TODAY, Africa-China trade and investment plays a crucial role in fostering the African economy. Data shows two-way trade and investment contributes about 20 percent of African economic growth.
China has been Africa’s largest trading partner since 2008. Last year, trade between China and Africa reached US$178 billion — 18,000 times larger than that in six decades ago.
Africa-China trade has also updated its structure and components over time.
Before China’s economy took-off, primary trade was in products such as cotton and minerals. When China began its economic reform, it began exporting labor-intensive products as well as food and chemicals to Africa. By contrast, after China acceded to the WTO in 2001, it began intensively exporting products such as machinery, transport equipment and high-tech products to Africa. The main exports from Africa to China are fuels and metals.
But the most important fact is that China’s Foreign Direct Investment (FDI) in Africa is booming in this new century. Today, around 2,000 Chinese firms invest in 51 African countries and total outward FDI recorded US$10 billion last year, which accounts for around one percent of China’s worldwide outward FDI. China has surpassed Japan as the second largest country with outward FDI, followed by the United States.
There are four types of Chinese firms actively investing in Africa. The largest deals are in construction. For instance, CITIC and China Railway Construction Co. jointly built Algeria’s 1,200-kilometer East-West highway, roughly the same distance as Beijing-Shanghai.
The second type of outward FDI is mining. China Petroleum’s subsidiaries in Sudan are perfect examples.
The other two types of Chinese outward FDI are more worthwhile to explore.
First, some Chinese firms invest in Africa to seek for larger international market. Huawei’s story is a perfect case. This company has already successfully established its subsidiary in Mauritius to operate the first third-generation telecommunications service in the continent.
Perhaps the last type of Chinese investment in Africa deserves special care. As Chinese labor costs increase, more and more Chinese firms, especially those in labor-intensive industries, move to low labor-cost African countries such as Ethiopia. Huajian, a shoe company in Dongguan, Guangdong province, has established a plant in the Oriental Industrial Park in Addis Ababa and employs 3,000 local workers there. Similarly, Deer-King, a cashmere company headquartered in Baotou, Inner Mongolia, has also established a subsidiary in Madagascar and earns desirable profits from its overseas business.
Who are the owners of such outward FDI firms? Indeed, most of them are private and small and medium sized enterprises. For example, there are more than 240 deals in Nigeria conducted by small and medium firms. The economic rationale behind this is that private firms face input distortion in China’s domestic markets, as they need to pay more to acquire land to build plants and find it hard to finance working capital from commercial banks. But they don’t find such problems when they invest in foreign countries, as found in our recent research.
It is reasonable to predict that manufacturing FDI from China to Africa will increase, as it fits with the comparative advantages of both Africa and China.
China’s population is aging. We can no longer “infinitely” supply cheap labor. Clear evidence is that China’s unskilled wages have been increasing rapidly since 2004. To overcome this economy-wide challenge and keep reasonable profits, firms in labor-intensive industries need to find other lower labor-cost countries to invest in.
Africa is a perfect investment destination. Half of Africa’s pollution is under 20. And Africa needs to create 20 million jobs a year to employ its expanding workforce. This seems an impossible mission without China’s industry transfer.
But, how can African countries directly benefit from Chinese FDI?
The answer is clear: China’s investment can help Africa realize its industrialization and urbanization.
The continent’s urbanization level is far behind that of other continents. Most of its people still live in rural areas without the amenities of modern industrialization. China’s economic miracle in the past four decades provides a perfect blueprint for the continent.
Finally, China’s rise provides a huge opportunity for Africa to alleviate poverty. Today, China has around 85 million labor-intensive jobs. Even a small proportion of movement by outward FDI will help create many jobs for Africans.
Essentially it is job creation, not foreign aid, that can help African countries alleviate poverty and realize their dreams of their economies taking off.
A famous old Chinese saying goes: “Do not give people fish, but teach people how to fish.” China’s outward FDI is an exact fishing skill for African countries.