This study aims to objectively assess China’s economic engagement on the African continent, the extent to which African economies are benefiting, prospects for the future, and ways to make this relationship more productive. David Dollar marshals evidence about the scale of trade, investment, infrastructure cooperation, and migration between China and Africa, all of which are relatively recent phenomena. In addition, Dollar addresses the question of whether and how China’s involvement differs from that of Africa’s other economic partners. The concluding chapter provides some tentative recommendations for African countries, China, and the West.

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Executive summary

While China’s deepening engagement with Africa has largely been associated with better economic performance, its involvement is not without controversy. This is particularly true in the West, as typical headlines portray an exploitive relationship: “Into Africa: China’s Wild Rush”; “China in Africa: Investment or Exploitation?”; and “Clinton warns against ‘new colonialism’ in Africa.” This study aims to objectively assess China’s economic engagement on the African continent. The surge in Chinese involvement is relatively recent, so one simple objective is to marshal evidence about the scale of China’s trade, investment, and migration. Beyond that is the question of whether China’s involvement differs from that of Africa’s other economic partners.

China’s economic engagement with Africa is a complex issue with numerous facets. It is usually difficult to find good and comprehensive data on low-income countries, and much of Africa is low-income. This general problem is compounded by a tendency toward non-transparency on the part of the Chinese government and China’s state-owned enterprises (SOEs). In general, China’s engagement with Africa is a win-win scenario for both sides, so it would make sense to be more forthcoming with information. Still, there is enough available information on and research into China’s trade, investment, and migration vis- à-vis Africa to draw some tentative conclusions and to make some recommendations for African countries, China, and the West. Specifically, this study draws six main conclusions.

The first tentative conclusion relates to the scale of China’s activities in Africa. The media often portrays China’s involvement as enormous, potentially overwhelming the continent. To be fair, China does not always help its image in this regard. When Xi Jinping participated in the latest China-Africa summit in South Africa in December 2015, he pledged US$60 billion of support for African development. This is a big, general commitment covering many different areas and potentially disbursing over many years. Almost certainly, some of the plans will never pan out. In terms of realized Chinese investment in Africa, the amounts are significant enough to contribute to African growth but not at the huge scale that some media coverage suggests. According to data from China’s Ministry of Commerce (MOFCOM), the stock of Chinese direct investment in Africa was US$32 billion at the end of 2014. This would represent less than 5% of the total stock of foreign investment on the continent. However, about half of Chinese outward investment is reported as going to Hong Kong, even though much of this transits to other locations. In other words, MOFCOM’s figures for Chinese investment in different countries may be lower than in reality. But even if one doubled the estimate of Chinese outward direct investment (ODI) in Africa, China’s share of overall ODI would still be modest.

Stocks naturally change slowly. But the World Investment Report 2015 similarly finds that China’s share of inward direct investment flows to Africa during 2013 and 2014 was only 4.4% of the total. Of course, direct investment is not the only form of foreign financing. The Export-Import Bank of China and China Development Bank have also made large loans in Africa, mostly to fund infrastructure projects. In recent years, Africa has received about US$30 billion annually from outside sources for infrastructure projects, and China has provided about one-sixth of that financing. In short, Chinese financing is substantial enough to contribute meaningfully to African investment and growth, but the notion that China has provided an overwhelming amount of finance and is buying up the whole continent is inaccurate.

The second main finding from the study concerns China’s direct investment and governance. China has drawn attention by making large resource-related investments in countries with poor governance indicators, such as DR Congo, Angola, and Sudan. These deals are certainly part of the picture when it comes to China’s engagement with Africa; MOFCOM data show large stocks of Chinese investment in those countries. But the more general relationship between Chinese direct investment and recipients’ governance environments is different. After controlling for market size and natural resource wealth, total foreign direct investment is highly correlated with measures of property rights and rule of law, as one might expect. This is true both globally and within the African continent. China’s ODI, on the other hand, is uncorrelated with measures of property rights and the rule of law after controlling for market size and natural resource wealth. In this sense, Chinese investment is indifferent to the governance environment in a particular country. Again, this is true both globally and across the African continent. While China has investments in DR Congo, Angola, and Sudan, those are balanced by investments in African countries that have relatively good governance environments. South Africa, for instance, is the foremost recipient of Chinese investment. But because Western investment tends to avoid the worst governance environments, Chinese investment is relatively high in those locations.

