CHINA’s well-choreographed economic machine has been dancing out of step recently, and it seems that every other bit of information coming out of the country suggests that the world’s second-largest economy is in a mess, and much of its vaunted growth over the past decade has been partly due to government’s expert massages – like many suspected.
New research now suggests that China’s investment in Africa, far from being so dominant that it was practically annexing the continent, has been overstated.
The study by the Brookings Institution shows that the notions that Chinese investment in Africa is massive, aimed primarily at natural resources, or concentrated in countries with poor governance records, are largely myths not backed up by data.
What is true is that China has emerged as Africa’s largest trading partner, and there is a growing volume of Chinese FDI in the continent, some of it taking the form of high-profile natural resource deals in countries with poor governance track records like Angola and Sudan.
But the Brookings research shows that this is not by any means the only, or even the dominant, form of Chinese investment in Africa.
First, on the scale of China’s direct investment in Africa, Chinese statistics on what they call “overseas direct investment” (ODI) show a stock of $26 billion in Africa as of the end of 2013.
This figure would amount to about just 3% of total foreign direct investment (FDI) on the continent. UNCTAD’s World Investment Report 2015 similarly finds that the flow of Chinese FDI to Africa during 2013-2014 was 4.4% of the total to the continent.
The European Union countries, led by France and the UK, are overwhelmingly the largest investors in Africa, the study shows. The US is also significant, and even South Africa invests more on the continent than China does.
“Clearly, China’s FDI does not meet the extreme heights many believe,” the researchers say.
Second, the paper wanted to find out if it was true that Chinese investment was concentrated in natural resources.
The researchers found that other things equal, African countries that are more resource rich attract more Chinese investment. However, this effect is about the same for Western investment, and it is only one factor determining investment.
For example, Chinese ODI is also influenced by the size of the domestic market, indicating that some of it is aimed at serving that market, and not just extracting natural resources and shipping them to China.
Crucially, the researchers went beyond aggregate data and looked at firm-level data compiled by China’s Ministry of Commerce (MOFCOM); all Chinese enterprises making direct investments abroad have to register with MOFCOM.
The resulting database provides the investing company’s location in China and line of business. It also includes the country to which the investment is flowing, and a description in Chinese of the investment project. However, it does not include the amount of investment.
The data shows that between 1998 and 2012, about 2,000 Chinese firms were operating in 49 African countries.
In terms of sectors, these investments are not concentrated in natural resources. Services are the most common sector; and there are significant investments in manufacturing as well.
In terms of countries, Chinese investment is everywhere—in resource-rich countries like Nigeria and South Africa, but also in non-resource-rich countries like Ethiopia, Kenya, and Uganda.
The paper also found that Chinese ODI is more concentrated in capital-intensive sectors in the more capital-scarce countries, suggesting its importance as a source of external financing to the continent.
Finally, we examine the relationship between ODI and two governance indicators: a measure of property rights and the rule of law, and an index of political stability. Total FDI, other things equal, is concentrated in countries with better rule of law. Chinese ODI is indifferent to the rule of law measure, but on the other hand is positively correlated with political stability.
This finding means that Chinese investment is not concentrated in poor rule of law countries. Indeed, the biggest recipient on the continent is South Africa. But it does mean that China’s investment is more visible in the poor rule of law countries because China has invested in those locations whereas Western investment generally stayed away from them.
Countries in which China’s share of investment is large include Angola, Burundi, the Central African Republic, the Democratic Republic of the Congo, Eritrea, Guinea, and Zimbabwe.
The researchers say their paper provides a more nuanced and accurate picture of China’s direct investment in Africa.
Ultimately, with China in a tailspin, the country is likely to pull back on investment into the region.
This will hit certain African countries hard, particularly the ones above – the Angola’s, Congo’s and Zimbabwe’s – which, on the one hand, could make their regimes even more repressive, in a bid to stave off discontent and consolidate their rule.
But the squeeze could also be the spark that leads to reform and change in some long-suffering countries.