Africa, and China’s One Belt, One Road initiative: Why now and what next?

15 September 2016

China’s growing outbound investment ambitions could be as transformative for today’s poor countries as inbound investment was for China. This will depend upon how recipient developing economies, in particular in Africa, utilise China’s investor interest for their own sustainable development.


Aid, trade, and investment flows between China and Africa are among external catalysts of the latter’s nascent integration into global value chains. This proceeded from changes in the mid-1990s, for example in apartheid having then ended in South Africa and China having become a net energy importer. For China, greater outreach to Africa was part of an official push to secure access to energy resources in exchange for more aid, trade, and investment. Related policies included extended trade preferences for least developed countries and financial support for selective special economic zones. Two-decades of explosive growth in trade ties ensued, with China becoming Africa’s largest trade partner by 2009. Trade flows, however, were broadly characterised by China buying resources from Africa, and selling manufactures back – a contentious historical pattern of exchange for Africa. Investment too flowed largely to secure those resources.

The striking drop-off in demand for China’s exports following the global financial crisis helps explain why China’s demand for commodities has since fallen. The consequential slowing of China’s GDP growth is forcing Chinese policymakers to search for economic life beyond the low value-added labour-intensive manufacturing export-led model. China being home to both a high level and rate of savings and a rapidly ageing population is among reasons why Chinese policymakers are increasingly looking for outbound investment opportunities (Figure 1). This piece elaborates the economic logic and emerging development finance alternatives that loosely fall under a related umbrella framework, the One Belt, One Road (OBOR) initiative. The focus here is OBOR’s link to Africa, the world’s least-economically-developed region and home to abundant untapped human and natural resource wealth.
 

The economic drivers of the One Belt, One Road (OBOR) initiative

After three decades of being mostly a recipient of foreign direct investment (FDI), China is emerging as an important overseas investor. Figure 1 illustrates the steady convergence of inbound and outbound investment.[1]
 

Figure 1: China’s inbound and outbound investment levels, 1990-2014

 

Source: Johnston (forthcoming, 2017).
 

Outbound investment first came into policy focus in the late 1990s when China launched the “Going Out” policy, which selectively incentivised outbound investment. Acquisition of natural resources; capture of foreign market share; building a number of global Chinese brand names; and acquisition of foreign technologies were then among the drivers of the policy. China’s high foreign reserves that had been accumulated since the Asian currency crisis of the late 1990s also played a role. Not only was the preferred investment, US government debt instruments, offering a low return, but this also presented a currency risk. After the global financial crisis, America’s demand for imports from China also began to diminish, adding to China’s reasons to diversify its interests.

Another factor is demography. Strict family planning policies mean that the share of youth in China’s population has fallen dramatically in recent decades. This produced a period of “demographic dividend” – a large share of the population being of working age and providing a boost to output per capita of the total population. That workforce share in China, however, is now falling, putting upward pressure on wages and downward pressure on total productivity. To retain the same level of output per capita, China must now produce more output per worker than during the period of demographic dividend. One way China aims to achieve this is via shifting domestic low-cost labour-intensive production abroad and moving into higher value-added industries and services. Wage comparison between one of China’s labour-intensive manufacturing hubs, Guangdong province, and those of an emerging industrial park in Ethiopia tells the story of why Africa is in focus for realising the former objective. The minimum wage in 2016 in Guangdong is some US$300. In Ethiopia’s Hawassa Industrial Park, due to open in October 2016, the average wage is expected to be some US$50 monthly. Moreover, and in general, sub-Saharan Africa sits on the edge of the potential of its own period of demographic dividend – akin to the demographic and developmental curve at which China sat some three decades earlier.

Successful outsourcing of labour-intensive manufacturing will also help to generate concurrent demand for some of China’s now excess industrial capacity. Falls in demand for China’s exports and earlier disproportionate capital investment growth mean that China is now home to excess capacities across a swathe of its industrial sub-sectors, especially for example in steel. Africa’s under-realised industrial capacity and substantial opportunity for Chinese firms in African construction sectors have instigated a steady stream of investments in African steel and iron ore.[2] Of the US$60 billion of lending China promised to African countries in late-2015 at the FOCAC summit in Johannesburg, more than half will be spent on building infrastructure. China is committed to dozens of large-scale infrastructure investments in Africa, in the power generation sector and also in transportation. Table 1 identifies a selection of some of the larger such projects, and conveys some of the geographic and sectoral depth of China’s infrastructure-related investments in Africa.[3] The flagship project among those is most probably the Standard Gauge Railway project in Kenya. This significance is explained by both economics and politics, and in particular by China’s OBOR and “Maritime Silk Road” initiative.

Table 1: Selected large Chinese-invested infrastructure projects in Africa

Source: Mail and Guardian (2015).

The OBOR initiative

In 2013, on a visit to Kazakhstan, Chinese President Xi Jinping announced a proposal for a “Silk Road Economic Belt.” In South East Asia later that year, Xi proposed a “21-Century Maritime Silk Road.” The combination is now commonly known as the OBOR initiative. The idea harks back to the fact that for more than a millennium the Silk Road served as the world’s first “trade super highway.” Formally, OBOR emphasises five areas of cooperation: (1) coordinating development policies; (2) forging infrastructure and facilities networks; (3) strengthening investment and trade relations; (4) enhancing financial cooperation; and (5) deepening social and cultural exchanges.