A third main finding emerges from examining MOFCOM’s database on Chinese firms investing in Africa. In the aggregate data on Chinese investment in different countries, the big state enterprise deals naturally play an outsized role. MOFCOM’s database on Chinese firms investing in Africa, on the other hand, provides a snapshot of what small and medium-sized Chinese firms – most of which are private – are doing in Africa. Unlike the big SOE investments, these firms are not focused on natural resource extraction. The largest area for investment is service sectors, with significant investment in manufacturing as well. Many African economies are interested in attracting Chinese investment in manufacturing and services and welcome this development.

The fourth finding relates to infrastructure finance. Africa has well-known infrastructure deficiencies, but in recent years infrastructure financing has expanded and helped many African countries begin to rectify these deficiencies. Much of the funding for this will have to come from domestic sources, but foreign financing can play a useful, complementary role. As noted above, in the past few years Africa has received about US$30 billion annually in external finance for infrastructure. China is providing about one-sixth of this amount. Chinese financing is a useful complement to other sources, particularly as traditional finance from multilateral development banks and bilateral donors is concentrated on water supply and sanitation. Likewise, private participation in infrastructure is primarily aimed at telecommunications. China has filled a niche by focusing on transportation and power.

Chinese financing of infrastructure has also enabled Chinese construction companies to gain a firm foothold on the continent. Evidence suggests that Chinese companies have become highly competitive, crowding out African construction companies. This is an area where a tradeoff seems to exist between, on the one hand, getting projects completed quickly and cheaply and, on the other, facilitating the long-term development of a local construction industry.

This point leads to the fifth finding of the study. There are many Chinese workers in Africa; the total is disproportionately high when compared to the amount of financing that China has provided and compared to migrants from other continents. This is a tentative conclusion because the data on this issue are particular weak. But estimates of Chinese migrants in Africa exceed one million. Many migrants initially move to Africa as workers on Chinese projects in infrastructure and mining and then, perceiving good economic opportunities, stay on. Similar to the dilemma confronting the continent’s construction industry, African countries face a tradeoff here: Chinese workers bring skills and entrepreneurship, but their large numbers limit African workers’ opportunities for jobs and training. The popular notion that Chinese companies only employ Chinese workers is not accurate, but the overall number of Chinese workers in Africa is large, and it is not clear that all of these workers are on the continent legally.

A final important finding of the study is that the foundation for the Africa-China economic relationship is shifting. China’s involvement in Africa stretches back decades, but the economic relationship accelerated after 2000, when China’s growth model became especially resource-intensive while its domestic supplies of energy and minerals were dwindling. In the early 2000s, China was poor in natural resources but boasted a rapidly growing labor force that gave the country comparative advantage in manufactures. By contrast, Africa was relatively resource-rich, with a labor force significantly smaller than China’s. It was logical for China to import natural resources from Africa, and demand from China drove up prices and trade volumes. It was also natural for China to export manufactures to Africa.

These patterns of trade and investment are now likely to gradually shift in response to changing demographics. The working-age population in China has peaked and will shrink over the coming decades. This has contributed to a tightening of the labor market and an increase in wages, which benefits Chinese people. Household income and consumption are also rising. At the same time, China’s old growth model, which focuses on exports and investment, is running out of steam. China is already the largest exporter in the world, and it is unrealistic to expect its exports to grow faster than world trade, so exports have become a lagging sector for China. And after years of high investment, China now faces excess capacity in real estate, manufacturing, and infrastructure. Chinese growth has entered a phase in which consumption is growing faster than investment, and the expansion of consumption primarily benefits services, not industry. Compared to past trends, China’s changing pattern of growth is less resource-intensive, so China’s needs for energy and minerals are relatively muted. At the same time, China is likely to be a steady supplier of foreign investment to other countries, and part of that will involve moving manufacturing value chains to lower-wage locations.