China in Africa
11. The Role of China's Financial Institutions
Critical to China’s economic successes in Africa has been the important use of the country’s state backed banking institutions. Under-pinning the aggressive buy-out of foreign resource companies, mineral and energy reserves and large institutional investment projects in the continents oil and infrastructure sectors, are a phalanx of state funding agencies supported by massive national reserves of accumulated liquidity of over US$2 trillion, ready to be shifted into the global market at a moments notice.
These entities include the China Development Bank (CDB), Industrial and Commercial Bank of China (ICBC) China International Trade and Investment Corporation (CITIC), China Export and Credit Insurance Corporation (CECIC), Sinosure and the China Export- Import Bank, whose executives work closely with Chinese oil corporates in putting together financial deals at preferable subsidized interest rates. These state driven institutions have vast resources at their disposal and are able to provide discounted loans to Chinese corporations on the overseas acquisition trail not necessarily subject to the same rigorous accountability and transparency constraints that govern Western business ventures.
It is this golden triangle that exists between Chinese companies, the state and quasicommercial lending institutions that provide Chinese oil companies with cheap finance to undercut their Western competitors. The China Development Bank, for example, is the largest quasi-commercial bank in the world. With assets of US$350 billion, it is bigger than the World Bank and the Asia Bank. The China Exim-Bank is the world’s third largest export credit agency – its principal mandate being to “implement state policies in industry, foreign trade and economy, finance and foreign affairs”. The newly created China Investment Corporation (CIC) sits on an acquisition war chest of US$200 billion, courtesy of the Chinese Central bank, now wanting to diversify its foreign exchange holdings out of US dollars and Treasury bonds into resource assets.
Indications are that China Exim Bank provided an open line of cheap credit worth US$1,2 billion to CNPC and its subsidiary PetroChina, for overseas exploration and acquisition purposes. CITIC Resources, a subsidiary of CITIC, which specializes in equity investments in energy and natural resources, has also been working closely in putting together oil deals involving Chinese oil companies in several African countries, most notably Chad and Nigeria.
Consequently, with this type of financial backing, the China National Offshore Corporation (CNOOC) was able to put in a higher cash bid of US$18,5 billion for Unacol two years ago than that offered by Chevron-Texaco back in 2005. Only US legislators were able to stop the deal from going through.
In 2004 for instance, Huawei obtained a US $10 billion credit line from the state-owned China Development Bank and US$600 million from the Export-Import Bank of China to fund its global expansion. That, analysts say, helped Huawei undercut competitors' bids by as much as 70 percent and offer vendor-financed loans. For example, Nigeria received US$ 200 million in loans from the China Development Bank in 2004 to buy Huawei equipment. Lending rates at the time were well below the 6,39 percent benchmark oneyear lending rate in China – sometimes as low as one or two percent.
All this amounts to subsidized risk investment – courtesy of the Chinese tax payer. Importantly, in the absence of such “investment packages” Western companies find themselves at a clear disadvantage, unable to negotiate discount signature bonuses like their Chinese counterparts. Innumerous instances, a Western mining company for example cannot commit to infrastructure to secure a mining project which Chinese companies are able to do with the assistance of Chinese banks, geared specifically at resource acquisition ventures.
Another strategy being used by Chinese financial institutions to facilitate trade and investment is buying into overseas banks which have an extensive African footprint, by way of branches and clientele. In October 2007 the Industrial and Commercial Bank of China (ICBC), the largest bank in the world by market value, purchased a 20 percent share in South Africa’s Standard Bank Group Ltd. for $5,4 billion. Standard, operating in 18 African countries, leads all banks in African loans and has assets of nearly US$120 billion (Caggeso, 2007). China complemented this purchase by acquiring a stake in the United Kingdom banking house of Barclays. Using the $200 billion assets of the China Investment Corp., China paid $3 billion for a stake in the US investment banking firm Blackstone. Blackstone then helped CDB acquire a $7 billion stake in Barclays Bank, the United Kingdom’s leading African bank, with dominant positions in such resource powers as Nigeria, South Africa, Zambia, and Zimbabwe. These purchases guarantee Chinese access to powerful interests in the financial community of key African countries, and facilitate investment through non-bilateral government to government arrangements.
