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Iron clad: mining partnerships with Chinese firms in West Africa

Partnerships between Chinese and western firms in West Africa could prove beneficial for companies and host governments, but only if the partners are a good fit

In recent years there has been an increasing trend of western multinational companies turning to Chinese partners to seek investment. This is particularly evident in the capital constrained mining industry where partnerships have provided western firms with access to Chinese project finance.

However such partnerships have also led to lengthy delays and may present reputational risks. This article highlights why West Africa has been a particularly fertile home for these relationships and some of the key partnerships have fared. Based on the experiences of these firms their chief concern should be getting to know their partner before it is too late.

Falling commodity prices and a tough political environment in West Africa have soured investor perception of mining projects – despite a number of high quality reserves of iron ore – forcing Western firms to look elsewhere for investment. The major reserves in West Africa tend to be some distance from the coast meaning expensive infrastructure must be built to export the metal. Chinese firms have experience constructing railway and port infrastructure at low cost, and despite the recent slowdown in China’s manufacturing sector, China remains the world’s largest consumer of iron ore. Therefore securing supplies remains a strategic priority for Beijing.

Complementary characteristics

For a Western firm the key benefits of a partnership are access to Chinese state finance and cheaper procurement and construction costs. These benefits are more likely to be enjoyed where the Chinese partner is a major Chinese State Owned Enterprise (SOE), which have closer relations with government and often bring with them a wide array of subsidiaries and affiliates able to provide low cost equipment and supplies.

For a Chinese firm, the experience of the western partner operating in that country or region negates the need to build their own relationships and understanding. Chinese companies have struggled to win major mining concessions outright, demonstrated by the fact that there are no major wholly owned Chinese mining projects in the region. By strengthening their knowledge and credibility through partnerships, Chinese firms may also increase their future chances of winning concessions.

For a West African government under pressure from its electorate (or elites) to get projects off the ground a Chinese SOE may also be more likely to push development than a western firm. A Chinese partner under pressure from Beijing or a steel making partner is, like the government, under pressure to produce quickly. If Beijing sees a project as being particularly strategically significant it may also lobby a host government on the project’s behalf, possibly offering development finance or even debt cancellation. In general terms Chinese development finance closely follows its business relationships.

International as well as national stakeholders, such as shareholders and NGO groups, may also pressure a western firm not to accept a Chinese partner. Smaller privately owned Chinese firms have a poor reputation for their labour practices and quality of goods and services. In Ghana, recent controversy around small scale Chinese mining firms engaged in gold mining has prompted a national reaction against China and Chinese firms. International investors may also be put off. For example if a company was to partner with a Chinese SOE with a defence arm, this could prompt criticism from socially responsible investors and human rights NGOs.

Has it worked in practice?

Four recent partnerships in West Africa between western and Chinese firms have enjoyed varying degrees of success. The most high profile of these has been the Simandou project in the Forestiere region of Guinea which is jointly owned by Rio Tinto, Chinalco, the government of Guinea and the IFC. For Rio Tinto and Chinalco (a large SOE) the partnership was the result of long running discussions as to how the firms could best complement each other. The partnership at Simandou has secured significant investment for Rio Tinto, and has reportedly helped to cut procurement and construction costs.

African Minerals in Sierra Leone has three such partnerships at its Tonkolili project. The company received a first tranche of investment from China Railway Materials (CRM) to develop the first phase, and then brought on Shandong Iron and Steel Group (SISG) to provide a larger injection of capital to further expand the mine. While development has been slower than hoped the company recently brought in a third partner (in late September 2013), Tianjin Materials and Equipment Corporation (Tewoo). Rather than partnering with a fellow mining firms African Minerals partnered with: a potential customers in SISG (the state steel producer of Shandong province), and Tewoo (a metals trader); and a potential infrastructure service provider in CRM.

However not all experiences have been as positive. The slow Chinese approvals process has caused considerable impact on the fortunes of Sundance Resources. Hanlong Group, a politically connected but privately owned Chinese conglomerate seemed likely to conclude a takeover in early 2013, but after 21 months of negotiations and doubts over the extent of Chinese state support for the takeover, Sundance was forced to pull out of the deal.

Bellzone’s Kalia project partnership in Guinea with China International Fund (CIF) has also failed to perform as expected. Little progress has been made on the project since the deal was signed in 2011 and CIF has been criticised by the government for illegitimately acquiring concessions under the former military government. CIF has also been criticised by Global Witness for allegedly funding Zimbabwe’s secret police force in exchange for diamonds and access to business opportunities. CIF denies any impropriety in both cases.

Securing investment from a Chinese firm may speed development of a project and reduce costs, but only if the right partner can be found. In order to protect against negative impacts it is vital to gain a strong understanding of the partner organisation. The due diligence process is likely to be challenging as Chinese firms often have a limited public profile. In general terms the larger state owned companies are more likely to be able to access state funds and support. However this is no guarantee of success and therefore it is important to take adequate time to examine whether strategies are aligned, who a company’s affiliates are, what level of support they have from the state, and whether they have any skeletons in their closet which might be criticised by investors or NGOs.

