The major pillar behind African-Chinese trade
By Isaac Twumasi Quantus in Accra.
Africa has the undeveloped resources China so desperately wants. Depending on which side of the fence you sit on, much has been said about China’s new “colonial” role in Africa or the massive development
opportunity for the continent to dovetail on China’s great economic ambitions.
There are a couple of interesting factors that make up China’s drive to secure mineral resources and energy assets. The first is the sheer scale of the undertaking. China has a massive population and burgeoning economy to support. The other is the role of the state in securing these resources. This is a national prerogative, which is not unique in itself. However, the fundamental difference is that the Chinese government plays a prominent role in meeting these strategic requirements, while most other governments rely largely on the invisible hand to meet a rising supply and demand needs.
At China’s disposal is an army of state operated enterprises (SOEs). Long a backbone of a previous, more socialistically inclined, era, the more effective SOEs have subsequently embraced a world of initial public offerings (IPOs), international acquisitions and foreign contracts.
A recent “secret” meeting at the World Economic Forum in Davos, Switzerland, washeld between the heads of more than a dozen of the world’s largest mining companies. The six-hour think tank highlighted what a growing concern Chinese encroachment in Africa was becoming. The group — ironically given thecolonialesque title of “the governors” — sought to find ways of curtailing China’s immense interest in Africa, which is rapidly displacing their exposure on the continent. What “the governors” are rapidly realising is that competing with government-backed Chinese companies is beyond their capacity.
The World Bank estimates that in 2006, China spent more than $10-billion on infrastructural projects in Africa as part of its capacity for-resources exchange. There is a flip-side to China’s foreign mining exploits. The debate started in earnest when in 2005 China’s Minmetals made an audacious takeover bid to acquire
Canadian miner Noranda — then the world’s ninth-largest copper and third-largest zinc producer. A strong nationalistic Canadian backlash revolved around the argument that Minmetals was a state-owned company and local officials were not comfortable with a foreign SOE acquiring an important industry on home turf. The deal was eventually scuppered and other Chinese SOEs have faced many similar subsequent acquisition challenges. Bear in mind that China has more than a trillion dollars in foreign reserves from spiralingtrade surpluses.
One of the reasons it is reluctant to completely open its currency to market forces is the inevitable appreciation of the Chinese yuan against major currencies such as the United States dollar. Even a “small” 10% depreciation will wipe off $1000-billion from Chinese reserves — enough to finance the estimated
project costs of Gabon’s Belinga Project 169 times over. It has to be tempting for China to reduce currency exposure on its monolithic foreign reserves by investing in foreign resources, killing the proverbial two birds with one stone.
Whatever the future holds for China’s quest to build its resource supplies, the rules of the game will definitely be different from those of the corporate game being played at present.
This article was originally posted on Africa China Business Network
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