11.1. China Exim-Bank
The vast majority of infrastructure financing arrangements done by China in the African continent are financed by the China Exim Bank, which (like any Exim bank) is devoted primarily to providing export seller’s and buyer’s credits to support the trade of Chinese goods. These credits reached a total of US$20 billion in 2005, making the China Exim Bank one of the largest export credit agencies worldwide. In addition, the China Exim Bank is the only Chinese institution that is empowered to provide concessional loans to overseas projects.
By June 2008, China Exim Bank had financed more than 300 projects in Africa worth at least US$6,5 billion. Infrastructure is the core of China Exim Bank’s undertakings, as approximately 80 percent of projects approved have involved infrastructural development.
The China Exim Bank is increasingly making use of a deal structure - known as the “Angola mode” or “resources for infrastructure” - whereby repayment of the loan for infrastructure development is made in terms of natural resources (for example, oil). While this approach is by no means novel or unique, and follows a long history of natural resource - based transactions in the oil industry - China has taken its implementation to a higher level.
By providing preferred lines of credit to Chinese state-owned enterprises and foreign governments wishing to purchase Chinese made goods, the China Exim Bank supports the overseas expansion of Chinese firms in line with the country’s “Go Global” strategy, whose long-run goal is to increase the productivity and competitiveness of these enterprises vis-à-vis their global competitors.
The arrangement is used for countries that cannot provide adequate financial guarantees to back their loan commitments and allows them to package natural resource exploitation and infrastructure development.
The China Exim Bank’s terms and conditions are agreed on a bilateral basis, with the degree of concessionality depending on the nature of the project. The World Bank’s Debtor Reporting System offers some insight into Chinese lending to Sub-Saharan Africa, including both infrastructure and non-infrastructure loans.
On average, the Chinese loans offer an interest rate of 3,6 percent, a grace period of 4 years, and a maturity of 12 years. Overall, this represents a grant element of around 36 percent, which qualifies as concessional according to official definitions.
However, the variation around all of these parameters is considerable across countries; thus interest rates range from as low as 0,25 (as in the case of Angola) to 6 percent, grace periods from 2 to 10 years, maturities from 5 to 25 years, and overall grant elements from 10 to 70 percent. Chinese loans compare favorably with private sector lending to Africa but are not as attractive as ODA, which tends to provide a grant element of around 66 percent to Africa.
In the case of concessional loans, there is a requirement that a Chinese enterprise be selected as the contractor or exporter. Moreover, no less than 50 percent of the equipment, materials, services, or technology needed to implement the project should be secured from China. In the Angolan case, the figure was even higher at 70 percent.
11.1.1. The Angolan Example
Angola constitutes the best example of just how intertwined China’s economic and political interests are and how effectively Exim Bank’s loans were used to leverage Chinese corporate access to Angola’s oil sector.
Chinese interest in Angola coincided almost simultaneously with a reorientation in Angola’s foreign policy towards the East. Several issues were emerging to aggravate relations with Angola’s traditional Western partners:
- Growing criticism of Angola’s rampant corruption problems by NGOs such as Global Witness and global financial institutions like the International Monetary Fund (IMF) and World Bank demanding greater transparency and good governance considerations with regard to oil revenue flows;
- The Elf Aquitane corruption scandal exposing the payment of bribes to African elites including Angolan government officials, in return for favourable access to oil markets;
- Luanda’s continuing civil war against UNITA;
- The absence of democratic elections;
- The so-called Falconegate scandal in France which fingered high-ranking Angolan officials involved in the illegal acquisition of French arms, including officials in the President’s Office i.e. General Helder Viera aka “Kopelipa” – the President’s main security chief;
- The most important aspect was funding – to jump start the rehabilitation of the social fabric and the country’s infrastructure practically destroyed in nearly 30 years of civil war. According to the Angola bank BCI, the country needed US$15 billion in direct loans, at the start of the post-war (April 2002) reconstruction period of which only US$3 to 4 billion could be raised in Angolan banks or other credit institutions.
The bulk – some US$11 to US$12 billion would have to come from abroad. Angola found itself in a catch 22 situation – it owed the Paris Club of Creditors some US$11 billion in foreign debt – monies which the Angolan government was unable to repay, let alone properly service its interest debt repayment obligations. Relief could only be gained by embracing an IMF structural adjustment programme which required fundamental institutional reform of the Angola’s government institutions and the opaque use of its oil revenues. Once an IMF programme was place, negotiations with the Paris Club could move forward providing much needed debt relief for Angola.