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Blog: Immigration. Blessing or curse?

An increasingly common complaint emanating from the African media is that Chinese immigrants in Africa are having a negative impact in their host economies. Recent studies suggest that the population of Chinese in Africa now stands at close to one million. The chief concern is that Chinese SMEs, often run by a Chinese families, are capitalising on: their better access to Chinese markets; more advanced techniques; or superior access to capital, to make profits in key industries in which Africans seek employment, namely petty trading, agriculture, mining and building work.

Migration has long been a popular route for poorer Chinese workers and traders hoping to make their fortunes. This has resulted in the establishment of Chinese communities throughout Southeast Asia, often setting up industries with close connection to the Chinese economy. This model has been playing out for hundreds of years and has allowed the Chinese economy to vent excess labour out into the peripheries of its sphere of influence, creating durable linkages with other markets, and more recently easing the political pressure created by rural poverty and urban unemployment. This has played a catalyst role in the growth of a number of economies in Southeast Asia whilst also garnering disquiet as local inhabitants complain that Chinese migrants take their opportunities.

In recent times there have been moves in Malawi, Tanzania, Uganda and Zambia to curtail which industries Chinese immigrants are allowed to work in, especially focused on market traders. Chinese market traders have a poor reputation in Africa with complaints over counterfeit and poor quality goods, although this may be partially motivated by jealousy of the immigrants success. Their advantage over African traders stems from their superior access to Chinese markets and capital, sometimes earned through working on large Chinese building projects on the continent. In other industries such as building, agriculture and mining Chinese labourers and small businesses often bring with them skills and experience lacking in many African markets.

The question of whether these small scale Chinese businesses and labourers benefit African economies comes down to how far they integrate. Some Chinese entrepreneurs set up in Africa to make their fortune, but use the wealth they accrue to support their families in China or to build up sufficient capital to move home and set up a business there. This is akin to outsourcing industries like petty trading and agriculture to China, as in this case most of the wealth created leaves the country. However in other cases Chinese entrepreneurs build up successful pockets of industry, employing local people and transferring skills to the local economy. This is especially useful when considering industries which are not well developed in Africa such as manufacturing. If Chinese entrepreneurs using skills learnt in China, can successfully set up manufacturing for export in Africa, it could provide a huge boost to the African economy.

The problem for African governments in knowing which immigrants are going to be productive members of the economy, and which will take opportunities away from locals or transfer their wealth back to China. Considering the generally weak bureaucracies in many African countries this is a real challenge. In order to make progress here African governments will need to enlist the support of their Chinese counterparts to help limit the flow of unskilled immigrants, and to send home those who are not creating employment or investing in the local economy.

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Who’s the most attractive partner for Africa? All of them.

Europe’s debt crisis continues to rumble on, it’s not difficult to see why Africa’s relationship with China is growing so fast. For an African leader deciding on whether to align themselves with one or the other of Europe or China, the latter would appear the more forward looking choice, especially considering China’ eager and encouraging attitude to engaging politically with African leaders. Often economic relations with Africa are depicted as a zero sum game for Europe and America. In the media especially, Africa’s political and economic relationships are understood as a competition between China and the West. The reality is quite the opposite.

It is in fact China’s role in catalysing Africa’s growth which has caused Europe and America to reconsider their preconceptions about Africa. At the moment the developed world is struggling to shift its perspective and lazily reverts to Cold War conceptions of spheres of influence. In the past it mattered that big resource suppliers were in a Western sphere, because of the economic apartheid imposed by the Cold War. Today, much of the copper and oil that China ‘grabs’ will end up in Apple’s iPads, or will power their manufacture. Global supply chains and markets are so intertwined that the issue of strategic resources should not carry the same weight it once did.

While Chinese and Western firms occasionally compete for African resource contracts, the big deals still tend to be won by industry leading Western firms. Where China is ahead is in the sheer scale of trade, investment and economic integration it is realising with Africa. Chinese firms are only gradually building the skills needed to run large scale resource projects in foreign countries, as Reuters backhandedly report this week. Until they do Western firms are still likely to snap up the most attractive new concessions.

The reason for Europe’s failure to take advantage of Africa’s opportunities is down to two factors. Firstly it lacks the economy to engage with Africa in the way that China has. Europe lacks the small scale manufacturing and cheap infrastructure industries which Africa’s economy requires.  Secondly Europe lacks the appetite for African engagement. Politically Europe does not give place the same importance on its relations with Africa. As individual states and as a union Europe fails to engage with African politicians and businesses to anywhere near the same degree as its Chinese counterparts. This is in part a flaw in Europe’s perception of the continent in obsessing about an aid based relationship, and a paternal responsibility to save Africa. It is growth in the developing world – both as a market and a source of innovation- which will eventually allow the European and the US economies to recover. Both should focus on how their economies can service a changing world market rather than attempting to hold back China’s growing relationship with Africa.

