China now Africa’s biggest economic partner – report….Africa-China trade growing at 20 percent per year

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Staff Reporter

Windhoek-In a mere two decades, China has become Africa’s biggest economic partner. This is according to a Mckinsey & Company report released in June, titled ‘Dance of the lions and dragons’. The report notes that across trade, investment, infrastructure financing, and aid, there is no other country with such depth and breadth of engagement in Africa.

“The Chinese ‘dragons’ – firms of all sizes and sectors – are bringing capital investment, management know-how, and entrepreneurial energy to every corner of the continent – and in so doing, are helping to accelerate the progress of Africa’s ‘lions,’ as its economies are often referred to. Yet to date, it has been challenging to understand the full extent of the Africa-China economic relationship due to a paucity of data,” read the executive summary in the report.

This report aims to provide a fact-based picture of the Africa-China economic relationship.
Its foundation is large-scale data focussing on the economic relationship between Africa and China, including on-site interviews with more than 100 senior African business and government leaders, as well as the owners or managers of more than 1,000 Chinese firms and factories spread across eight African countries that together make up approximately two-thirds of Sub-Saharan Africa’s gross domestic product (GDP).

The report notes that since the turn of the 21st century, China has been catapulted from being a relatively small investor in the continent to becoming Africa’s largest economic partner. Since the turn of the millennium, Africa-China trade has been growing at approximately 20 percent per year.

Foreign direct investment (FDI) has grown even faster over the past decade, with a breakneck annual growth rate of 40 percent.

“Yet, even this number understates the true picture: we found that China’s financial flows to Africa are around 15 percent larger than official figures suggest when non-traditional flows are included. China is also a large and fast-growing source of aid and the largest source of construction financing; these contributions have supported many of Africa’s most ambitious infrastructure developments in recent years,” the report states.

In compiling the report, Mckinsey & Company evaluated Africa’s economic partnerships with the rest of the world across five dimensions, namely trade, investment stock, investment growth, infrastructure financing, and aid. China is among the top four partners for Africa in all these aspects and no other country matches this depth and breadth of engagement.

“Behind these macro numbers are thousands of previously uncounted Chinese firms operating across Africa. In the eight African countries we focused on, the number of Chinese-owned firms we identified was between double and nine times the number registered by China’s Ministry of Commerce (MOFCOM), until now the largest database of Chinese firms in Africa,” the report reads.

Extrapolated across the continent, the report’s findings suggest there are more than 10,000 Chinese-owned firms operating in Africa today. Around 90 percent of these firms are privately owned – calling into question the notion of a monolithic, state-coordinated investment drive by “China, Inc.”

Mckinsey & Company emphasised that although state-owned enterprises (SOEs) tend to be bigger, particularly in specific sectors such as energy and infrastructure, the sheer multitude of private Chinese firms working toward their own profit motives make Chinese investment in Africa a more market-driven phenomenon than is commonly understood.

“Chinese firms operate across many sectors of the African economy. Nearly a third are involved in manufacturing, a quarter in services, and around a fifth in trade and in construction and real estate. In manufacturing, we estimate that 12 percent of Africa’s industrial production – valued at some US$500 billion a year in total – is already handled by Chinese firms.

In infrastructure, Chinese firms’ dominance is even more pronounced, and they claim nearly 50 percent of Africa’s internationally contracted construction market. The firms we talked to are profitable; nearly one-third of them reported 2015 profit margins of more than 20 percent.

They are also agile and quick to adapt to new opportunities. Except in a few countries such as Ethiopia, they are primarily focused on serving the needs of Africa’s fast-growing markets rather than on exports,” the report reads.

Meanwhile, an overwhelming 74 percent of Chinese firms said they felt optimistic about the future. Reflecting this, most Chinese firms have made investments that represent a long-term commitment to Africa rather than shallower trading or contracting activities.

“One thing is clear to those who are closest to the Africa-China relationship: it will grow. We interviewed more than 100 senior African business and government leaders and nearly all of them said the Africa-China opportunity is larger than that presented by any other foreign partner—including Brazil, the European Union, India, the United Kingdom, and the United States,” reads the report.

For the foreseeable future, China’s dragons are in Africa to stay and with continued and likely growing Chinese involvement, it will become ever more urgent to address the gaps in the partnership, including a greater role for African managers and partners in the growth of Chinese-owned businesses.

Moreover, both Chinese and African actors will need to address three major pressure points: corruption in some countries, concerns about personal safety, and language and cultural barriers.

“In five of the eight countries in which we conducted fieldwork, 60 to 87 percent of Chinese firms said they paid a “tip” or bribe to obtain a license. After corruption, the second-largest concern among Chinese firms is personal safety. On their part, the African interviewees described language and cultural barriers that lead to misunderstanding and ignorance of local regulations.

“If these problems are left unaddressed, the misunderstandings and potentially serious long-term social issues could weaken the overall sustainability of the Africa-China relationship,” the report cautioned.

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