At the turn of the millennium, Angola briefly flirted with an IMF Staff Monitoring Programme (SMP) to try and put into place building blocks for the reform of Angola’s economy and governing institutions. However, it would require the dismantling of the way Sonangol conducted business – effectively a “sovereign state” within the Angolan government – more powerful than the Finance Ministry and the Central Bank of Angola (BNA) combined. At the time, this was not something the Presidential Palace (the “Futungo”) was willing to consider.
After oil prices started to rise from its low levels of around US$10 per barrel by the close of the last century – Angola dumped the SMP programme and aggressively switched to raising oil backed loans on the international money market via Sonangol. Effectively the state oil company became lender of last resort for the Angolan government and quickly built up a reputation for scrupulously adhering to debt repayment schedules of such loans – much to the delight of international bankers.
However, the price of such loans were extremely high, with Angola paying premium interest rates for its high risk status, using oil backed guarantees that were much lower than prevailing market rates. At one stage Sonangol was locking up nearly its entire future planned oil production as oil pay back guarantees for the loans. The oil backed loan policy also came under scathing criticism from the Bretton Woods institutions. They argued that arguing that it was an expensive alternative to embracing IMF reforms, and postponing much needed reforms to stabilize the Angolan economy and the reintroduction of Angola back into the mainstream global economy.
In addition, the much promised “donors conferences” never materialised in Angola’s attempts to attract IMF monitored foreign money and soft loans. Angola’s top negotiators at the time led Finance Minister José Pedro de Morais and the ever competent Aguinaldo Jaime - head of the Angolan Central Bank (BNA) at the time, were met with the constant refrain that “it is immoral to lend to a country soaking rich with natural resources, as Angola, a country that is unable or unwilling to initiate sizeable political reforms”.
In the end a stalemate was reached with foreign donors, who would not lend because of the lack of reforms, and Angola would state that the lack of reforms was due to the refusal to lend.
184.108.40.206. Enter the Chinese
It was this confluence of events which saw China enter the Angolan equation, already hungry for the acquisition of raw materials. With the ending of the civil war in April 2002, Angola needed rapid socio-economic development to fast-track the development of an emaciated populace. This became Dos Santos’s most important policy objective - to leave behind a legacy of socio-economic development (a type of economic peace dividend) for which he would be remembered for, before he stepped down.
China provided the solution – flush with cash, Beijing was willing to leverage its political influence in Africa by using its growing pile of cash filling up the Central Bank coffers and related state backed financial and developmental state owned enterprises (SOEs) such as the China Exim Bank, China Development Bank (CDB), China Construction Bank (CCB), Sinosure, China International Fund (CIF), etc.
Importantly, there were no political or “moral” strings attached to such loans – with China strictly sticking to its principle of “non-interference in the sovereign affairs of nations states. At the time, Aguinaldo Jaime confided to several interlocutors that China had a supplementary advantage: its banks had enough liquidity to immediately disburse money, and saw loans as a continuous process, until the necessities of the borrower would end.
Angolan officials say they turned to China because Beijing was willing to offer assistance without political strings attached, especially on the issue of transparency, as well as opening up important sectors of the Angolan economy. The Chinese were prepared to negotiate low interest rates and reasonable repayment schedules, but with the understanding that there would be economic and political prizes to be won, especially in the oil industry.
220.127.116.11. A Loan Chronology and the Oil Link
Thus examining a time line assessment of the loans made to Angola since 2004, shows a close relationship between lending announcements and the clinching of important energy projects between both countries. This interlock is outlined below along with a sequenced analysis of when various loan disbursements were made to the Angolan government.
Thus examining a time line assessment of the loans made to Angola since 2004, shows a close relationship between lending announcements and the clinching of important energy projects between both countries. This interlock is outlined below along with a sequenced analysis of when various loan disbursements were made to the Angolan government.
- 2000: In the same year that Defence Minister Kundy Pahyama visits China in May 2000, Angola’s oil exports to China surge from 40 000 bpd in 1999 to 174 000 bpd in 2000.
- 2002:The China Construction Bank (CCB) and China Eximbank invest US$145 million in Chinese firms working in Angola.