But it is also due to the fact that Africa’s success over the past decade is fundamentally aligned with China’s rise, and that as the last great developing market and holder of huge swathes of the world’s remaining untapped resources, Africa is a natural partner for China. Had Europe and America decided in 1999 to pursue a policy of engagement and investment in Africa similar to China’s, they would have found it impossible to achieve the same results. Europe and the US’s recent realisation of African potential is completely predicated on the positive impacts of high resource prices and improved infrastructure driven by China’s engagement.

In the mid-1990s President Clinton was sending Robert Kaplan’s apocalyptic note on Africa (The Coming Anarchy) to all of his African embassy staff. Business leaders were unlikely to consider an office anywhere but perhaps South Africa. Asia was in vogue while Africa had been forgotten with the end of the Cold War. But now, after a decade of impressive growth Western institutions like McKinsey and PWC predict Africa’s take-off, and funds increasingly search for ways in to Africa. Nevertheless engagement is tentative, reactive, and politically naive.

There is an oft quoted principle that the Chinese economy must grow at 8 per cent per year in order for the country to avoid serious civil revolt. Therefore the continuing fragility of the in the Western world is likely to be of concern to China. In order to offset the risk of US and European markets ceasing their seemingly inexorable increases in imports from China, Beijing needs to find new markets to buy their goods. China knows better than most that a large population is a powerful tool. Therefore as well as providing resources to China’s industries, Africa holds special potential for Beijing. There should be more consideration of this long term potential as a market in Europe as well.

This represents a significant change in the geopolitical importance of Africa. While Asian markets remained undeveloped they were a less risky place than Africa for the developed world to invest. Western firms have sought to build their brands in Africa over the past few decades, but generally other regions have been the real prize. While seeding the Coca-Cola brand in Africa was seen as an important part of the long term strategy, it was not a significant investment, as the big profit was to be made elsewhere. However in the emerging world economy growing powers such as Brazil, China and India will need to find new markets for their exports if they are to grow. In Africa this means stimulating demand as well as meeting it. The African consumer class is growing, but urbanisation and more widespread wage labour will be necessary in order for African consumers to make an impact on the world market. China, Brazil and India therefore have a vested interest in Africa’s development, as they may be dependent on Africa’s one billion population for their future success.

Europe and China have fundamentally different interests in Africa, but both should benefit from its rise. Europe and the US need to free themselves from the misconception that they are in competition with China in Africa, and find their own ways to innovate and help. This must focus on the private sector rather than charity, and leverage what the developed world is best at. Europe must cease in their attempts to compete with China at what they do best, and should focus on their own strengths. Europe and Africa share a long and often successful relationship and despite sensitivities around colonialism, attitudes towards Europe are often very positive. Europe should concentrate on building constructive relationships with regional and national bodies, and lead trade trips for European business, and entrepreneurs to Africa’s key markets. Diasporas are also potentially powerful tools, but the key change should be to engage Africa in a business friendly and positive manner. European leaders grant much lip service to private sector engagement, but little is actually done. In whatever state Europe eventually emerges from its credit crisis, its constituents will need to reengage with the parts of the world that are growing. Increasingly, that’s Africa.

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Ghana’s opposition look to Zambia for election tactics

Recent events in Ghana point to an increasingly politicised relationship with China, reminiscent of the electoral conditions which brought Micheal Sata to the presidency in Zambia. The opposition NPP party who lost power in the previous election in 2008, seem to have learnt from Sata’s tactics in Zambia, and Akufo-Addo’s party are making efforts to brand the ruling NDC, lackies of Beijing. The next election is still a year away, but recent comments about a $3bn loan from China look like the beginning of a campaign to discredit President Atta-Mills.

In the previous election in 2008 the NDC defeated the NPP by less than 1% in the second round of voting, the NDC winning out with promises to build infrastructure and reduce fuel and food costs. However with the Presidency the NDC inherited a parlous national budget, and a long wait for oil revenues to start to take an effect on revenues. Production began last year, but Ghana’s oil wealth is not as bountiful as that of Nigeria or Angola, so the results do far have been welcome but not transformative. The previous NPP government has borrowed significantly in anticipation of future resource wealth, so Atta-Mills has struggled to fulfil his promises of large scale infrastructure spending. This lack of action has left him vulnerable for the elections in December 2012, and therefore he has taken measures to ensure his government can deliver on their promises before then.

This was the motivation for the $3bn loan agreed between the NDC government and Beijing in September 2010. The loan has proved controversial with both the opposition NPP and the IMF obstructing the loan’s progress. The NPP have argued that the loan is overly conditional, requiring that 60% of the value of the loan be spent with Chinese contractors. This is an odd stipulation for Beijing to insist on considering that Chinese firms routinely win competitive tenders in infrastructure. The NPP have also argued that the government is wrong to saddle itself with further debt. Having withdrawn from IMF support under the previous NPP government, Atta-Mills went back to the IMF for support early in his presidency. The IMF have recently criticised the loan as they argue that it contravenes debt conditions contingent within their support. The NDC need to deliver big ticket projects if they are to stand a chance of winning the elections next year. Therefore Atta-Mills has remained defiant, threatening to withdraw from the IMF and rubbishing NPP suggestions of an overly cosy relationship with Beijing.

