China-Africa Testimony before House Africa Subcommittee - 29 March 2012

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Testimony on China-Africa relations before the House of Representatives Subcommittee on Africa given by David Shinn on 29 March 2012
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  1 Assessing China’s Role and Influence in Africa   Hearing Held byHouse Subcommittee on Africa, Global Health, and Human Rights29 March 2012Rayburn House Office Building, Room 2172Remarks by David H. ShinnAdjunct Professor, Elliott School of International AffairsGeorge Washington UniversityI thank Chairman Ileana Ros-Lehtinen of the House Committee on Foreign Affairs,Subcommittee Chairman Christopher Smith and Ranking Member Karen Bass for inviting me toparticipate in this hearing. For the past six years, two of us have been researching a book onChina-Africa relations that is being published by the University of Pennsylvania Press and willbe available this June. My comments today reflect some of that research. Unless otherwisenoted, the statistics and analysis in this testimony refer to all fifty-four countries in Africa. Chinatends not to make a distinction between Sub-Saharan Africa and North Africa as the U.S.government often does. U.S.-China Economic Competition in Africa The Subcommittee asked that we focus on how China competes economically with theUnited States in Africa, how China serves as an undemocratic model of governance and issuesconcerning natural resources, land grabs and human rights. Let me take the economiccompetition question first. The most important difference between the United States and Chinais the very structure of the American and Chinese governments and the way their respectivesystems engage in Africa. American commercial activity (trade, investment and bidding oncontracts) in Africa is conducted by private companies with limited involvement by the U.S.government. If two or more private U.S. companies are competing for the same project, the U.S.government must be impartial, providing essentially equal help to all U.S. interested parties.When this situation occurs, my experience was that the role of the U.S. government diminisheseven further.The situation concerning the relationship between Chinese companies and thegovernment of China is significantly different. While most Chinese companies operating inAfrica are private, they tend to be small or medium sized and account for a relatively smallpercentage of the dollar value of Chinese trade, investment and wining of contracts in Africa.  2The following sectors in China are controlled predominantly by the state: oil, petrochemicals,mining, banks, insurance, steel, aluminum, electricity, aviation, airports, railways, ports,highways, health care and education. Most of the large Chinese companies operating in Africaare state owned enterprises or SOEs. This includes nearly all of the large construction companies that are today building most of Africa’s infrastructure and China’s principal national oil companies  —  China National Petroleum Corporation, China Petrochemical Corporation andChina National Offshore Oil Corporation Ltd. Some SOEs, for example the AluminumCorporation of China (CHINALCO), which is a holding company, has a subsidiary, theAluminum Corporation of China Limited (CHALCO) listed on the New York, Hong Kong andShanghai stock exchanges. All of the SOEs receive extensive support from the government of China in the form of financing and establishing contacts with African governments. Othercompanies are owned by provincial governments and also receive government help.A few large Chinese companies that are prominent in Africa are not SOEs. Theircorporate structure is sometimes unclear. ZTE Corporation is China’s second largest telecom equipment provider. It has forty offices in Africa and a total staff of 4,000 on the continent. It isa publicly owned company on the Shenzhen and Hong Kong stock exchanges. Ninety percent of its stock is privately held and 10 percent held by the government of China. ZTE benefits fromChinese government loans and appears to have a close working relationship with the governmentalthough it tends to operate like a private company.Huawei, which competes with ZTE as well as large Western telecommunicationscompanies, is an information and communications technology solutions provider. It has morethan 2,000 personnel in Africa and has established training centers in Nigeria, Kenya, Egypt andTunisia. It is providing services to more than thirty African countries. Huawei is sometimes saidto be a private company and on other occasions called a “collective.” It has never published its ownership structure. It sells no shares on the stock exchange. It is believed that most of its shares are owned by Ren Zhengfei, a former People’s Liber  ation Army logistics officer whofounded the company in 1988. Like ZTE, Huawei seems to have the full support of thegovernment of China in its Africa operations.The links between the government of China and private companies are less clear. Forexample, Mindray is a smaller, publicly-owned medical equipment and technology company thatis listed on the New York Stock Exchange. It has no government ownership. It competes inAfrica with Chinese SOEs in addition to non-Chinese companies such as General Electric andPhilips. Mindray has subsidiaries in Egypt, South Africa and Kenya; it sells products to forty-five African countries. Several of its leaders told us in February that it receives no financing andvery little support from the government. Chinese embassies in Africa have provided Mindraywith useful market information.The Bosai Minerals Group Company Limited has a single project in Africa; it purchaseda bauxite mine in Ghana in 2009 after the bottom fell out of the market. It now has 400  3employees and the mine has reportedly become a huge success. Bosai is a wholly privatecompany that decided to go overseas because it is easier to compete with Chinese SOEs abroadthan in China. Bosai officials told us in February that the company relies heavily on governmentsupport, especially financing. The government helped open doors in Ghana and Bosaimanagement representatives said the Chinese embassy in Accra was extremely helpful