- 26 November 2003: A “Framework Agreement” is signed between China’s Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and the Angolan Ministry of Finance. This is the legal basis for the whole credit contracting process between the two states that was to follow in the period ahead. Very importantly, it was determined that the credit line could extend up to US$10 billion, until the end of the reconstruction period.
- February 2004: Sonangol head Manuel Vicente visits Beijing to discuss joint projects and steps to enlarge the Chinese stake in Angola’s upstream and downstream sectors. Discussions included Sinopec’s possible participation in the proposed Lobito oil refinery set to produce 240 000 bpd of refined petroleum products.
- March 2004: – Chinese Deputy Prime Minister, Zeng Peyan, visits Angola and then Angolan Prime Minister Piedo Nandó visits Beijing. China Eximbank and the Angolan Ministry of Finances sign a US$2 billion loan agreement, with a further facility of US$500 million set aside to be drawn upon if required. The initial US$2 billion loan is divided into two equal parts. US$1 billion would cover 18 contracts for public works, 60 different projects and a host of supplementary plans including 1 500 trucks for farmers and agricultural merchants, a new power grid for Luanda, agricultural projects, and a 371 km road linking the capital with the crucial northern town of Negage, through heavily mined parts of the country. The balance would go to 27 contracts and 50 social projects covering health and education, public works and social development.
- September 2004: Visit to Luanda by the Exim Bank head Yang Zilin to look into allegations of corruption around the loan and means to monitor more effectively its disbursements. Shortly after the visit, Angola establishes a Technical Monitoring Office (GAT) for the Chinese loan, working under a Inter-Sector Monitoring Commission. The Commission, headed by then Finance Minister José Pedro Morais, include the Minister for Public Works, the BNA Governor, the Secretary at the Council of Ministers and the Chairman of Sonangol. The GAT is made of experts from the Ministry of Finance, BNA, cabinet ministries involved in projects and Sonangol officials - as the loan is guaranteed against oil production. [See below.] • At the time of the visit, China’s Sinopec oil company eased out India’s ONGC-Vindesh to acquire Shell Oil’s 50 percent stake in Block 18, operated by BP-Amoco.
- October 2004: Upon consultation with Beijing, President Dos Santos and Nandó decide to create a specialised office, to supervise the national build up, oversight and spending of foreign funds, and channel and monitor part of the Chinese loan. Known as the National Reconstruction Office (GRN), it presides directly under the chief of security in the presidency, General Hélder Vieira Dias, aka “Kopelipa”. Importantly the GRN started as a monitoring entity over the Eximbank loan, following allegations that Angolan officials via questionable economic entities were skimming off massive commissions from the fund. The main culprit identified was António Van Dunem, Secretary of the Council of Ministers and the direct link between the President and the Cabinet who shortly after his exposure was sacked.
- November 2004: China ejects Total SA from Block 3/80 in retaliation over the Falconegate affair. Sonangol enters into discussion with Sinopec to take over the block.
- 26 February 2005: Visit to Luanda by the high powered Prime Minister Zeng. Several oil related and financial agreements are signed, including the handover of US$6,3 million interest free loan for “technical projects” and the signing of two memorandums of understanding linked to a joint study on the oil exploration of Angola's Block 3/05 (formerly Block 3/80), between Sonangol and Sinopec and another one on the joint exploration of the country's new oil refinery.
- March/April 2005: A new loan agreement is signed between the China International Fund (CIF) and the GRN, with documents signed in Hong Kong and Luanda. A initial amount of US$2,9 billion is disbursed to previously war ravaged corridors such as Luanda-Lobito, Malanje-Saurimo, Saurimo-Dundo, Saurimo-Luena, including a slew of presidential projects - revamping of the current Luanda airport and the construction of a new one (US$450 million), expansion and repairs to railway lines – including the famous Benguela railway line (US$300 million), dredging Luanda bay, a new sewage system for the capital, etc. An additional US$6 to US$7 billion was envisaged for disbursement over a four year period but have yet to be fulfilled. However, in 2007, many CIF projects came to a standstill due to problems within CIF and its parent company - construction arm of Beiya International Development Ltd., the parent company of China Angola Oil Stock Holding Ltd., which trades Angolan oil. By the end of 2008, 80 percent of the initial US$2,9 billion disbursement had been spent. The balance of the US$6billion to US7billion has not been spent and is likely to become part of a “joint venture” financing deal that will include China EximBank.