Ghana, like many countries in Africa, has a media which is suspicious of China’s impact. Recent stories suggest that the NPP’s attempt to link the Atta-Mills to a wider unease with China has the potential to succeed. Since the start of October a number of stories have surfaced which demonstrate suspicion over the Chinese working practices, and also of a more general moral deficit in Chinese dealings. In a more directed articlequestions have also been raised over the NDC’s new headquarters, reputed to cost as much as $20 million dollars. The article insinuates Chinese support for the project. Ironically the NDC made similar accusations aimed at the ruling NPP prior to the 2008 elections.

In terms of working practices the press was quick to highlight the halted construction of a major road in the Volta region. China Jiang International Construction Company is accused of having failed to comply with Ghana’s labour laws. The company reportedly banned employees from joining a union and failed to pay compensation after serious injuries occurred. Also in the news was the deportation of 25 Chinese miners working ona concession belonging to Force Field Mining. The firm has been fined GHȼ 2,000 for each illegal miner and is to provide tickets for their deportation.

Other stories surfacing in the last couple of months highlighted the trafficking of Chinese prostitutes for work in mining areas. The Accra-based Non-Governmental Organisation, the Enslavement Protection Alliance West Africa (EPAWA) said victims are recruited under the guise of working as restaurant assistants. They are then confined and forced to provide sexual services. Another article focused on corruption and Director for Finance and Administration of the Ministry of Food and Agriculture, Seth Dumoga. Dumoga allegedly defrauded an estate developer of about $100,000, and was said to have a Chinese accomplice, Tang Hong, who is currently at large. In a more colourful offering Ghana Web published this poem about the neo-colonial injustice of qualified Ghanaian engineers working for uneducated Chinese foremen.

This mistrust for China has been simmering for a long while. Back in January 2009 I wrote this article on the prospects for China in Atta-Mills Ghana. The common thread between the two is China’s keen interest in establishing itself in Ghana, especially within the oil industry. The difference is that now China seems more willing to fight back, often using the media.

Xie Yajing, China’s Commercial Counsellor for West Asia and African Department of the Chinese Ministry of Commerce, called recently for Chinese companies in Ghana to be held to account (full article). Ms Xie called for sanctions on Chinese outfits which fail to operate at sufficient standards, and called for disgruntled Ghanaians to make their case to the Chinese embassy in Accra. While it seems unlikely that this process will be carried through, it is nonetheless interesting that Chinese officials should take this stance.

A Chinese delegation led by Zhou Tienong, Vice Chairman of the Standing Committee of the National People’s Congress of China, visited Ghana in mid-November. Zhou met with the Ghanaian Vice President John Mahama and the parliament speaker Joycelyn Bamford-Addo during his visit. This personal touch in bilateral relations has been a real advantage for China in contrast to Western countries’ distant attitudes to the continent.

Western institutions are however making their feelings known. As mentioned previously the IMF have been obstructive. At an event organized by the NPP aligned Danquah Institute, the World Bank chief economist in Ghana warned Ghanaians against white elephant projects. At the same event it was reported that Ghana has, “unlimited access to the United States Exim Guarantee Bank and can access any amount of loans it requires for embarking on developmental projects of the country.” This assertion was apparently made by Mr Ryan Bowles, the Chief of the Economics Section at the US Embassy in Accra. The GOP might be surprised to hear it.

Ghana was famously the first international destination for a President Obama visit. The country is the darling of western investors and academics excited by its democratic success, and balanced middle income economy. This stability is equally attractive to Chinese partners resulting in competitive international courtship. For Beijing, the tendency for opposition politicians to play the China card will be a worrying trend. The western media has been successful in whipping up a monochrome view of China’s faults in Africa, which many Africans have been receptive to. Much is made of China’s imperialist tendencies, but it is telling that those complaints most often come from a western media sensitive to encroachment into their back yard. Hopefully this competition between China and the West will ensure that Africans get a good deal.

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Blog: US Senate Committee hearing on China in Africa

Last week the U.S. Senate Committee on Foreign Relations held a hearing on the implications of China’s role in Africa on US policy. Answering the senators questions were Dr. David ShinnDr. Deborah Brautigam (both of whom write regular blogs on China in Africa) and Stephen Hayes, president and CEO of the Corporate Council on Africa. The session seemed a legitimate attempt to gain a better understanding of how and why China has strengthened its position in Africa, relative to the US, and what that means for US policy in Africa.

A big part of the discussion was the question of whether the US government should use its funds to pursue bilateral aid, or support a private sector led approach. China’s role was described in terms of its avid support for its businesses, support that was regarded jealously by Stephen Hayes. Contributors remarked on the importance of bringing jobs to Africa in order that they can one day pay for their own anti-retrovirals and food. The hearing created the bizarre scenario in which the inventor of modern capitalism was being taught lessons about the importance of supporting the private sector, by a communist state.

