China’s economic scramble into Africa and Latin America follows a mercantilist approachusing state resources to underpin state controlled business entities with economicobjectives at variance with traditional Western multi-national corporations. For example,Chinese state corporations seek more than just profit for their shareholders. Chinesecompanies, backed by senior political leaders, government financing and foreign aidinstruments, are willing to invest in countries with high political risk for three reasons: a)secure energy and natural resources for the motherland, b) access new consumer marketsfor China’s products, and c) challenge Western hegemony in the international political andeconomic arena to reshape global institutions to suit Beijing’s worldview. These factorsare not reflected in the business decision-making process of traditional Westerncompanies, making them vulnerable to a Chinese business strategy which is multi-layeredand includes massive state assistance on a range of levels.

The groundwork for China’s competitive entry into developing world energy and resourcemarkets was laid over a decade ago when important internal restructuring of the oilindustry was undertaken by the Chinese government. For example, in early 1998, whenthe state oil companies had thin profits or lost money, the Chinese government adopted aseries of measures (including cracking down on small refineries, small oil producers,smuggling, suspension of the People’s Liberation Army’s involvement in the oil business,and banning diesel and gasoline imports) to shore up the profit margins of state oilcompanies. From 2001 onwards, in preparation for China’s entry into the WTO and duringthe early years of China’s WTO membership, state oil companies were granted monopolypowers over many business areas to strengthen their bottom lines, including the refiningbusiness, wholesale oil business, retail stations, and the oil trade.[ENERGY POLICY ACT2005 Section 1837: National Security Review of International Energy Requirements, Preparedby The US Department of Energy, February 2006.]These measures provided space for thelarge NOCs to broaden their asset base and build up a financial war chest to go on theacquisition trail. A similar restructuring policy followed for mining, banking, constructionand telecommunication companies.

At the same time a specific policy to go out and secure energy supplies taken by the CCPor more specifically the National Development and Reform Commission (NDRC) sawmajor Chinese state oil companies step up equity investment and takeovers of a numberof small and medium sized oil companies worldwide. Key to this was a coordinatedapproach which included the simultaneous use of political, military, and financial levers ofpower to fast track relations between Beijing and the targeted countries and regions oftheir oil companies.

For example, the formation of the Shanghai Cooperation Organisation (SCO) includesenergy producing nations which are high priority targets for Chinese oil companies inCentral Asia. Similarly in Africa and the Middle East the FOCAC and the China-ArabConsultative Forum (CACF) established in early 2004, provide the political muscle tosupport and steer the acquisition programmes of large Chinese companies in general.

In a sense what Chinese leaders are developing is an integrated independent energy andsecurity model that will insulate and protect their import of energy resources from thesource to final destination. For example, the new PRC approach is a contractual one, butbased on strong diplomacy and lobbying efforts, in order to achieve rights of explorationand acquisition of crude, based on long term, stable agreements. The diplomatic effort issupported by institutions such as FOCAC and the China-Africa Business Council.

It is most demonstrably seen in places like Sudan where in obtaining oil at source,Chinese companies either a) buy and exploit concessions with the assistance of localsecurity or Chinese military (PLA) personnel, or b) enter into long-term purchaseagreements with the host country for guaranteed supplies, according to one source in theChina Institute of Contemporary International Relations (CICIR), for as long as 20 to 25years, backed by a panoply of political and financial inducements. This has to do with“locking in supplies” to the China mainland and is evident in places like Gabon.

The transport of oil will be done preferably via Chinese built, maintained and controlled oilpipelines to Chinese built or maintained refineries, or on to ports which will enjoy some sortof security agreement with the Chinese navy (PLAN). Loaded onto Chinese ships (verylarge cargo carriers), the oil will travel under close surveillance by the Chinese navy,especially through potential choke-points which in time of war constitute a real threat to themovement of shipping.