- March 2006: China and Angola announced the establishment of a joint venture between Sonangol Refineries (Sonangref) and Sinopec to build the much discussed US$3,4 billion oil refinery in Lobito with a capacity of 240 000 bpd. In the same month the original US$2 billion loan is increased by US$1 billion to US$3 billon, rendering China the biggest foreign player in Angola’s post-war reconstruction process.
- May 2006: SSI beat off international competitors in bids worth US$2,4 billion to win crucial stakes in Blocks 15 (20 percent) and 17 (27,5 percent). The two blocks have total proven reserves of 3,2 billion barrels.
- 20 June 2006: Chinese Prime Minister Wen Jiabao undertakes a blitz visit to Angola, and Prime Minister Nandó meets visiting Exim Bank boss Yang Zilin. A Memorandum of Understanding (MoU) is signed between Yang Zilin, Angolan Prime Minister Nando and Finance Minister José Pedro Morais, extending an additional lending facility of US$2 billion to Angola.
- April 2007: Gao Jian, head of the China-Africa Development Fund (CADF) and the Vice President of the China Development Bank (CDB) meet Deputy Prime Minister Aguinaldo Jaime. First discussions take place on loans not attached to oil guarantees. Established in 2006 with seed capital of US$5 billion, the CADF based Equity Fund, is used by Beijing as a “first step” to investment in Africa. Jian has been in touch with the Angolans, usually accompanied by CADF CEO Chi Jianxin. Indications are that a loan is planned from CADF in April/May later this year at Libor plus 1,5 percent. However, the amount to be loaned will not be as high as the Exim Bank amounts. [Note: No loans as yet have been made by CADF to Angola. This remains part of ongoing negotiations between both countries.]
- 19 July 2007: An additional US$500 million is granted as part of the credit extension linked to the provisions of the 2004 Exim Bank loan. The conditions linked to this loan are precisely the same as those governing the first disbursement of US$2 billion as per the March 2004 Exim Bank loan.
- 20 September 2007: Finance Minister José Pedro Morais meets new Exim Bank head Li Ruogu (a US educated technocrat, who worked in IMF circles and the African and Asian Development banks) to finalise the contractual document for the MoU signed between Yang Zilin, Angolan Prime Minister Nando and Finance Minister José Pedro Morais in June 2006, making available an additional US$2 billion loan. Conditions vary slightly from the initial Exim Bank loan structure negotiated in 2004. Interest is set at Libor plus 1,25 percent with the repayment period reduced from 17 to 15 years,
- 3 July 2008: New Exim Bank head (Li Ruogu and José Pedro de Morais sign a “Complementary Individual Financing MOU”, which sees the disbursement of a separate US$134 million loan to three communal development projects in Angola. The terms of the loan are the same as the September 2007 Exim Bank loan. The credit will fund the modernisation of the electricity system in two towns in Lunda Norte and Luanda Sul provinces, the construction of a water treatment plant and canals in the Luanda area and a road upgrade projects in two other provinces.
- August –September 2008: President Dos Santos visits Beijing and Shanghai, for the Olympic Games. China and Angola affirm the need to start a new approach to loan agreements. Dos Santos and Aguinaldo Jaime meet CADF head Gao Jian, and plan a new series of loans no longer guaranteed by oil, but by “sovereign guarantees” issued by the Angolan treasury. Jian calls this a “risk sharing loan”. Gao Jian is also the Vice-President of the China Development Bank (CDB).
- December 2008: With global markets collapsing, Dos Santos returns to China to obtain guarantees that loans promised to Angola will not be interrupted, and to ask for the possibility of additional funding . He is told by Chinese officials that the global credit crunch is “temporary”. Dos Santos meets with the Exim Bank board, under Li Ruogu and reviews a new set of proposed loans, partly decoupled from oil backed guarantees, as the Chinese believe that Angola’s growing currency liquidity is enough to satisfy their credit concerns. The CIF payment crisis issue is also reviewed (see below), as are other FDI projects. Discussions centre on the possibility that stalled CIF projects like the new Luanda airport and the New Luanda City Project – could be cofunded with Exim Bank money, as could other flagship projects such as the planned SONAREF refinery, the new Soyo Technological and Industrial City and Development Pole, new power generation projects, the expansion and training of the TAAG air fleet and crews and Sonangol’s LNG project.