While the senators in attendance were interested in the role China’s ‘business led development’ has played, a number of questions were asked as to whether China’s ‘mercantilist’ policies were doing damage in Africa. While it was pointed out that labour practices among Chinese firms are often very poor (although generally no worse than in China, India or Brazil), Dr Brautigam also ventured that there is no evidence of systemic damage to humans rights and anti-corruption in countries in which China operates. This is not to excuse these poor practices. Work must be done to improve them. But China’s engagement is a reality, and will not be reversed; therefore the West should work with the positives as well as highlighting the negatives.

Senator Durbin complained that Prime Minister Meles of Ethiopia had told him that he felt that the US had abandoned Africa, and that China was breathing new life. While it is somewhat unfair that the US and Europe contribute enormously to health care, disaster relief and food aid without gaining the same credit as China for its infrastructure support, the west’s obsession with alleviating suffering in Africa is symptomatic of the wider perception of Africa as a basket case, worthy of sympathy rather than belief. Furthermore the discussion of getting the deserved credit somewhat devalues the idea that the West’s support is without self-interest. China’s business like pragmatism has been part of its success in Africa, as African leaders have enjoyed being treated as equals. Western paternalism is unsurprisingly seen as patronising. No one likes feeling pitied or ignored.

The way in which the US pursues relationships was another area of particular interest. The discussants pointed to diplomacy as an area for potential improvement. Stephen Hayes pointed out that a US Secretary of Commerce hasn’t visited Africa in over a decade, and during ten years of fantastic economic growth. Chinese embassies actively support Chinese businesses, Mr Hayes suggested this was not matched by US diplomats. Writing in the Daily Nation, Mukhisa Kituyi pointed out in his article last weekthat China regularly holds Sino-African conferences gathering African presidents to meet China’s top policy makers and discuss aid and investment. He writes, “[e]ach head of state has a brief photo session with the hosts, and country-specific programmes are announced. Every leader feels appreciated”. It is telling that it was Senator Durbin and not Secretary Clinton that was visiting Prime Minister Meles, Prime Minister of the 12th largest economy and the second biggest population in Africa.

While relations with African countries could be improved, the US could also engage better with China. Chinese companies have made attempts to improve their practices. Dr Brautigam and Dr Shinn pointed out that both environmental and bribery policies were slowly getting better. As a signatory to the UN compact against bribery China has now made overseas bribery a crime. It will take some time to be properly enforced, but it shows willing. Some Chinese companies have used western firms to perform their social and environmental impact assessments. Dr Brautigam also pointed out that the OECD is the vehicle the West uses to define corporate practices against bribery and counterfeiting, yet China is not a member. It seems clear that more channels need to be opened to consider how to engage China in the same way that developed nations engage each other to set the rules.

US oil and mining firms could potentially benefit from the infrastructure investment that China is making, while US firms are unlikely to be able to compete in the provision of the services in which China has such a clear advantage, like railway building or telecoms. The overwhelming message of the discussion was that China’s engagement is a reality. The US and other western powers should stop worrying about whether the Chinese model is fair. That is up to Africa to decide. African success over the past decade should be the focus of attention. This should necessitate a private sector led engagement. For US policy China’s role is incidental, and should be embraced in terms of the incredible catalysing role it has played in Africa’s recent development.

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The Dalai Lama and South African Independence

Since early September the potential visit of the Dalai Lama to South Africa has stoked inward reflection as to Pretoria’s relationship with Beijing. Since the Tibetan leader’s visa was turned down, his disappointed host Desmond Tutu has been heavily critical of the ANC regime, and its disconnection with the values that formed the rainbow nation. He feels as though South Africa’s history of oppression garners the country with a responsibility to speak out against the subjugation of Tibet, despite economic cost.

Zuma’s response to this South African soul searching was telling. Defending his foreign policy stance he said, “Let me state categorically that our foreign policy is independent and decisions are informed by the national interest”. While this statement deflects claims that China is making decisions for South Africa, it also tacitly admits that decisions are made based on pragmatism rather than idealism. The decision to bar the Dalai Lama is in South Africa’s direct national interest, as the alternative would certainly result in economic repercussions. By adhering to the ‘one China policy’ Zuma will likely protect South Africa from economic hardship associated with shunning China, but as Archbishop Tutu has so vehemently argued, he has also betrayed the values through which the country was formed.

The official reason given for the rejection by the South African foreign ministry was that the visa process was delayed by problems with the timing and completeness of the application. In reality this decision was made a great deal earlier. While it may never have been discussed between Chinese and South African leaders, the $2.5-billion investment agreement between China and South Africa in September, undoubtedly affected the decision indirectly. These very large investments seem to have proved too tempting to risk any offence. In the context of South Africa’s emergence as a BRICS member, and an impending recession in the western world, South Africa is wise to align itself with the developing powers.

A recent research paper by Fuchs and Klann, Paying a Visit: The ‘Dalai Lama Effect’ on International Trade, found that in the year after a meeting between head of a state or government and the Dalai Lama, exports to China drop by an average of 8.1% or 16.9% (depending on the estimation technique used). It seems like this position is unlikely to change if the Chinese Communist Party’s heir apparent, Xi Jinping, comes into power. In July he spoke publically of his intention to take hard line with separatist Tibetan groups, associated with the Dalai Lama.

For Zuma this policy may have been more dangerous than he thought. While in pure economic terms the decision to refuse a visa for a birthday party in order to protect a trading relationship with a key economic partner is rational, the ANC leadership is suffering a crisis in its connection with ordinary South Africans. This disconnect is both expressed and exaggerated through the rise of Julius Malema. Malema has appealed to disgruntled poor South Africans who have not witnessed the realisation of the grand promises made post-Apartheid, and who have grown weary of perceived corruption and detachment in the political elite. Countries do maintain relations with the Dalai Lama and retain relations with China. Both the USA and France have done recently, although not without some cost. For South Africa to make the same move would be brave, but also perhaps necessary for a government which has become depressingly detached from its ideals.

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Discontent spreads after Sata victory

This week’s news makes painful reading for policy makers in Beijing. Much focus has been on the perception of a backlash against Chinese involvement across the continent. It is difficult to say whether news of Sata’s victory has catalysed the expression of disaffection for Chinese practices, or whether news sources have looked harder for stories around African rejection of China’s role. Either way, it is a challenging time for Chinese interests on the continent.

First of all workers at NFCA’s Chambishi copper mine in Zambia downed tools last week in protest against poor pay. Strike action is likely to be a more common problem for Chinese mines in Zambia now that miners have clear political support for their complaints. Protests spread to a nearby Chinese copper refinery, Sino-Metals later in the week. Miners will feel confident of getting concessions from the mining companies under current conditions.

An interesting article in PRI last week investigated conditions at the Collum coal mine, at which a shooting last year caused so much controversy. They report that conditions have improved but that miners continue to feel that they are overworked and underpaid. A particular issue has been the casualization of working practices whereby workers are paid when they are needed, but have little contractual protection.

High expectations after Sata’s victory may be difficult for both mining companies and the Zambian government to manage. While pay will likely increase, conditions are unlikely to improve significantly, especially in small mines and enterprises where profit margins are tight. A trade-off is likely to arise between employment and workers’ rights.

This problem is not only common to mining. Strikes in South Africa at Chinese textile plants have resulted in the closure of factories. The imposition of minimum wage legislation and minimum labour standards has caused less responsible factories to close, resulting in job losses. Workers whose jobs are at risk have complained that the targeted closures of factories are linked to vested interests in higher cost sections of the industry, who wish to do away with the competition.

Protests this week correlate well with middle income countries in which China has a strong interest. The third example from this week comes from Ghana where poor practices have brought about a halt to the construction of a major road in the Volta region, after China Jiang International Construction Company failed to comply with Ghana’s labour laws. The company reportedly banned employees from joining a union and failed to pay compensation after serious injuries occurred. This comes after back and forth between the government and opposition around the value of a $3bn Chinese loan.

In Liberia too the opposition Congress for Democratic Change party in the imminent election seems to have copied Sata’s Patriotic Front, in accusing the ruling party of taking campaign donations from China. Recent Nobel laureate President Johnson-Sirleaf has denied the claim and defended the role of China in the country. However after the success of Sata’s campaign this will become a tempting ploy for opposition parties.

While none of these events are catastrophic for Beijing in of themselves, they represent a worrying trend for Beijing’s policy makers. What is clear is that China will have to work hard to win over populations throughout Africa who are familiar with and receptive to a political narrative of exploitation.

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Chinese crackdown on errant Chinese firms?

One suggestion I made in last week’s blog was that China might begin to do more to regulate smaller Chinese actors whose behaviour could serve to damage Beijing’s strategic interests. Ghana’s stable politics, relatively low corruption environment and new found oil wealth make the country an attractive partner for China. However complaints over poor working and environmental practices of Chinese firms, and over perceived damage to Ghanaian industry due to Chinese imports, have created a negative perception.

These complaints are similar to those in Zambia. In addition the opposition NPP party have begun to complain of irregularities in the president’s relationship with Beijing, especially surrounding the $3bn infrastructure loan agreed between Beijing and Accra. Beijing therefore has cause to worry that a populist political campaign might target China’s involvement, as in Zambia.

Interestingly this week Xie Yajing, Commercial Counsellor for West Asia and African Department of the Chinese Ministry of Commerce, called this week for Chinese companies in Ghana to be held to account (full article). Ms Xie called for sanctions on Chinese outfits which fail to operate at sufficient standards, and called for disgruntled Ghanaians to make their case to the Chinese embassy in Accra. While it seems unlikely that this process will be carried through, it is nonetheless interesting that Chinese officials should take this stance.

