No other country in Africa is China so deeply engaged as an investor than South Sudan.  Fighting continues as a rebel force known as the White Army has cut across oil producing states in battles against the government.  The war has changed China’s perception of big investments in Africa as 20 billion USD worth of investments by China in oil in the Sudans could be destroyed in the course of war.

In the Sahel countries of Chad and Niger, there are high stakes disputes over Chinese oil investments with host governments.  Earlier in the year, Chad closed down an oil field operated by the China National Petroleum Company (CNPC) for environmental violations and the environmental penalty could have been imposed as part of continuing negotiations between CNPC and Chad.

Similarly in Niger, former President Tandja had made sure a refinery was built as part of an oil production and infrastructure package with China. But the refinery was not a commercial success and spreading out the losses became highly contentious. A deal was reached though in October 2013 to loan Niger 1 billion USD at 1% interest over 25 years with a long grace period to refinance the refinery.

Due to the stress of these encounters, the Sahel may become a region left behind in increasing China-Africa engagement.

However, the problems in the Sahel are not representative of Africa.  Star economies like Ghana and Zambia, supported by strong civic and government institutions, have a robust investment climate for relations to thrive.  In Zambia for instance, output of the main export of copper will almost double by 2017.

Chinese investment in Ghana and Zambia is not limited to extractives.  Two industrial zones financed by China have been built in Zambia and are expanding.  In both Ghana and Zambia, there are Chinese entrepreneurs making formal service sector entries, opening hotels and home improvement stores.

One sector that is being transformed by China across Africa is construction and engineering.  According to the latest data from Engineering News-Record, Chinese firms hold 45% of the market share in Africa among international contractors. In countries with robust governance like Ghana and Zambia, the market share held by Chinese construction contractors is especially strong.  The open climate in those countries has attracted more Chinese firms to establish operations and compete for market share.

Although the long term trend of lower mineral prices is a setback for the rapid boom in China-Africa engagement seen in the past. As demonstrated by Ghana and Zambia, African countries are not without maneuvers in the face of soft prices.  Policies by governments that attract Chinese companies to invest and compete boost engagement to overcome market constraints.

« Return to News


Explore our news articles, specialist publications and browse through our webinars and gallery

What We Do

Explore our range of expertise, and see how we can help you.
Banking & Finance, Investment Funds & Private Equity
Business Crimes & Investigations
Construction & Engineering
Corporate Mergers & Acquisitions
Cyber Law, Block chain & Technology
Dispute Resolution
General Business Law
Healthcare and Life Sciences
Infrastructure, Energy & Projects
Insolvency & Business Restructuring
Intellectual Property
Labour & Employment
Local Investment Laws and Indigenisation
Media, Broadcasting & Communications
Mining, Environmental & Resources
Property Law and Real Estate

Member Countries

Explore our member firms by country

Burkina Faso
Equatorial Guinea
Guinea Conakry
Ivory Coast
South Africa