Developmental Effects of the Chinese Presence

The evidence gathered thus far clearly warns against too positive an assessment of the impact of the Chinese economic presence in the region. But there is also ample evidence to contradict an entirely negative assessment which paints Chinese investment as purely exploitative and neo-colonial.

Claude Kabemba's picture

Director of the Southern Africa Resource Watch (SARW)

October 9th, 2012

The evidence gathered thus far clearly warns against too positive an assessment of the impact of the Chinese economic presence in the region. But there is also ample evidence to contradict an entirely negative assessment which paints Chinese investment as purely exploitative and neo-colonial.

In Angola, over the last few years, it has become clear that Chinese investments have contributed to overall poverty reduction. The rehabilitation and construction of electrical and hydro-electrical infrastructure has expanded electricity access for ordinary Angolans and improved lives. New water-supply systems have improved access to clean water for people across the country. War-damaged roads and rail systems have been improved, allowing access and new commercial interaction across the country. Improvements in hospitals and health centres offer improved healthcare for Angolans, while China has sent doctors to Angola to assist in strengthening medical facilities.

In the Democratic Republic of Congo, cash brought in by the Chinese has had a significant impact on the day-to-day life of ordinary people in Katanga province and beyond. It came at the time when none of the DRC’s traditional partners wanted to provide finance to the government. The Chinese cash came as relief to the population of Katanga who were experiencing hardships. The sudden increase in the mass of liquidity in the province contributed to increasing the number of artisanal miners.

Chinese intervention, which is built on direct responsibility for infrastructure development, is proving far more effective than western intervention. Much of the funding that the west sends to the DRC (whether through multilateral or bilateral cooperation) is misappropriated and ends up in European banks (a situation that has prevailed since the days of Mobutu). The accusations of corruption levelled at the Congolese government have been linked to funds that are provided by western governments, and taxes that western mining companies pay to government. With the Chinese approach, money which would have been paid as taxes is put straight into infrastructure development. This has prevented money from going into the pockets of politicians, and resulted in tangible progress for Congolese citizens. This might also explain why China is reluctant to join the Extractive Industries Transparency Initiative (EITI), a coalition of governments and private interests dedicated to greater transparency in the extractive industries. The EITI is a progressive initiative, but it is proving quite weak in stopping corruption where it is implemented because of its voluntary approach. Corrupt African officials and mining executives cannot be sanctioned through the EITI.

China’s increasing investment on the continent has benefited from the failures of western development strategies led by the World Bank and IMF. The Chinese follow a different approach to entering the mining sector in the DRC. Their ‘infrastructure for resources’ model addresses the issues of variability as they build infrastructure and roads while exploiting resources at the same time. This approach of ‘infrastructure for minerals’ is a complete paradigm shift that will avoid some of the major international trade factors (such as volatility of price, variation in the rate of extraction, the change in timing of payment by companies, and fluctuations in the price of natural resources). A clear example of this was during the financial crisis. While many were expecting a change of attitude from the Chinese, they continued to build infrastructure even before they could start extracting the minerals. For the Chinese, there should be a serious impact on the contract considering that it is a long term project. But China agreed during the negotiations and gave guarantees to the Congolese government that external factors (including global financial turmoil) would not undermine the contract.

In Zambia, Chinese mine ownership has reversed a negative trend in which privatisation eroded the viability of the LCM mine. In 2004, after a difficult period, the mine was sold to J and W, originally from India, with 80 percent shareholding and a 20 percent share for the government of Zambia. Four years later, and following the effects of the 2008/2009 global economic downturn, the company decided to place the mine under care and maintenance before withdrawing their interest and leaving more than 1500 employees jobless.The Zambian government, through ZCCM-IH, managed the mines until a strategic partner was found. Due to two previous bad experiences, various stakeholders took a keen and active interest in ensuring that the anticipated new owners were more established, experienced, and with the requisite financial capabilities. With this in mind the government embarked on a process to look for a suitable investor to take over the operations at the mine. In April 2009, a new equity partner was found to take over mining operations and projects at LCM through a bidding process which witnessed a great deal of pressure from the general citizenry and, finally, China Non-ferrous Mining Company (CNMC) was sold an 85 percent shareholding while the other 15 percent was retained by the government. In June 2009, CNMC pledged to invest US$400 million in LCM. This new money was to see the Baluba mine reopened and further development of the Mulyashi project, intended to produce copper cathodes. The effect has, as mentioned in Chapter X, been renewed and apparently sustainable growth and enhanced job creation. Locals who are deeply critical of Chinese mine CCCM acknowledge that it is a major source of employment.

Our study showed that the new owner has taken a seemingly unique approach by partnering with the local business association, the Luanshya Suppliers and Contractors Association (LSCA), with whom they have agreed that for all business opportunities connected to provision of services, local institutions or companies shall be given priority consideration. LCM so far has sub-contracted most of the LSCA members for work during the rehabilitation of the mine. More than forty local companies are enjoying good business relations, with contractual work ranging from the supply of engineering equipment to labour. LCM has also put in place a predictable payment system, which enables the business community to plan their activities and investment. CNMC has shown its commitment to increased involvement and consultation with stakeholders in the community, and there seems to be a very transparent system of doing business with the locals. Although the mine was not yet operational at the time of the study, observations show that the local economy of the district has started recovering. There are increased transactions in banks, and increased goods in local shop. Most of the respondents interviewed by our researchers further hoped that the long-term commitment by the mine, especially when it becomes operational, will assist in restoring economic activity to the district.

In South Africa, academic sociologist Mike Morris argues that the negative employment impact is partly balanced by the welfare gains to consumers arising from the competitiveness of Chinese imports which lower prices and ensure that goods are available at affordable prices to the poor. Morris further contends that saving jobs (an anti-Washington Consensus approach) should not be the only priority, as China’s global exports should be calculated in terms of both welfare and competitiveness impacts. Clothing retailers have opposed quotas on Chinese clothing imports, complaining that it would result in a 20 percent to 25 percent price increase.

From a short-term business perspective, the relationship between Chinese buyers and South African commodity producers is mutually beneficial. South African companies have direct and guaranteed access to the fast-growing Chinese market, while Chinese steelmakers have a guaranteed supply at affordable prices. In recent years, Chinese steelmakers have adopted different strategies to deal with rising demand and rising domestic production costs. The driving factors for steelmakers in China are stability of supply and the cheapest sources. This has pushed Chinese steelmakers to purchase mines and or smelters in South Africa to ensure access to affordable chrome.

Deputy MD of the partly Chinese-owned IFM Yang Xiaoping has suggested that Chinese purchases of ferrochrome mines were not aimed at driving down prices, but rather to guarantee supply, pointing out that purchases of ferrochrome are made at market-related prices. However, obviously over the longer term, market forces will demand that production costs in South Africa be contained or improved. Yang also stressed that Chinese investors saw joint ventures with well-established South African producers as the best business model under present conditions. Thus for the foreseeable future, Chinese companies would not seek a controlling share in South African producers, unless options for the purchase of small operations emerged. The Chinese business model for the ferrochrome industry also has positive features. Chinese investments in the form of joint ventures with South African companies offer the prospect of building more rewarding relationships with Chinese capital. Through joint ventures, Chinese companies are exposed to and are automatically supportive of existing corporate social investment programmes. The Sinosteel-Samancor relationship, for example, offers a good model for Chinese business partnerships with South African companies.

In Zimbabwe, the thesis that ‘China’s engagement in SADC’s extractive industry presently conforms to a neo-colonial exploitative approach’ is exaggerated. Chinese investment seems geared to the longer term, and is more tolerant of conditions in host countries than investment based in other countries. The CEO of Sino-Steel and Chairperson of ZIMASCO expressed great optimism on Zimbabwe’s economic prospects. He felt that the challenges Zimbabwe was currently facing were of a temporary nature, and that his company was looking into the future and not just the short-term. To illustrate his company’s long term perspective, he gave the example of its Australian investment which made losses throughout the 1980s and only started making profits in 1995 (some 15 years later). According to information provided, projected investments in Zimbabwe over the next 5 years are over $500 million. In 2009, $20 million was injected into ZIMASCO and a further $40 million in 2010 that helped to expand capacity. A new furnace is planned in KweKwe to expand smelting capacity. The CEO of ZIMASCO is quoted as saying that his company plans to increase production from the 69 000 tonnes recorded at the end of 2010 to about 162 000 tonnes (a 245 percent increase) by bringing one of the company’s furnaces back on line (newzimbabwe.com). The target is an operational capacity of 230 000 tonnes per annum through the upgrading of furnace no. 2 when their capital allows it. There are also expansion plans beyond the refurbishment of furnace no. 2. The research team learnt from the CEO of Sino-Steel that efforts were underway to upgrade technology at the ZIMASCO plant. Teams have been sent to China for training on manning the furnace. There is also a process of learning from each other between locals and Chinese staff.

Large Chinese corporations (whether state-owned or privately owned) seem to have entered into ‘win-win’ joint venture operations with Zimbabwean state enterprises and private indigenous investors. This relationship, however, is currently limited to extraction of resources, and only ZIMASCO’s operations go beyond extraction to beneficiating the mineral ore (in this case chrome ore). For those that are engaged in extraction, Zimbabwe still stands to benefit from technology transfer and capital investment and also from the 50 percent shareholding that it enjoys in these corporations. The aggressive entry of Chinese corporations in platinum, diamond and other minerals would increase production to levels that justify the establishment of processing facilities in Zimbabwe. The extent to which mineral producers climb the value-addition ladder depends on economies of scale, market dictates, and the returns earned. Market conditions should therefore be made to favour the beneficiation of minerals because economies of scale are guaranteed by the new investment and the expansion drive that has been observed at the sites of the traditional investors.

About the author(s)

Claude Kabemba is the Director of the Southern Africa Resource Watch (SARW). In 2006, the Open Society Initiative for Southern Africa (OSISA) asked him to spearhead the formation of SARW. He holds a PhD in International Relations (Political economy) at the University of the Witwatersrand (Thesis: Democratisation and the Political Economy of a Dysfunctional State: The Case of the Democratic Republic of Congo). Before joining SARW, he worked at the Human Sciences Research Council and the Electoral institute of Southern Africa as a Chief Research Manager and Research Manager respectively. He has also worked at the Development Bank of Southern Africa and the Centre for Policy Studies as Policy Analyst. Dr. Kabemba’s main areas of research interest include: Political economy of Sub Saharan Africa with focus on Southern and Central Africa looking specifically on issues of democratization and governance, natural resources governance, election politics, citizen participation, conflicts, media, political parties, civil society and social policies. He has consulted for international organizations such Oxfam, UNHCR, The Norwegian People’s Aid, Electoral Commissions and the African Union. He has undertaken various evaluations related to the work of Electoral Commissions and civil society groups interventions in the electoral process in many African countries. He is regularly approached by both local and international media for comments on political and social issues on the continent. His publication record spans from books (as editor), book chapters, journal articles, monographs, research reports, and newspaper articles.

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