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Sata wins, changes for China

Long-time opposition leader Michael Sata, was elected President of Zambia last week after elections generally judged to have been free and fair. While the focus has been on the implications for relations with China, it is important to first note that this was only the second incidence of a democratic transition of power in Africa. It is a great achievement for Zambia and a positive sign for democracy on the continent. It is also worth noting that Africa’s two newest middle income countries -Zambia and Ghana – are also the two to have enjoyed democratic transition.

Sata was made famous by his anti-Chinese campaign in the lead up to the 2006 elections, and therefore people seem to have focused upon this as the basis for the 2011 campaign (the UK’s Daily Telegraph newspaper had the headline, ‘Zambian election a referendum on China’). However Sata’s stance on China has been less extreme in this campaign, focusing instead on redistribution of wealth. Sata has been adept at finding the message that chimes best with the people, and this time round he did not stress the anti-China stance. And since winning the election he has played down his distaste for Beijing. Chinese Ambassador to Zambia Zhou Yuxiao was the first diplomat to meet President Sata, on his first day in office at State House. It will be interesting to see how Ambassador Zhou deals with Sata’s ties to Taiwan, which Sata looks unlikely to give up.

The changeover from the free market orientated former president Rupiah Banda has been met with suspicion by the markets. Zambia’s kwacha fell to a 12-month low of 5030 against the dollar on Friday. The Zambian economy has been growing impressively, 7.6% in 2010 on the back of a strong mining sector. Sata is unlikely to make any move which would jeopardise his chief source of income, in which Chinese companies are key players. While some commentators expect a hard line on Chinese interests, since his election Sata has made reasonable demands of employment and local benefits, while also making it clear that he is pro-business and investment from China.

Unrest among Zambians has been growing due to the poor labour practices employed by Chinese enterprises and the increasing numbers of Chinese immigrants taking up low paid jobs in all sectors of the economy. The rise of Sata over the past six years has caused large Chinese companies to take note, with Non-Ferrous Metal Industries Corporation subsidiary NFCA- owner of the Chambishi mine- launching a Corporate Social Responsibility Plan in 2007. In contrast the shooting this year at the Collum coal mine was perpetrated by a foreman at a small family run Chinese firm, with little interest in working conditions or the communities they are a part of.

NFCA is a large state owned Chinese firm and therefore has both the awareness and the capacity to deliver programs to repair roads, donate stationery to Chambishi school children, support the women’s empowerment plan, and participate in Malaria and HIV/AIDS campaigns, much like a western multinational. These mature corporate practices will likely protect them from Sata’s attacks. However smaller operators and petty traders are likely to find themselves under pressure now Sata is in power. While some operators will not be missed it is important that Sata’s party, the Patriotic Front, find some way to create a smooth transition. Many Chinese SMEs fill important gaps in the market, and expulsion could create gaps in supply as well as ugly scenes of forced eviction.

As I’ve argued before on this blog the majority of the complaints against China’s role in Africa have been directed at cowboy operators, rather than big state owned enterprises. These small scale operators have existed in an almost unregulated space, evading local regulations through corruption, and not being held to account by Beijing. In the past Beijing has ignored the transgressions of these unconnected players, but the association of these players with China as a whole (the perception of a China Inc.) has been shown to create a serious risk for Chinese strategic interests. One possible outcome of this election will be that Beijing takes a greater interest in the lower reaches of China Inc., helping African countries to better regulate Chinese immigration and poor practices. For Beijing, resource security comes first. The election of Sata will demonstrate to Chinese policy makers that regulating the small players matters.

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China and the west work best together in Africa

As the vast archive of wiki-leaks material is digested and worked through, we are occasionally offered an interesting glimpse of the thinking of American policy makers. A story surfaced last week which showed that US policy makers are both suspicious and wary of China’s role in Africa, but beyond the threat of competition for resource contracts, China poses little threat to US interests. The story was from the American embassy in Malawi, and displayed a slightly negative perception of their Chinese counterparts. One key criticism of China’s engagement with Africa has been the lack of political conditionality attached to China’s deals. However conditionality has not always been a successful policy for western donors, and there is serious discussion in the aid community as to whether it is counterproductive in many environments.

Western countries made their donor relationships conditional after becoming frustrated with the cycle of corruption, wasted aid, and eventually debt cancellation.This is a paternalistic response, controlling how support is given and used as a result of a lack of trust in recipient governments’ commitment to taking  a responsible course themselves. Western criticisms of Chinese support mainly concern political conditionality whereby support is contingent on policy reforms safeguarding democratic elections and free speech. In an international context this seems reasonable.  If western powers are to provide funding and support to developing countries, it makes sense that these donors would demand political reforms which the donor countries see as being necessary for the recipient’s future success.