The most direct historical link to Africa relates to China’s 14th century maritime fleets, which reached Africa’s east coast, specifically an area that is part of modern Kenya. This helps explain why Kenya is China’s nominated African hub for the OBOR initiative. As a relatively large regional and coastal economy with a port of East African importance (in Mombasa), Kenya is also important for reasons of economic geography.[4] Chinese-invested rail plans intend to better connect Kenya and its ports to a number of proximate landlocked economies, including Uganda, South Sudan, Rwanda, and Burundi, unlocking intra-Africa as well as broader international trade opportunities in the process. In July 2016, neighbouring and coastal Tanzania also signed a US$7.6 billion loan agreement with the Export-Import Bank of China (China EXIM Bank). The loan is for the construction of a standard gauge rail corridor that will similarly link Tanzania with regional neighbours Uganda, Rwanda, Burundi, and Congo.

Such in fact is the scale of Africa’s need for infrastructure and innovative funding for it – and China’s capacity and willingness to deliver it – that a former chief economist of the World Bank and Peking University professor, Justin Lin, has argued the OBOR initiative should evolve into the “One Belt, One Road, and One Continent” initiative. China has already officially promised to help Africa, via the African Union, to build the foundations of a comprehensive transportation network. It is heavily involved in enhancing Africa’s power generation capacities also (see Table 1 for some examples). According to World Bank estimates, Africa’s infrastructure financing requirement is some US$38 billion annually, with a further US$37 billion required annually in operations and maintenance. This is equivalent to some 12 percent of Africa’s GDP, the funding gap being estimated at some US$35 billion.

In parallel, and in line with the broader set of goals comprising the OBOR initiative, China is instigating a dizzying array of new development financial institutions and funding pots. Most prominently, China led the establishment of the Beijing-based multilateral Asian Infrastructure Investment Bank and the Shanghai-based BRICS Development Bank. The former has many developed country members, while the latter’s membership is exclusive to developing countries. In addition, a US$40 billion Silk Road Fund was established in 2014 to foster development along China’s new Silk Road project that broadly sweeps across Asia and the Indian Ocean. A South-South Climate Cooperation Fund with some US$3 billion in funds was also announced in 2015 to provide assistance to developing countries on climate issues. In a sign of greater localisation of its earlier bilateral investment park creation, in August 2016, China EXIM Bank agreed a US$1 billion industrialisation programme with the African Export-Import Bank. The funds are to be targeted at the construction of industrial parks and special economic zones, with a focus on light manufacturing and processing of raw materials and commodities – just the type of investment projects being intended by OBOR.

China has also worked bilaterally to agree fundamental bilateral policies with African countries. For example, China has concluded double taxation treaties with Ethiopia, Mauritius, Morocco, Nigeria, Seychelles, South Africa, Tunisia, and Zambia, as well as bilateral investment treaties with selective others. Similarly, in support of the internationalisation of its currency, the Renminbi (RMB), China is signing settlement currency agreements with an ever-greater number of African countries and organisations. Most recently, COMESA agreed to include the RMB among its official settlement currencies.
 

Back to the future in Africa

On his first visit to Africa as president in early 2013, speaking in Tanzania, China’s President Xi Jinping called for China and Africa together to realise a fast track of “comprehensive development.” Since then, growth in China has slowed, increasing the importance of outbound growth to China’s own economic transformation. This piece has provided an overview of the logic of broad economic complementarity that underpins OBOR in Africa: that of a large per-capita-resources-scarce developing economy with an old population and that of a large resource-rich developing continent with a mostly young population; and between a country with excessive savings and infrastructure capacity, and a continent which in aggregate relatively lacks both. The OBOR initiative represents an agenda that broadly seeks to take “win-win” advantage of that complementarity.

The One Belt, One Road initiative builds upon two decades of intensifying China-Africa economic ties. This ambitious plan, alongside Africa’s independent growth performance, is drawing worldwide attention to the continent’s vast development promise. And since most OECD members and even those of the G20 are home to ageing populations, increasingly not only China is awake to the benefits of investing in the untapped potential of lesser-developed and youth-filled economies, including in Africa.

For African policymakers and entrepreneurs, whether China or another investor supports the development of local infrastructure or opens a textile factory ultimately may prove less important than the fact of negotiating the best and most transformative deal for local development – as China itself has so powerfully demonstrated over recent decades. In exploring ways to best utilise OBOR’s immense offerings and those of other investors, African governments should be hard-nosed, and oriented towards implementation and sustainable development in first identifying and then agreeing the best policy mix and governance structures for realising African wins.


Author: Lauren A. Johnston, Postdoctoral Fellow, Melbourne Institute of Applied Economic and Social Research, Faculty of Business and Economics, University of Melbourne.


[1] Johnston, Lauren A. “China’s Africa Return: Trends and Changing Sino-African Economic Prospects.” In Handbook on African Development, edited by Tony Binns, Kenneth Lynch, and Etienne Nel. London: Routledge (forthcoming 2017).

[2] Johnston, Lauren A. “Steel pipe dreams: A China- Guinea and China-Africa lens on prospects for Simandou's iron ore.” The Extractive Industries and Society, 2016. doi: 10.1016/j.exis.2016.08.004. http://www.sciencedirect.com/science/article/pii/S2214790X16300995 

[3] Mail and Guardian. “What crisis? 16 of China's biggest projects in Africa — it's all billion dollar territory in here.” 19 September 2015.

[4] Johnston, Lauren A., Morgan, Stephen L., and Wang, Yuesheng. “The Gravity of China's African Export Promise.” The World Economy 38, no. 6 (2014). doi: 10.1111/twec.12229. http://onlinelibrary.wiley.com/doi/10.1111/twec.12229/abstract

This article is published under
9 September 2013
T his a r t i c l e i s i n t ended to raise debate and reflection, without prevarication, on t he strengths and limitations of South- South cooperation. Over the last few decades, the international...
Share: 
9 September 2013
A C h i nese perspective on how Africa can solve its lack of governance issue. For a long time, capacity deficiencies and the low level of governance performance among African countries lead to...
Share: