Keywords: foreign direct investment, FDI, Africa, Chinese investors

Welcome Note

China's hunger for foreign assets is a well-documented phenomenon, given the country's need to support its rapid growth trajectory and a staggering 1.3 billion people. Over the past decade, bankers and lawyers have flocked to the Middle Kingdom to advise Chinese corporations on a range of M&A deals as they snatch up everything from US computer companies to Australian iron ore deposits.

As we will see in this paper, China's appetite for foreign assets is especially prevalent in Africa. China and Africa have been trading partners for centuries, but political and diplomatic relations grew particularly close in the second half of the 20th century when China threw its support behind African liberation movements, and both geographies sought greater influence within the post-World War geopolitical order. Today the contours of the relationship have an economic flavour: Africa is looking for reliable partners as it navigates through the early years of an economic renaissance, while newly minted Chinese companies are aiming to put capital to work.

In the past few decades, China has committed to a wide variety of investments in Africa – from infrastructure projects to oil wells to copper mines. China's foreign direct investment (FDI) in the continent grew at an annual rate of 20.5% between 2009 and 2012, according to a white paper on China-Africa economic and trade cooperation published by China's State Council in 2013.

Both geographies have much to gain from their strategic partnership. From Angola to Zimbabwe, African governments and companies need reliable partners to jointly build infrastructure, develop mineral wealth, and most importantly, provide stable jobs to Africans eager to climb out of poverty and improve their social and material well being. China, meanwhile, has to find natural resources to supplement its supplies at home. Chinese state-backed enterprises – and top privately held companies – also aim to gain more experience operating abroad, outside the comforts of the domestic context. Last but not least, China's investments in Africa – if handled properly – will only serve to strengthen the already firm bonds between the two geographies.

As with any relationship, challenges remain. China is facing a host of perception-related issues in Africa as many locals grow suspicious of its true intentions, and chafe under the different expectations of Chinese employers. At the same time, Africa is trying to address a range of legal and infrastructure hurdles so as to improve transparency and win the confidence of new investors.

Given the stakes of this important socio-economic relationship, I am delighted that we have commissioned The Economist Intelligence Unit to investigate the opportunities and challenges posed by Chinese investment in Africa. The research in this paper explores the trends defining China's investment on the continent, as well as the potential problem areas that both parties need to address in order to preserve their relationship over the long term.

Despite the number of deals that have already come to pass, the China-Africa partnership still has much more to contribute to the global economy in the years ahead.

Key Findings

  • While Chinese official data for foreign direct investment (FDI) in Sub-Saharan Africa (SSA) are unreliable (in part because much investment is routed through offshore jurisdictions), comprehensive third-party datasets that take into account funds committed, M&A and infrastructure contracts show Africa is China's largest investment destination.
  • China's latest phase of investment in SSA is consistent with the country's "Going Out" policy articulated in the mid-1990s and is part of six decades of engagement with the continent. It is a well-considered, long-term strategy that has increasingly become focused on growing economic links, both in terms of securing natural resources and of serving as a market for Chinese exports and a base for manufacturing as China moves up the value chain.
  • Energy and mineral resources attract the most Chinese FDI, but the activities of China's construction companies and service providers in developing Africa's physical infrastructure is underestimated. The success of these projects (which are often tied to resources contracts) has been mixed, but in cases where local governments lack the resources to build urgently needed infrastructure such investment can have a multiplier effect on the local economy. Chinese investment also has some advantages related to the availability of reliable and relatively fast financing.
  • China policymakers have announced plans for significantly increasing FDI into Africa at a time when there are indications that the appetite for riskier projects is subsiding (with FDI dropping off substantially in the first half of 2014). In part this may be linked to problems in project execution: Chinese investors are often confronted with inadequate mechanisms, staff levels or organisational structures to move from intention to implementation. However, the trajectory remains positive due to the potential of Africa's untapped resources and its growing markets.
  • China invests in Africa "just like everyone else", according to experts interviewed for this report, although the perception persists that Chinese projects suffer from lower standards, a lack of corporate social responsibility, or CSR, in business practices, and a failure to hire enough local workers. Anecdotal evidence does provide some support for the contention that Chinese companies need to improve their local image through better diplomacy and sensitivity to community requirements. Western investors may have had more success in closing deals on greenfield investments since they focus more on community capacity-building and working with NGOs and UN agencies that produce social and environmental studies—often prerequisites for funding.

To read the full article please click here.

Originally published 20 October 2014

Visit us at www.mayerbrownjsm.com

Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; Mayer Brown JSM, a Hong Kong partnership, and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2014. The Mayer Brown Practices. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. Please also read the JSM legal publications Disclaimer.