South Africa: Crossing Borders - China And Africa

Last Updated: 26 April 2012
Article by Rita Chen and Greg Nott

China's engagement with Africa is nothing new; it never left the continent in the first place. The noticeable impact on the performance of African economies is underpinned by the growing strategic partnership between China and Africa. According to Chinese official figures, China has invested $40 billion in more than 50 African countries till the end of 2010, benefiting over 2000 enterprises. In 2010, direct investment in Africa from Chinese firms' amounted to $2.11 billion, up by 46.8 percent year on year.

Africa's interest in learning from China's reported success

The 2008 crisis had a severe impact on Africa as it did on China. There were 670 000 closures of small companies with the loss of 6.7 million jobs in China. Clear signs of recovery were however evident by 2009. China's economy grew by 8.9 percent in 2009, foreign direct investment (FDI) grew by 30 percent and retail sales rose by 16.9 percent. This headline making recovery sparked Africa's interest in learning from China's success. This success is evident in its economic management, home-grown radical economic transformation agenda and visionary leadership.

China also promotes its economic interest in Africa by concluding bilateral investments treaties (BIT). By 2007, China had concluded BIT's with 33 African countries and double taxation treaties with four African countries to protect and encourage FDI to Africa. In order to create a more secure environment for Chinese investors in the continent and for African students wishing to study in Chinese institutions, over 20 Confucius Institutes have been established in African countries and African study centres have been established in China for the purpose of expanding cultural exchanges.

China's footprint in Africa

China's outward FDI into Africa is dominated by a few resource-rich countries, including South Africa. Between 2003 and 2007, more than half of Chinese FDI into Africa was absorbed by just three countries, namely Nigeria (20.2 percent), South Africa (19.8 percent) and Sudan (12.3 percent)1. China has positioned itself to capture the vast neglected African market and secure supplies of African oil and mineral resources that it needs to supply its rapidly emerging economy. Oil alone represented 71 percent of Africa's trade with Beijing. China National Offshore Oil Corporation (CNOOC), China National Petroleum Corporation (CNPC) and China Petroleum and Chemical Corporation (Sinopec) – China's three state-owned oil companies, have either acquired stakes in established African operations or have entered into prospecting and exploration deals with major oil producing countries such as Nigeria, Angola, Sudan, Equatorial Guinea, Gabon and Chad. Africa has an abundance of natural resources, oil and minerals which provides unlimited business opportunities for the continent. The position taken by Nigeria, the leading oil producer of sub-Sahara Africa, reveals the Chinese strategy in recent years of seeking energy independence. It weighed much less in 2003. According to the Financial Times, CNOOC is negotiating with Nigeria, to acquire one sixth of the rights to the latter's oil reserves.

Another investment by the Chinese in Africa is transportation infrastructure. Recent examples of infrastructure projects include roads and bridges in the Democratic Republic of Congo, railways in Angola and hydro power stations in Zambia. In the rail sector, China's largest deals include the construction of mass transit systems in Nigeria and the construction of new lines linked to mining developments in Gabon and Mauritania. The importance of this improved transportation infrastructure, not only provides regional integration between African countries, but it allows access to globalised markets and strengthens Africa's position in international negotiations.

Africa to strengthen its continental and national policies to secure longterm FDI

It is not unusual to hear investors criticise Africa's government services, disintegrated regional and continental strategy and incoherent national policies. Commentators argue that Africa must learn from its past failures and accept the recommendations that are pointed out by investors. By doing so Africa will maximise this enormous economic opportunity. African leaders must develop coherent national policies, integrated regional and continental strategy, reliable provisions of government services and expanded infrastructure investments including the support for regional trade. Evaluation and monitoring is an efficient tool to gauge compliance of trajected growth. It is in respect of these tools that Africa will fall short. Africa must seize the opportunity and create a coherent and transparent legal framework. It is this framework that will form the cornerstone for a long-term African strategic partnership with China as well as with its global trading partners.

Strategies for promoting investments in Africa

The law, the economy and the people of Africa are on the move. Plenty of stories are yet to be told in the unfolding of this exciting phase of Africa's rise. We at Werksmans Attorneys are fortunate to have our own African story. We are also privileged to be part of Lex Africa, a blue chip legal network that is pan-African in its composition.

Our business starts by first understanding our clients' needs and from feedback in dealing with Chinese clients in particular, including some of the challenges they typically face in South Africa; Werksmans co-hosted an International Forum on Risk Management for Chinese Global Investments with a select group of leading international mining advisors (Canada, Peru, Australia, Brazil and South Africa) in Beijing, March 2012. We discussed our experience in our dealings with global and local mining companies and how to manage the risks of acquiring finance, developing and operating mining projects in the various jurisdictions. We had over 100 attendees from over 30 different companies, including most of the important state-owned mining companies. We are privileged to have high-level support from the National Development and Reform Committee (who is a macro-economic management agency under the Chinese State Council which has broad administrative and planning control over the Chinese economy) and high-level management from both China Development Bank and Aluminium Corporation of China as our guest speakers at the conference to discuss their foreign investment experiences.

At the conference we identified that mining companies face an unprecedented level of risk. Traditional risks, such as commodity prices, increasing capital expenditures, labour shortages and engineering and technical challenges, are more difficult than ever. In addition, increased political and social opposition to mining, environmental regulations and demands for greater taxes and government royalties are creating even further challenges for mining companies today.

We discovered how Chinese companies are becoming more sensitive to corporate social responsibility and are starting to focus on the "triple bottom line" – profit, social and the environment. Overall, the conference proves to be a success and despite the label which has been attached to Africa as a high risk continent, Chinese investors are still eager to explore Africa as the returns are far greater.

Africa – the dynamic continent

South Africa, and Africa as a whole, is going through a major transformative and development phase and China's entry is seen as a mutually beneficial economic cooperation that is shared amongst "developing country" status.

Africa finds interest in China's domestic policy lessons and the role played by the Chinese state in steering the market in a positive direction by developing a series of institutional reforms, financial support and investment in vital infrastructures to unlock the prospective domestic producers. The Chinese recognise Africa's needs and priorities and is able to fill the gap by providing cheap, less bureaucratic and support services within a shorter time frame. Finally, contrary to the standard Americans and Europeans analysis of Africa as a landmass of disease, poverty, corruption, starvation and death; China holds the view that Africa is a dynamic continent with unlimited business opportunities.

The rise of China is a fact. China needs to understand the law in Africa as it needs to learn Africa's business. It is in this regard that we can, in the cultivation of business links, advise Chinese business on the business of law and the law of business. It's got to be a win!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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