China in Africa - staying in or getting out?

The New York Times reports that, thanks to the global economic crisis, China is becoming more hesitant with its investments in Africa. With falling commodity prices and unstable political environments in some countries, the Chinese are apparently driving a hard bargain. But the government still wants to take a long view.

The Times's report focuses on Guinea, the West African nation awash with mineral deposits, especially bauxite and iron ore. In the current climate, China (according to its Ambassador to Guinea) finds the political situation 'not stable' and the international markets 'not favourable' for billions of dollars of investments in Guinean infrastructure in return for access to its minerals. Instead, China is building a 50,000-seat stadium in Conakry, the capital.

Similarly, a $9 billion deal struck in 2007 with the Democratic Republic of Congo (copper, cobalt, tin and gold in return for roads, railways, dams and schools) is stuck. Chinese investments are in the form of minerals-backed loans , so falling commodity prices means higher debt burden for African countries and lower potential investments by Chinese companies. Unlike until a year ago, when China was pouring billions of dollars into Africa, it is now making clear that large infrastructure projects are 'not gifts, but investments'.

But the story is more mixed than it seems. Ngaire Woods, professor of international political economy at Oxford, reports in a recent BBC documentary that even as Chinese companies are exiting Africa, the Chinese government is staying put. China's banking system is 'awash with liquidity' and the government has a strategy for using nearly $2 trillion in foreign exchange reserves. One such strategy is to buy mineral assets at low prices. In the same programme, Deborah Brautigam, who researches Chinese investments in Africa, argues that China has past experience in buying mines (like a copper one in Zambia in 1995) at 'bargain basement prices'. It is now looking for similar opportunities. Brautigam quotes the President of the Chinese Ex-Im Bank: 'We have a very long-term view...we're in Africa for the long-term...we have increased our reserves at the Ex-Im Bank.'

Postscript: Meanwhile, other continents might not be as welcoming. Chinalco (the state-owned aluminium company) wants to invest $19.5 billion in Rio Tinto, an Anglo-Australian mining giant. Although Australia's competition commission approved the deal yesterday, there is a stir among some Australian MPs that Chinese investments in Rio Tinto (and other mining companies) would be against Australia's national interest. (They draw inspiration from China's own rejection of Coca-Cola's bid for Huiyuan Juice.) Australia's Foreign Investment Review Board is now putting the deal through 'national interest' compliance tests. Tit-for-tat protectionism is on the rise.