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Finance & Development
A quarterly magazine of the IMF
June 2007, Volume 44, Number 2

Getting Together
Ulrich Jacoby

The new partnership between China and Africa for aid and trade

China is itself a developing country, but it is also fast becoming a major player in the development of sub-Saharan Africa (SSA). Its brisk growth and resulting hunger for oil and other commodities has propelled trade with resource-rich Africa, and Chinese companies are investing across the continent. Moreover, at a time when Africa is still waiting for the scaling up of aid promised by major industrial countries at the 2005 Gleneagles economic summit, China has already sharply stepped up its aid to SSA and recently pledged to do even more—
remarkable from a country that is still among the top 10 recipients of official development assistance.

Huge rise in trade and investment

On the trade front, in 2005, SSA exports to China shot up to $19 billion, or 15 percent of the region's total exports, from some $5 billion in 2000 and negligible levels in 1990. This 30 percent annual growth since 2000 accounts for about one-fifth of SSA's total export growth during that period. The emergence of China as an important trade partner for SSA is most pronounced for fuels and raw materials. In 2005, China received one-fourth of SSA's raw materials exports and one-sixth of fuels in 2005; conversely, one-fifth of China's fuel imports came from SSA. Overall, China is now SSA's single largest Asian trading partner and its fastest-growing trading destination (see chart).

Export boom

SSA imports from China—most of which are manufactured products—also surged, from $3.5 billion in 2000 to over $13 billion in 2005, again almost 15 percent of total SSA imports.

On the investment front, Chinese state-owned companies often enter into joint ventures with SSA state-owned companies to secure sources of commodities. In Angola, the Chinese company SINOPEC is investing $3.5 billion in a partnership with Sonangol to pump oil from recently auctioned offshore blocks and plans to build a $3?billion refinery. In Gabon, the CMEC/Sinosteel consortium, financed by the Chinese Export-Import Bank, is investing about $3?billion in exploiting iron ore deposits; the plan is to construct a railway, a port, and a hydroelectric power station in return for exclusive rights to develop the mine. And in Equatorial Guinea, a subsidiary of the China National Offshore Oil Corporation (CNOOC) recently signed a production-sharing contract with the National Oil Company of Equatorial Guinea (GEPetrol).

Stepped-up Chinese aid

China has substantially stepped up its aid, which it provides in the forms of technical assistance, with an emphasis on training in Chinese institutions; grants; interest-free loans; preferential loans that have an interest subsidy; and debt relief. But China is not a member of the Development Assistance Committee of the Organization for Economic Cooperation and Development (OECD), which reports on members' international aid, and China does not provide details about the level and terms of its own aid to other countries—so data and information in that regard are sketchy.

China's financial assistance to Africa is substantial: as of 2006, existing loans and credit lines are estimated to total about $19?billion. The beneficiaries of the largest flows are Angola, Equatorial Guinea, Gabon, Republic of Congo, and Nigeria—with Angola and Equatorial Guinea alone having credit lines totaling about $14 billion. The proportion of grants is small, but China recently cancelled an estimated $260?million in debt for the Democratic Republic of the Congo, Ethiopia, Mali, Senegal, Togo, Rwanda, Guinea, and Uganda.

The assistance is largely for energy, telecommunications, and transportation projects. Aid is mostly provided in kind, usually by Chinese companies, and tends to be on a turnkey basis, mostly with Chinese inputs, including labor. Projects are concentrated in economic and social infrastructure such as roads and hospitals; the productive sector, notably agriculture; and other construction projects, such as government buildings and sports stadiums. They are often accompanied by deals to develop mining and energy resources.

China prides itself on not attaching political conditions to its aid (other than support for the "one China" policy), and emphasizes that partners are on an equal footing by stressing South-South cooperation. The concessionality of loans varies widely. Some large loans and credit lines have not been fully concessional, although they are on more favorable terms than the market. However, a recent $2?billion credit line to Equatorial Guinea and numerous smaller loans to SSA countries are concessional. The degree of concessionality of a project also depends on other aspects, such as the requirement that only Chinese companies using Chinese products bid for the projects (70?percent of Chinese credit lines in Angola have been used this way). Also, repayment of loans has sometimes been tied (as in Angola) to the supply of oil. As for debt relief, China has its own initiative, the terms of which are not necessarily consistent with those of the multilateral enhanced Heavily Indebted Poor Countries Initiative.

Big increases planned

China plans substantially more aid to Africa. At the Beijing Summit of the Forum on China-Africa cooperation in November 2006, President Hu Jintao announced that China would double its 2006 assistance to Africa by 2009. He also said China would provide $5 billion in preferential credits (of which $2 billion would be buyers' credit), establish a $5 billion development fund to encourage and support investment by Chinese companies in Africa, and cancel all interest-free government loans due at end-2005 owed by the poorest and least developed countries in Africa with diplomatic relations with China. China would also boost trade access for these countries by raising the number of their export items that receive zero-tariff treatment from 190 to over 440; establish three to five trade and economic cooperation zones in Africa; provide assistance in the social and health sectors; and build a conference center for the African Union. During the summit, commercial contracts worth $1.9 billion were concluded in various sectors, and the intention to more than double bilateral trade to $100 billion by 2010 was announced.

Policy implications for SSA

Faced with this largesse, how should African countries react? Certainly the continent needs additional resources to make more progress toward the Millennium Development Goals—on which Africa lags behind—and boost living standards. Rising trade and direct investment could create employment opportunities and facilitate the transfer of technology. But in order to make the most of the opportunities provided by China, African countries should also strengthen their own policies relating to both trade and aid use.

Trade. SSA countries should proceed with trade liberalization by encouraging intraregional trade and division of labor. This would help keep costs low and competitiveness high and make the most of access to shipping. Improved regional infrastructure and more effective border and customs procedures would also help. Moving up the value chain based on traditional SSA exports, in particular in agriculture and raw materials, would increase export values and help these countries better exploit preferential access to the European Union and the United States. In doing so, SSA countries would benefit from cooperation with Chinese partners in overcoming market entry hurdles such as technical and quality standards, given their successful experience in entering Western markets. The scope for seeking out partnerships with Chinese firms is significant. However, SSA countries will need to ensure a level playing field for all foreign investors in order to maximize investment from abroad.

Aid. Aid flows from China should be laid out transparently to other donors and development partners, including those that are locally present. This will help not only the harmonization of activities but also the integration with economic policies to underpin macroeconomic stability.

To preserve fiscal and external sustainability, the volume and terms of loans should be compatible with the low-income country debt sustainability framework of the IMF and the World Bank. Assistance should also be aligned with national priorities of the recipient countries, as formulated in their poverty reduction strategies.

Finally, the provision of turnkey projects using mainly Chinese labor has its pros and cons. It offers particular benefits in countries with short-term limitations to their implementation and absorption capacity and appears to ensure timely delivery of a capital stock that expands the supply response of the domestic economy. However, it likely scores lower in terms of creating local employment, enabling effective technology transfer, and ensuring the sustainability of projects.

In the medium term, to maximize benefits from Chinese projects, SSA countries should strive to provide more local skilled labor, thus raising employment, and move toward forms of cooperation such as joint ventures that better promote technology transfer and sustainability.

Ulrich Jacoby is a Senior Economist in the IMF's African Department.