- 19 January 2009: During a quick two day visit, China’s Commerce Minister Chen Deming meets with new Angolan Finance Minister Severim de Morais, and states that direct loans made to Angola from Exim Bank totalled US$4,5 billion in the 2004-2008 period. The figure, however, is over US$5,5 billion.
7 February 2009: Angolan Finance Minister visits China to put the finishing touches to a new US$1 billion loan from Exim Bank. Indications are that this will not be oil backed but linked to “sovereign guarantees”. No details are forthcoming on this at the time of writing.
There is no doubt that Angola was given unusually generous terms on the loans, even by normal Exim Bank standards: British index Libor 3 M (three months) plus 1,5 percent. Payment to be spread over 17 years, with 5 years of grace. Two semi-annual payments, were scheduled for 21 March and 21 September each year. Although rates are favourable, if compared to the famous 2005 Standard Bank loan of US$2,35 billion (at Libor plus a 2,5 percent interest rate), interest payments do not vary much from other loans made to Angola, re LR Luminar, Deutsche Bank of Spanish Santander. India Exim Bank offered a loan at Libor plus 1,75 percent. However, all these loans differ in one respect - they are based on “sovereign guarantees” (i.e., promissory notes from the Ministry of Finance) and not on “real guarantees”, as mandatory allocated quotas on oil production, or loan amount equivalent oil barrels.
This year, Angola has reopened discussions with the IMF. Reasons have been suggested in some quarters was that Angola’s reliance on Chinese funding was becoming excessive and that alternative funding avenues are now needed, to balance Angola’s foreign debt portfolio.
11.2. The China-Africa Development Fund
The CADF was officially established on 14 March 2007, following Chinese President Hu Jintao’s promise at the China-Africa summit in Beijing in 2006, to provide additional funding for investment in Africa. The CADF is funded and controlled by the China Development Bank (CDB), a state-owned bank which has played a key role in developing China’s economy over the past twenty years.
The CADF is one of eight elements in China’s planned enhanced engagement with Africa over the next three to five years as outlined by President Hu Jintao at the 2006 Forum on China - Africa Co-operation (FOCAC) Summit in Beijing. At the FOCAC summit, President Hu emphasised that China was seeking a new mechanism to facilitate investment in Africa. The fund’s business scope includes equity and quasi-equity investments, fund investments, investment management and consulting services. Its mission is to support African countries’ agriculture, manufacturing, and energy sector development; to expand transportation and telecommunications networks; and to promote the pace of urban infrastructure, resource extraction and the establishment of trade zones, or Chinese business centres, in Africa.
Chinese officials have promised that the fund will be more comprehensive than similar offerings by international organisations such as the ADB and the International Finance Corporation (IFC). Chinese multi-nationals and state-owned companies have already received assistance from the fund in accessing the African market. Telecommunications giant, Alcatel Shanghai Bell, for example, has received backing from the CADF to explore new opportunities in Africa.
The CADF provides a mechanism for Chinese companies to establish and maintain business networks across the continent, by providing them with low interest bearing loans and on-site facilitation services. It is expected that the initial US$1 billion will be spent during 2009, with an additional US$2 billion available in 2010 and the remaining US$2 billion on offer in 2011/12.
The CADF will provide a major incentive for Chinese companies to come to Africa. In addition, the CADF backed by official links, will assist Chinese companies in overcoming the many challenges of doing business in Africa. The fund is now well positioned to assist Chinese companies to fill the vacuum left by retreating Western businesses, especially mining houses such as Rio Tinto, as Western economies contract.
The more than 900 large Chinese companies active across the African continent will be able to access CADF funding for new projects and for the expansion of existing operations.
Since its inception, the fund has invested US$400 million in over 20 projects in Africa,including:
- Malawi - cotton project;
- Ghana - 560 000 kW power station;
- Ethiopia - glass factory (other projects in the following sectors are under investigation: agriculture, manufacturing and construction);
- Egypt - Suez Trade Park;
- Liberia - projects under discussion include agriculture and construction;
- Nigeria - Lachish Trade zone;
- Zimbabwe - chromite project;
The CADF has also concluded a co-operation agreement with EcoBank, the leading independent regional banking group in Africa. EcoBank is active in 25 African countries providing a range of services from micro-lending to major investments.