Ports of call being probed for possible regular stops or leased bases in Africa for Chineseships include at least two points of anchorage in Madagascar (Majunga, Antongil Bay), Dares Salaam, Maputo and Beira, Port Said, Walvis Bay, Simonstown, Massawa and DahlakKebir archipelago (Eritrea), Flamingo Bay (Sudan) and Algiers and Annaba (Algeria).Discussions on this led to the visit of Chinese Defence Minister Cao Gangchuan to Cairoand Dar es Salam in April 2006.

Consequently, China’s growing energy investments in Africa will be followed byheightened naval activity around its coastline, and the deployment of an increasingnumber of civilian and military personnel in Africa, already obvious in China’s growing rolein African peace-keeping missions. It is also being followed by other Chinese non-oilcompanies and growing numbers of Chinese diplomatic personnel – many economicintelligence officials placed their by the Ministry of Commerce (MOFCOM) and the MSS.[See Chapter 6]

Underpinning China’s entry into the African energy and telecommunications sectorsspecifically has been a calculated effort to forge close economic alliances with local stateowned entities (SOEs). By doing so, China has been able to move closer to the politicalelites which dominate the decision-making process of such SOE’s, and in turn are able toinfluence broader strategic decisions pertaining to the development of the local energy andtelecoms sectors.

For example, an emerging pattern of China’s expanding energy search in Africa is that ithas made an effort to work closely with African-based national oil companies (NOCs),larger (non-Western) NOCs and international oil companies (IOCs), as well as privateniche companies that while low on technical capacity have high levels of political influence.This has been done to:

• Fast track political networking
• Access new energy markets
• Undermine Taiwan’s influence in Africa
• Access new technologies

Alliances between state companies are invariably based upon bilateral arrangementsunderpinned by aid, and to marriages of convenience between minnows and majors –each trading political connections for capital, technical expertise and legitimacy.

This entry strategy at state level is evident in a number of countries, most notably Algeria,Angola, Chad, Congo-Brazzaville, Niger, Nigeria, Mauritania, and Sudan. The equation issimple: African SOEs and especially national oil companies (NOCs) are highly politicizedentities enjoying close links to the ruling elites. Examples of these include Sonangol(Angola), Sonatrach (Algeria), Nigeria National Petroleum Industry (Nigeria) and Sudapet(Sudan). While Western oil companies are reluctant to consider economic engagementwith NOCs, Chinese companies take an opposite view, where they are viewed as vitalconveyer belts to piggy-back their way into the corridors of power. Careful not to be seenas an "exploiter" of such oil, China, for example, stresses that its increased presence willalways result in new opportunities for local petroleum firms. This is most obvious, forexample, in Angola with the formation of Sonangol-Sinopec International (SSI) in 2004,and in Nigeria.

As the scramble for energy in Africa intensifies, the game becomes more complex. Whereaccess to state NOCs are not possible, Chinese oil companies have resorted to a “TrojanHorse’s” entryist strategy into Africa, hiding behind ostensibly new and little-known playerswho enjoy considerable political clout in sensitive energy rich regions on the continent.Some notable examples include the roles played by Energem Resources, Cliveden Oil andseveral Nigerian oil companies, in opening doors to sensitive but potentially oil rich areasin Africa with whom China had poor diplomatic relations with.

A similar policy has been followed in the telecommunications field where Chinesetelecommunications companies have worked closely with their African state counterpartsin various joint ventures to fast-track access into local markets.

Sitting on a foreign reserve war chest of over US2 trillion – the largest in the world - Chinais also able to offer generous aid and loans to African countries, using it as a lever to winenergy and other contracts. The most notable was the US$2 billion loan made to Angola inApril 2004 and topped up by another US$3 billion in 2006. This paved the way forSinopec’s entry into Angola’s oil industry in a significant way – although in more recentyears, Sinopec has suffered some economic setbacks in the country. Another example, isthe US$9 billion loan to the DRC made in 2008 which remains the subject of controversywhere in exchange for China’s involvement in infrastructure development, Chinesecompanies will have access to massive tracts of mineral concessions.

