Search This Blog

Thursday, 8 May 2014

China’s Energy & Raw Materials “Going Out” Strategy, the African Perspective

The Chinese Premier Li Keqiang is on a four country African tour this week, which will culminate in his addressing the 2014 World Economic Forum on Africa in Abuja, Nigeria today. He will also meet several African leaders on the fringes of the WEF for Africa. On this tour China is said to have signed agreements totaling US$12 billion in loans and aid to African countries. Here is the context the massive Chinese investment in Africa.

Approximately, Thirsty years ago, with a population of more than 1.1Billion people and a GDP growth rate of 9% annually, China was short of raw material – food, iron ore, aluminium, copper, coal, natural gas and oil. Its export led growth strategy, plus the growth needed for domestic consumption, had fueled massive demand for all sorts of raw material.

The construction of national infrastructure necessitated extraordinary amounts of iron ore, alumina, copper and metallurgical coal. China was also committed to the auto mobile industry setting a target of producing 20 million cars annually, requiring a lot of petroleum despite its limited domestic reserves. In May 2010, China was consuming 9.2 million barrels of petroleum per day, yet it produced only 3.9 million locally and the difference was being imported, The International Energy Association (IEA) projected that by 2030, China would be importing more than 12 million barrels a day, or three fourths of the oil it would require. To a lesser extent the same was true for natural gas, which would be used for gas turbines as a replacement for China’s abundant but more polluting coal.

Sometime after the Asian crisis of 1997-8, about a decade earlier , the Chinese government adopted a “Going Out” strategy. The 3 national oil companies – CNPC, Sinopec and CNOOC began ramping up their upstream investments activities overseas, displacing western firms in places such as Angola and investing in places like Sudan where western companies could not go. In the 15 months prior to to April 2010 alone, these companies spent US$29 billion to acquire oil and gas assets outside of China. CNPC and Sinopec were involved with 8 countries in 11 loan for oil deals worth US$77 billion. Further, these companies entered contracts to invest at least US$18 billion in future exploration and development in Iran, Iraq, Venezuela and Angola. 

The “Going Out” strategy was driven by a sense of geopolitical insecurity. The Chinese government realized it would be a huge net importer of fuels and other minerals for the indefinite future, and it worried about access to those minerals and fuels, not only in a competitive squeeze (where prices went up sharply and supplies were constrained), but also in a security situation.

This resource acquisition strategy seemed to fit well with Chinese foreign policy. For the past several years according to Thomas Lum, “China had bolstered its diplomatic presence and garnered international goodwill through financing infrastructure and natural resources development projects, assistance in the carrying out of such projects, and large investments in many developing countries”. This policy was “driven primarily by Beijing’s desire to secure and transport natural resources…. And secondarily for diplomatic reasons.”

As a result of these investments, China became a top trading partner to Africa and South east Asia, and by late 2010 was only second to the USA as a market for Latin American commodities. Some studies have shown that China’s aid amount was US$25 billion in 2007 and has been growing ever since.

In Africa, for example, nearly 70% of china’s infrastructure financing was concentrated in Angola, Nigeria, Ethiopia and Sudan – 3 of which have significant oil fields. Additionally, China pledged US$16 billion in aid, loans and investment to Latin America, with another US$8.2 billion for Brazil.

Therefore, we see the Chinese “”Going Out” strategy as a means of ensuring a constant supply of natural resource raw materials to power its economy in a bid to secure its way of life and long term survival. Africa has been a beneficiary of this trend that seems not to be abating by growing its trade with China, despite a few issues along the way in terms of higher value end products exports, capital and manpower being skewed towards China. There is also a growing fiscal & monetary indebtness towards China.