insecuring the deal. In this case, there was no Chinese competition for purchase of the mine.The very nature of the different U.S. governmental and economic systems gives a hugeadvantage to Chinese SOEs and those, such as Huawei, that have a special relationship with thegovernment of China. The SOEs often win bids as part of a package deal of government loansand tied contracts. After the SOE is engaged in the project, there are additional advantages thatAfrican countries have learned to appreciate. The director of roads in one African country whereChinese companies are building most of the roads explained it this way: “Whenever there is a problem such as a delay in construction or a quality issue I just call the Chinese ambassador andhe sees that the matter is taken care of. If this were an American or German company, I would  be in court for years.” While private Chinese companies may not have a significant advantageover American companies, even some of them seem to have easier access to governmentfinancing than is usually possible for American companies.It is also important to acknowledge that since the mid-1990s, Chinese companies (SOEs,publicly owned and private) have been more aggressive in Africa than have their Westerncompetitors. Many of them, especially the mining, construction, and telecommunicationscompanies, are now better established on the ground than most of their non-Chinese competition.In seeking to win bids, they are usually willing to accept a lower profit margin and, in somecases, to bid below cost in order to break into the market. In the past five years, Chinese bankshave also significantly increased their engagement in Africa, especially by purchasing shares of African banks and European banks with large exposure in Africa. The 2008 purchase by theIndustrial and Commercial Bank of China for 20 percent of South Africa’s Standard Bank Group for $5.5 billion underscores this trend. As Chinese banking increases in Africa, it attractsadditional attention from Chinese companies that were previously reluctant to invest in thecontinent because of the paucity of familiar Chinese banking facilities.There are persistent reports, which are very difficult to prove, that Chinese companies areprepared to pay bribes to win contracts. While this probably ensures consummation of a deal ina few cases, the far more important reason for the success of Chinese companies is the directassistance provided by the Chinese government to finance projects and sale of products, often aspart of a package arrangement. Most African governments, where the state continues to have alarger role in the economy than is the case in the West, understand this policy and often welcomeit. Many African governments have a vision of the government’s role   that is closer to China’s structure than Western structures. This poses a difficult challenge for any American companythat is competing with a Chinese company offering similar services or products even when thequality of the American service or product is usually better. The price of American products and  4services is almost always higher, sometimes significantly so. In much of Africa, lower pricetends to win out over higher quality. In the case of winning bids on large projects, especiallyinfrastructure, the most serious challenge is obtaining competitive financing and a willingness toaccept a lower profit margin.Natural ResourcesWhile China has a number of interests in Africa, maintaining access to raw materials is,in my view, at the top of the list. China imports just under one-third of its oil from Africa andthe total amount of Chinese oil imports globally is rising rapidly. Between 2009 and 2010,Chinese crude oil imports rose more than 17 percent. China also imports significant quantities of cobalt, copper, manganese, tantalum, bauxite and iron ore from Africa. About 85 percent of allChinese imports from Africa are raw materials, mainly crude oil and minerals. China requiresthese raw materials from Africa and other parts of the world in order to help insure the health of its manufacturing industry and export capacity. This, in turn, helps to maintain its high GDPgrowth rate, which has averaged more than 9 percent annually for the past three decades. Thishigh economic growth helps keep the leadership of the Chinese Communist Party in power.In 2010, China imported 4.8 million barrels per day (bbl/d) of crude oil. Of this total, 2.2million bbl/d or 47 percent came from the Middle East and 1.5 million bbl/d or 30 percent camefrom Africa. Angola was the principal African supplier followed by Sudan and Libya. In theUnited States, we are often quick to criticize China for a trade relationship with Africa that reliesoverwhelmingly on imports of raw materials. Even some African leaders have expressedconcern about a trade relationship that consists primarily of sending raw materials, which oneday will run out, to China in exchange for high value services, manufactured goods andconsumer products from China.We need to be careful, however, in making this argument. In 2010, the United Statesimported from the fifty-four African countries 2.3 million bbl/d or about 800,000 bbl/d morethan did China. Raw materials also dominate U.S. imports from Sub-Saharan Africa with morethan 80 percent consisting of energy products alone. Nigeria is the major U.S. supplier followedby Angola and the Republic of the Congo. Because of its huge oil imports from Africa andrelatively modest exports to the continent, the United States has a sizeable trade deficit withAfrica. China’s trade with all fifty -four African countries is close to being in balance.It is important, however, to put China’s trade with Africa in perspective. China becameAfrica’s largest trading partner in 2009, surpassing the United States. Total China -Africa tradein 2011 was about $150 billion. Although there has been a sharp increase in China-Africa trade in the past ten years, Africa only accounts for about 4 percent of China’s global trade. On theother hand, China constitutes more than 13 percent of Africa’s global trade. This disparity isaccounted for by the fact that China’s total trade is about three times the size of Africa’s total trade.
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