Blog Post

China’s investment in Africa: What the data really says, and the implications for Europe

China has clearly signalled to Europe that it does not shy away from involvement in Africa, historically Europe’s area of influence. But the nature of China’s direct investment flows to the continent will have to change if they are to prove sustainable.

By: and Date: July 22, 2019 Topic: Global Economics & Governance

Chinese president Xi Jinping visited Senegal in July last year, seeking further cooperation with the previous French colonial territory. Amid a heated debate over China’s increasingly dominant role in the world, this visit – before the 2018 Forum on China-Africa Cooperation (FOCAC) in Beijing –clearly sent a signal to Europe that China does not shy away from entering what is historically Europe’s area of influence, namely Africa. From China, such move is not surprising, as China-Africa relationships flourished at least half a century ago under the mantra of South-South cooperation.

Even if the history of China-Africa relations is longstanding, they have been mainly political and not necessarily economic. In the last eight years or so, though, China’s economic ties with Africa have ballooned. First of all, China has become the most important trading partner for many African countries. The rather unbalanced nature of Africa’s trade flows with China is well documented in the literature, but this is much less the case for the other major aspect in China-Africa economic relations, namely investment.

Investment is, indeed, at the heart of Africa’s needs. It is the continent with the fastest growing population but receives less foreign direct investment (FDI) than any other emerging region, except for Central-Asian transition economies. In other words, if we were to calculate inward FDI per capita, Africa would indeed be the region of the world with the least inflows and, given their population trends and the current level of development, clearly with the largest needs (Chart 1). This itself justifies a keen interest in better understanding China’s role in Africa’s inward FDI.

The global financial crisis marked the beginning of a race for China to invest in Africa by 2017 (Chart 2).  While many of the analysts focus on China’s landmark M&A deals in Africa, especially in the energy and metals spaces, the reality is that China’s project finance in African countries is nearly ten times as large (Chart 3). In other words, actual investment by China in Africa is much smaller than debt-generating flows and, in particular project finance. There are obviously many other types of debt-generating flows from China into Africa but this is not the purpose of this blog post, which focuses on investment.

That said, China’s investment in Africa is still at the early stages compared with that of key European countries that have a colonial past in Africa, especially France and the UK. Chart 4 shows that the FDI stocks sourced respectively from the UK and France into Africa are each still larger than the stock sourced from China. The Netherlands also rose to second-top by 2017, which may be explained by the rerouting of investment flows from other countries, but is still consistent with the facts that Europe is a key investor in Africa.

Thus, it is fair to say that China is catching up in accumulating outward FDI into Africa to a level which is commensurate with its economic size and long-term political ties with the African region. This is exactly what we find when focusing on the flow of FDI over the past few years (Table 1), a period where China stands out as a prominent acquirer of assets (M&A) while EU and US FDI has been more volatile, with some large divestment from 2016 to 2018.

In fact, China is the only one of the three blocs that has seen continuous net positive flow into Africa in each of the past three years. In any event, M&A continues to be a relatively small part of Africa’s inward FDI, with greenfield investment dominating the scene. This is true for China but also for the EU; slightly less so for the US. When both greenfield and M&A are accounted for, the EU continues to be the largest investor in Africa, not only in terms of stock but even in terms of flow.[1]

Another important aspect of China’s investment in Africa is its particular sectoral composition. While greenfield investment does include manufacturing, especially textile, it still remains quite concentrated in transport infrastructure and resources (Chart 5). This is even more true for M&A and project finance, where 60% of the total is in energy and 30% in infrastructure (Chart 6). In the same vein, China’s project finance in Africa is also focused on energy and transportation (Chart 7).

As such, with the exception of a relatively small part of greenfield investment in manufacturing, the bulk of China’s investment or lending (in the case of project finance) is directed towards China’s strategic objectives, namely securing access to resources and using China’s excess capacity in construction and transportation.

On this basis, it is not surprising that that the job creation of Chinese FDI into Africa through greenfield investment (due to data availability) is lower on average (only 1.78 people for every $1m investment) than that of China’s greenfield investment into other regions of the world (2.24 people for every $1m investment).[2]

This, in itself, could be one of the key problems that China may be facing when continuing to invest in Africa in the future. Africa is the fastest-growing region population-wise, but China’s FDI into Africa is creating fewer jobs per unit of investment, on average. For such inward FDI to be welcome, and thus sustainable, its nature will need to change so as to create more jobs.  In other words, for China to be successful in its investment strategy in Africa, it will need to move from focusing its investment in natural resources and infrastructure to manufacturing, which is more labour-intensive.

All in all, when looking at China’s increasingly relevant investment in Africa, some conclusions can be drawn for Europe. First, China’s stock of FDI into Africa remains limited compared to that of European countries, especially the UK and France. Furthermore, while it is true that China has increased its M&A activity in the past few years, the value of China’s acquisitions in Africa is not so large. Besides this, the EU continues to be a larger greenfield investor.

China, however, clearly stands out as a lender, particularly in project finance. Moreover, when we look at the sectoral composition of China’s investment and lending in Africa, there is a clear preference for strategic sectors, especially energy and infrastructure, and not only for M&A but also for greenfield investment. Such preference may be behind the relatively lower job creation of China’s greenfield investment in Africa, compared to China’s investment elsewhere.