Beyond political conditionality countries also regulated their donations through tied aid, and support in kind.  Many recipient countries did not have sufficiently strong oversight and accountability to deliver aid effectively, and therefore donors began to make the decisions for them. Loans became contingent on the way they were spent, ensuring that money was spent in ways the donor decided was best for the country. In order to protect the donor’s own interest this often included the condition that money from country x would be spent on procuring services from businesses in country x. However in the last decade western donors have moved away from this type of tied aid agreeing that self interest in aid decision making polluted the positive goals of support and created wastage as inefficient operators delivered poorly targeted or substandard work.

Unfortunately by removing domestic decision making from host governments, conditionality weakens countries ability to govern and causes a sense of condescension. Developing countries have found this approach especially patronising when donors have got their conditions wrong. Being forced to take rather than make decisions has exacerbated capacity issues in developing governments, as they have become reliant on foreign intervention, and have been refused experience in their own statecraft. Imposed structural adjustment in the 1980s was particularly damaging in this regard.

China has operated with a different set of principles. Over the past decade the concepts of win-win, and south-south cooperation have been centred on China’s offerings of cheap credit and world leading infrastructure companies, alongside a strong risk appetite and a pragmatic and cooperative approach to dealing with African governments. An exciting development for the future is the possibility of transferring urban manufacturing jobs to Africa. Beijing has been able to afford to take risks, having built up large surpluses. Discounting loans and investing in risky assets provides the chance to build resource security and a Chinese sphere of influence. It is largely due to China’s relationship building in Africa that Beijing is seen as the leader of the developing world, championing the inclusion of emerging powers in the UN Security Council and driving the transition from the G8 to the G20.

China’s risk appetite has been driven by necessity. In order to provide the inputs for its rapidly expanding economy Beijing has been driven to take risks in countries which developed powers considered off limits. In bilateral terms, western governments refuse to deal with some countries where resource potential has value, but where government is repressive or unreliable. However where resource potential is particularly high western governments have tended to make exceptions to their political positions. Competition for resources has driven Beijing to make exceptions in less competitive markets. Unable to get sufficient stakes in Saudi Arabia or Libya, Chinese policy makers dealt with Sudan and Angola. In Angola, China’s concessional loans trumped a rival World Bank offering, allowing President Dos Santos to circumvent western political intervention. On the whole the Chinese deal has performed well and Angola has grown impressively (Angola’s political situation is far from perfect, but nevertheless the country is economically transformed, and stable after a drawn out and debilitating civil war).

Despite criticism over a lack of conditionality in Chinese aid and state investment in Africa, both are highly conditional. While predictably Beijing does not demand democratic reforms, Chinese loans are targetted at specific projects, and within the large bilateral deals- such as China Ex-Im Bank’s $2bn loan to Angola in 2006- very large proportions are accounted for by specific offerings delivered by Chinese companies.

However these offerings are agreed in cooperative terms. Beijing does not tell African countries what the African countries need, but tells them what China can offer cost effectively. This has generally meant road or rail construction, but also government buildings and national stadia. Unfortunately it has also meant military support. Loans are often offered at discounted interest rates, and the fact that aid is tied is generally inconsequential, as Chinese providers in construction and telecommunications are almost universally cheap, fast and of fair quality. China therefore avoids the pitfalls of tied aid by offering the most efficient contractors in areas of need. China’s success at competitive tenders in Africa raises the question of whether the loans need to be tied at all (HT Sven Grim).

The second attitudinal element to China’s success is its pragmatism. Chinese contractors have built everything from churches to wind farms. If a government wants a national football stadium built rather than a hospital or a school, China will not second guess it. If a country needs power generation and decides that the environmental and social impacts of hydro-power are acceptable, then China will build a dam. The assumption that the western way is inherently better looks increasingly naive. Political conditionality is important. It is vital that transgressors against freedoms, human rights, and even good governance are held to account, and that China’s arms deals with repressive governments are highlighted and discouraged. Ideally this should occur domestically as international pressure can serve to isolate and galvanise dictatorship as in Zimbabwe. In contrast the ‘good cop, bad cop’ engagement in Sudan provided pressure on President Al-Bashir while also offering a way out for his government, enabling a calmed situation in Darfur and the eventual succession of Southern Sudan.

The west has always assumed that it knew how developing countries should develop, yet there are few examples of countries that followed the Washington consensus, and reached middle income status. The Asian tigers relied on strong state leadership to bring about national champions in industry, and reform dormant agriculture. Brazil has become a world power after shunning the restriction of the IMF and the World Bank and taking its own path. Western criticisms of China’s engagement are becoming increasingly tired as African governments, and even western multinationals queue up to work with China (Rio Tinto and Chinalco have a Joint Venture in Guinea, while Tullow Oil announced its cooperation with CNOOC in Uganda last week).

The irony of the situation is that often the west’s bilateral engagement has been well meaning, while Beijing has been simply pragmatic. Yet China’s engagement has catalysed a transformation in Africa over the past decade, which western multinationals are now happy to be a part of. Just as world economic conditions were right for the rise of Japan, China, the NICs, and the NECs throughout the latter part of the last century, globalisation appears to be opening the door for Africa now, and the variety of engagement from developed and developing countries will be a key element in Africa’s future success.

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