5 July, 2017
China’s involvement in Africa through investment, infrastructure and financing is bigger than previous studies have suggested, according to a new report.
According the report by global consulting firm McKinsey, China’s financial flows to Africa “are around 15% larger than official figures suggest when non-traditional flows are included”.
McKinsey’s report – ‘Dance of the lions and dragons: How are Africa and China engaging, and how will the partnership evolve?’ – said China is also “a large and fast-growing source of aid and the largest source of construction financing”. According to the report, “these contributions have supported many of Africa’s most ambitious infrastructure developments in recent years”.
“We evaluated Africa’s economic partnerships with the rest of the world across five dimensions: trade, investment stock, investment growth, infrastructure financing, and aid,” the report said. “China is in the top four partners for Africa in all these dimensions. No other country matches this depth and breadth of engagement.”
The report said: “Chinese construction contractors command around 50 percent of Africa’s international engineering, procurement, and construction market. African government officials overseeing infrastructure development for their countries cited Chinese firms’ efficient cost structures and speedy delivery as major value-adds.”
According to the report, with “continued and likely growing Chinese involvement, it will become ever more urgent to address the gaps” in partnerships – including a “greater role for African managers and partners in the growth of Chinese-owned businesses”.
McKinsey said its researchers conducted face-to-face interviews and surveys of 1,073 Chinese firms across eight countries – Angola, Cote d’Ivoire, Ethiopia, Kenya, Nigeria, South Africa, Tanzania, and Zambia – that make up approximately two-thirds of sub-Saharan Africa’s gross domestic product and around 50 percent of Chinese foreign direct investment (FDI) to Africa. McKinsey said the survey covered “the companies’ primary business activities, funding sources, motivations for investing in Africa, key challenges, and future expansion plans”.
“Since the turn of the 21st century, China has catapulted from being a relatively small investor in the continent to becoming Africa’s biggest economic partner,” the report said. “Africa-China trade increased from $13 billion in 2001 to $188bn in 2015 – an average annual growth rate of 21 percent.”
The report said: “FDI has grown even faster, from $1bn in 2004 to $35bn in 2015, according to official figures. This represents a breakneck average annual growth rate of 40 percent.”
In terms of potential future Chinese investment in Africa, the report cites two potential scenarios. In the first, revenues of Chinese firms in Africa “grow at a healthy clip to reach around $250bn in 2025, from $180bn today”. The report said this scenario “would simply entail ‘business as usual’, with Chinese firms growing in line with the market, holding their current market shares steady as African economies expand”. Under this scenario, “the same three industries that dominate Chinese business in Africa today – manufacturing, resources, and infrastructure – would dominate in 2025 as well”.
But McKinsey said it believes “much more is possible”. In a second scenario, Chinese firms in Africa “could dramatically accelerate their growth”, the report said. “By expanding aggressively in both existing and new sectors, these firms could reach revenues of $440bn in 2025. In this accelerated growth scenario, not only do the three established industries of Chinese investment grow faster than the economy, but Chinese firms also make significant forays into five new sectors: agriculture, banking and insurance, housing, information communications technology and telecommunications, and transport and logistics.”
According to the report, such an expansion could start with Chinese firms moving into sectors related to the ones they currently dominate, such as “from construction into real estate and housing”. Another part of this accelerated growth “could come from Chinese firms more fully adapting their formulas that have proved successful in China to markets in Africa, including business models in consumer technology, agriculture, and digital finance.”
However, the report warned that both Chinese and African actors will need to address the “three major pain points” of corruption in some countries, concerns about personal safety,and language and cultural barriers.
McKinsey said in five of the eight countries it conducted fieldwork for its report, “60 to 87 percent of Chinese firms said they paid a ‘tip’ or bribe to obtain a licence”. “After corruption, the second-largest concern among Chinese firms is personal safety. For their part, our African interviewees described language and cultural barriers that lead to misunderstanding and ignorance of local regulations. If these problems are left unaddressed, the misunderstandings and potentially serious long-term social issues could weaken the overall sustainability of the Africa-China relationship.”
The Forum on China-Africa Cooperation said last year that China planned to double a special development fund for Africa to $10bn and expand financial support for small firms on the continent. The China Africa Development Fund hit its initial target of pooling $5bn for equity investments in Africa towards the end of 2015.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