These trends are surely important to watch for European companies aiming at competing in the African market. It seems clear that, without job creation, foreign direct investment into Africa might not be sustainable down the road given the continent’s population dynamics.

Endnotes

[1] This is particularly true if we consider that China’s large greenfield investment in 2016 was due to a problematic transaction that does not took place, namely the Egyptian government project which aimed to construct a new administrative capital by China Fortune Land Development (CFLD).

[2] The estimation is calculated by fDimarket.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

Reading tea leaves from China’s two sessions: Large monetary and fiscal stimulus and still no growth guarantee

The announcement of a large stimulus without a growth target indicates that China’s recovery is far from complete.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: May 25, 2020
Read article More by this author
 

Podcast

Podcast

China’s financial system: opening up and system risk

China is opening up its financial sector- What does that mean for China and the world?

By: The Sound of Economics Topic: Finance & Financial Regulation, Global Economics & Governance Date: May 22, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: China’s financial system: opening up and system risk

China is opening up its financial sector? What does that mean for China and the world?

Speakers: Alicia García-Herrero, Gary Liu and Giuseppe Porcaro Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2020
Read about event
 

Past Event

Past Event

What help is needed for the EU neighbourhood to come through the COVID-19 crisis?

At this event European Commissioner Várhelyi and EBRD President Sir Suma Chakrabarti will discuss what Europe is doing to help it's neighbourhood respond to the COVID-19 crisis.

Speakers: Sir Suma Chakrabarti, Maria Demertzis and Olivér Várhelyi Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 12, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: China’s economy after COVID-19

This episode of The Sound of Economics Live will explore the short and medium term prospects for the Chinese economy after COVID-19

Speakers: Alicia García-Herrero, Yiping Huang and Giuseppe Porcaro Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 6, 2020
Read article More on this topic More by this author
 

Opinion

Depression, and not stagflation, could haunt China in 2020

This opinion piece was originally published in Asia Times and Medium China’s GDP in the first quarter of the year has surprised nobody but the devil is in the details. Local retail sales continued to fall in March (-16%), marginally better than during the peak of the Covid19 outbreak in January and February. The continuation […]

By: Alicia García-Herrero Topic: Global Economics & Governance Date: April 17, 2020
Read article More on this topic
 

Opinion

Disease, like poverty, does not stay at home

To fight the Covid-19 pandemic, best practice responses in Africa need to be implemented around international collaboration. These include the need to activate emergency operations centres, to establish a surge capacity in health systems, and to mitigate the economic and social consequences of the pandemic.

By: Yonas Adeto, Karim El Aynaoui, Thomas Gomart, Paolo Magri, Greg Mills, Karin von Hippel and Guntram B. Wolff Topic: Global Economics & Governance Date: April 8, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Mythbusters: debunking economic myths

Economics seems to be full of myths that are hard to debunk. Will robots take our jobs? Are trade deficits bad? Is China such a big economy simply because of the size of its population? This week, Nicholas Barrett, Maria Demertzis, Marta Domínguez-Jímenez and Niclas Poitiers put on the detective cap and become Bruegel's own economic mythbusters.

By: The Sound of Economics Topic: Global Economics & Governance Date: April 3, 2020
Read article Download PDF
 

External Publication

Analysis of developments in EU capital flows in the global context

This report presents an overview of the recent trends of capital flows, focused especially on the past year. It provides a detailed analysis at the global level and at the European Union level.

By: Grégory Claeys, Maria Demertzis, Marta Domínguez-Jiménez, Konstantinos Efstathiou and Tanja Linta Topic: European Macroeconomics & Governance Date: March 16, 2020
Read article More on this topic More by this author
 

Opinion

Uncoordinated policies behind market collapse

Underlying issues, and not just the coronavirus panic, fed the recent meltdown

By: Alicia García-Herrero Topic: Global Economics & Governance Date: March 10, 2020
Read article More on this topic
 

Blog Post

Gerard Masllorens headshot

The cost of coronavirus in terms of interrupted global value chains

The coronavirus is slowly morphing itself into an important shock. While the extent and cost of this pandemic are unknown, we do know that global supply chains that link Europe to China will be seriously disturbed. We take a look at the numbers based on input-output models. The industry that will be the most affected is Computers and Electronics, followed by textiles.

By: Maria Demertzis and Gerard Masllorens Topic: Global Economics & Governance Date: March 9, 2020
Read article More on this topic
 

Blog Post

What can the EU learn from the China-Switzerland free trade agreement?

The US-China trade war has placed EU trade relations with China under the microscope. Should the EU challenge China’s trade practices and employ trade defence measures? Or should they be diplomatic and embark on negotiations, perhaps paving the way to a Free Trade Agreement? Close examination of the 2013 agreement between China and Switzerland suggests much will have to change for trade negotiations between China and the EU to succeed.

By: Uri Dadush and Marta Domínguez-Jiménez Topic: Global Economics & Governance Date: March 3, 2020
Load more posts