For Western companies operating in Africa, the Chinese factor is set to weigh heavily onfuture investment decisions. In simple terms they do not have adequate responsemechanism in dealing with China’s holistic approach in accessing energy and mineralresources in competitively tight markets and therefore face a continual threat of beingblind-sided by an increasingly finely honed Chinese resource acquisition strategy. China’sintegrated approach towards foreign investments in places like Africa allow Chinesecompanies to enjoy lower political and economic risk entry levels to that faced by Westerncompanies, because the Chinese risk matrix underpinning the way it conducts business isfundamentally different to that held by Western companies, especially in the energy field.

For example, Western oil companies are primarily driven by profit not by their respectivecountry’s national security considerations. Chinese state oil companies on the other handare geared towards the acquisition of oil supplies for the Chinese economy, not the openmarket. Western companies are accountable to their share-holders, Chinese companiesare accountable to the state - more specifically the Chinese Communist Party (CCP).Western companies are essentially on their own in making investment pitches in Africancountries. Chinese companies enter a market with the full institutional backing of the statecovering financial resources, diplomacy, trade and development projects, and security andintelligence assistance.

In simple terms, China is becoming adept at putting together multi-tiered investmentpackages backed by the state and offering multiple benefits to host countries whichWestern companies can simply not emulate. For example, in July 2006, CNPC obtainedfour oil blocks (two in the Lake Chad Basin and two in the Niger Delta) in return for itswillingness to invest in the construction of a 1 000 MW capacity hydropower plant inMambila (now pushed to 3 000 MW), Plateau State, as well as taking up a controllingstake in the 110 000 barrels per day (bpd) Kaduna refinery for US$4 billion.

Consequently, problems associated with political risk for Chinese companies investing inAfrica is significantly offset by the willingness of the Chinese government to investconsiderable “diplomatic and political capital” in boosting Africa’s influence and prestige inglobal forums. Such political agreements or understandings underpin the existence of aspecial dispensation enjoyed by Chinese companies in African countries. In addition,Chinese investments are invariably backed by cheap government institutional financialinstruments whether in the form of soft loans and insurance, as well as a host of valueadded development projects and regional and intercontinental organizational supportgroups such as FOCAC, the China-Africa Business Council and a growing number of localChinese “friendship” and “business” associated chapters – that all give political muscle tothe protection of investment decisions.

This all amounts to ring fencing investment projects from political risk and open marketcompetition not enjoyed by Western investors, and fast tracking the entry of Chinesecompanies into previously tight markets. It also allows Chinese companies to toleratehigher risk thresholds than their Western counterparts, and invest in areas off-limits toWestern companies that will stabilize later i.e. Sudan. By the time stability emerges, Chinais already well entrenched in the local economies.

Massive loans provided by China’s Export-Import Bank (China Exim Bank) form thefoundation of China’s commercial engagement. Government support for Exim Bankensures that Chinese companies can conclude high-risk contracts and have longer graceperiods than their Western competitors to show a profit. [See Chapter 11]

According to a three-year plan for China's oil and gas industry made by the NationalEnergy Administration, China is considering setting up a fund to support firms in theirpursuit of foreign mergers and acquisitions. The plan was submitted at the National WorkConference on Energy held in Beijing in February 2009. This provides a further indicationof how China will use state finances to underpin global acquisitions abroad.

Long-term planning, backed by guaranteed state support therefore provides a solidbacking for Chinese entrepreneurs in challenging African markets. Short-term losses canbe ignored, while the strategic plan and state backing is in place since EXIM Bank isanswerable to China’s leadership and not to the concerns of stakeholders. State-ownedbanks provide guaranteed loans and guaranteed political support for Chinese initiatives.

Chinese corporations which link their commercial objectives to China’s national interesthave a business model which can withstand the rigours of the African market. At a timewhen Western companies are increasingly short-term focused and risk-averse, China isable to support its corporate advance in Africa, opening the way for a strong Sino-Africandependency.