The specific objectives of the fund have been identified as investing directly in Chinese companies which have set up operations in Africa, or plan to invest in Africa. The CADF co-operates alongside Chinese government and diplomatic initiatives to strengthen China-
Africa relations and strategic partnerships. The fund identifies appropriate projects and expects to show a profit from its operations. It is intended to improve Chinese corporate capacity, without further burdening African countries’ debt profiles. Though a specialised
team manages the fund with the overriding objective of ensuring profitability, it is beholden to the CDB which in turn operates under the jurisdiction of the all-powerful State Council. The primary target of the fund is Chinese companies operating in Africa which want to
expand operations, or undertake new ventures.
The CADF’s business scope includes the following:
- Equity investment - support for Chinese companies in Africa (usually the CADF will not be the major shareholder);
- Quasi-equity investment - investments in stocks and bonds;
- Fund investments - the CADF may invest in capital funds which have African exposure;
- Investment management and consulting services - the CADF will provide advice for Chinese corporations seeking to invest in Africa. Target industries identified by the CADF include:
- Agriculture and manufacturing industries;
- Infrastructure, including power generation; transportation, telecommunications and water supply;
- Natural resources, such as oil, gas and raw materials; and
- Industrial parks for Chinese enterprises in Africa.
The CADF is prepared to invest in new or existing Chinese enterprises which are initiating or expanding operations in Africa. Once on a sound footing, the CADF may decide to terminate support for any particular Chinese enterprise.
The CADF is fully funded by the state-owned China Development Bank (CDB), which has been a key institution in supporting China’s infrastructure development and the promotion of basic industries and strategic industries. The activities of the CDB provide the model
and guidelines for China’s activities in Africa through the CADF backed by significant financial capacity. CDB activities in China are substantial and have included the following:
- Electricity supply - the CDB has provided over US$500 billion to build power stations and develop power-lines throughout China;
- Roads - China’s Development Bank has played a key role in developing China’s main road system with an exposure of over US$490 billion;
- Railways - the CDB has a strategic partnership with China’s Ministry of Railways which has produced an extensive rail network in China. The CDB is presently involved in a high-speed rail project which will link the mid-west to Beijing;
- Petroleum - the CDB has invested over US$100 billion in oil fields, refineries, pipelines and support networks throughout China;
- Agriculture, public infrastructure and telecommunications - in all these areas the CDB has played a key role in funding new development projects and advancing economic development in China.
Thus the CADF’s funding partner has extensive and wide-ranging experience in developing an emerging economy and providing the capital and advice for positive outcomes. The China Development Bank of course is a key player in promoting and implementing China’s “go global” strategy of which Africa is a major focus of attention.
By the beginning of January 2009, CADF had concluded deals worth almost US$400 million in over 20 projects since its inception. At least another 100 proposed projects are presently under consideration by the fund. The fund has also established strategic partnerships with 10 major enterprises in China in order to expand business co-operation with African countries.
11.2.1. CADF Opens New Office in South Africa
On 16 March 2009, the China-Africa Development Fund (CADF) opened its first African representative office located in the city of Johannesburg. The opening was marked by a signing ceremony of an MOU between CADF and the South African Department of Trade and Industry (DTI). Little information, however, was provided on the nature of the MOU signed between both countries. Only a general statement that the MOU will “increase Chinese investment opportunities” in South Africa was offered. Chinese officials acknowledged afterwards that more information should have been forthcoming on the MOU.
The opening of the CADF office in Johannesburg, however, does constitute a more fundamental engagement with Africa by Beijing. According to Chen Yuan, Chairman of the board of the China Development Bank (CDB), the new office will serve as a channel to accelerate investment in both South Africa and the Southern African Development Community (SADC) region and that funding will be made available for a range of projects in Africa intended to assist in the continent’s development. An amount of US$5 billion has been ear-marked for the fund by the CDB, of which US$1 billion is now immediately available. To date, CADF has committed US$400 million to Chinese companies new investment projects in Africa.
Chairman Chen Yuan (See Annexure IV) explained that the fund will open the way for a new wave of Chinese investment in Africa to promote long-term economic development in Africa. Chen indicated that the fund will invest in “multiple industries” to provide a range of economic development options. CADF President Chi Jiaxin (See Annexure IV) explained that the office was the first of its kind in Africa, but many more were planned for other parts of the continent as a means to facilitate an active investment programme. The CADF will provide the foundation for expanded China-Africa trade and investment and will make it more attractive for Chinese investors to come to South Africa and Africa as a whole.
Zhong Jianhua, China’s Ambassador to South Africa indicated that his office was ready to facilitate an increase in Chinese companies visiting the country. He predicted a growing interest in Africa following the opening of the CADF office and assured delegates that the embassy would work closely with the CADF to advance new Chinese investment programmes. The ambassador also indicated that the opening of the CADF office followed closely on the visit of a high-ranking Chinese business delegation to South Africa three weeks earlier led by senior executives from the country’s telecom sector, in search of new investment opportunities in South Africa.South Africa’s Deputy Trade and Industry Minister, Elizabeth Thabethe, said the CADF will focus on collaboration in the following areas: mining, transport, energy, agriculture, infrastructure development and the information & communication technology sector. In this respect, South African officials are looking to building new commercial relations with a range of Chinese investment companies, backed by the CADF. Speaking briefly on the MOU signed between herself and CADF CEO Chi Jianxin, she said that it would provide “financial assistance” to South African companies in “distress”, alluding to the impact that the global financial crisis was having on local business.
Also a key speaker at the event, African National Congress (ANC) Treasurer Mathews
Phosa commented that the opening of the new CADF office was indicative of the trust that
China had in South Africa’s legal institutions. He pointed out that in recent years China’s
growing economic and political prestige had resulted in South Africa turning “east” in
search of new economic partnerships. Phosa said that projects financed by the Chinese
to help emerging entrepreneurs in South Africa would be supported by the ANC. Despite
the contraction of the world’s key economies, Phosa was impressed that China is still
willing to make new investments in Africa and help African economies overcome financial
difficulties, and that the “decline” in Western interest in Africa is expected to be filled by a
new wave of Chinese investments. He welcomed China’s interest in Africa and
emphasised that Chinese investments were welcomed by South Africa, SADC and the
continent as a whole.
Mathews Phosa assured attendees that the China-South Africa relationship will be
stepped-up after the April elections – predicting an escalation of co-operation in the
months ahead focused on “people to people” (party to party) engagement. .
The presence of Phosa as a non-government party functionary at the opening was
somewhat unusual. However, it followed up an earlier meeting that was had between
Chen Yuan and ANC President Jacob Zuma, to discuss improved China/SA collaboration.
Reliable reports indicate that China had made a substantial donation to the ANC to assist
the party in the funding its April 2009 election campaign.
11.3. Industrial Commercial Bank of China
The Industrial Commercial Bank of China (ICBC) – China’s biggest bank - made headline news in the African context when it bought a 20 percent share of South African Standard Bank for US$5,1 billion in 2007. Two years on and ICBC and its Standard Bank partner are in the process of planning a continent-wide acquisitions programme that may see it rope in over US$500 million by 2010. Standard Bank’s impressive access to the African market, backed by Chinese capital is set to transform the continent as Chinese acquisitions expand and accelerate. Standard Bank’s advantage is based on its network of 1,000 branches in 18 African countries with new outlets planned in the DRC and
Standard’s broad coverage has opened a new avenue for China’s state backed ICBC to advance Beijing’s geo-strategic agenda across the continent.
Contradictions between Standard’s traditional approach to banking and China’s statedriven, long-term vision for Africa are evident, but progress is being made on crafting a compromise business model. Clive Tasker, chief of Standard’s African Division is said to be planning a US$5 billion acquisition programme with a strong focus on oil, telecoms, mining, base metals and power generation. Target states include the DRC, Ghana, Tanzania, Mozambique and Nigeria.
The first step is expected to be a US$1 billion resources fund intended to leverage ICBC into major African commodities markets. Over the longer term, Standard Bank is increasingly expected to front for China’s strategic resource acquisition programme.
The ICBC-Standard Bank co-operation list now covers over 60 projects and is expected to expand significantly over the next few months. ICBC’s annual profit growth rate has totalled 37,5 percent on average over the past six years.