China’s investment in Africa

Africa’s population since 2010 has officially surpassed one billion. It is projected to be more than two billion by 2050, and possibly more than four billion by the end of the century, almost as much as in Asia. This demographic growth will likely produce a faster-growing domestic demand which will also be supported by an increased purchasing power thanks to remittances from the diaspora. Indeed, in 2015 alone, African migrants sent home around US$64.6bn. In the face of this challenge, the continent’s leaders understand that the private sector must play a forward-looking role. To facilitate that, African governments are making efforts to create a suitable environment for private sector-led activities and hence, encourage foreign direct investments (FDI).

On the other hand, over the past two decades, China’s robust economic growth and rapidly expanding presence in global markets have greatly intensified its trade ties with sub-Saharan Africa. China’s remarkable 10% average growth rate between 2000 and 2012, has fueled a steadily rising demand for oil, minerals and other primary commodities, many of which are abundant in sub-Saharan Africa. China has now become a major development partner for countries throughout the continent, and its trade, investment, diplomatic, and political relationships with sub-Saharan African countries continue to strengthen.

Foreign direct investments into Africa totaled $66.4bn for a sum of 705 projects in 2015. Egypt was the number one destination for FDI into Africa in 2015, mostly thanks to Eni’s plans to invest between $6bn and $10bn in the Zohr gas field. The top 10 destination countries for FDI into Africa account for 77% and 75% of FDI in the region as a whole, both by number of projects and capital investment respectively.

Business services; sales, marketing & support; and manufacturing were the top three business activities for FDI projects into Africa in 2015. Despite being the fastest-growing business activity by capital investment in 2014, the value of extraction projects dropped 32% in 2015 to $15.1bn. Infrastructure-related business activities such as electricity; construction; and ICT & internet infrastructure made up 13% of all projects into Africa and accounted for 44% of capital invested. Electricity, in particular, saw a 49% increase in capital investment and a 91% increase in project numbers.

Although concentrated in a few countries, services FDI accounted for 48% of Africa’s total stock of FDI, more than twice the share of manufacturing (21%) and significantly more than the primary sector (31%). As in 2014, the coal, oil & natural gas sector ranked top for capital investment in 2015 with $15.7bn invested. However, $12.2bn was invested in alternative/renewable energy. The clean energy sector saw a 23% increase in capital investment, whereas fossil fuel declined by 52%.

Italy was the top investor by capital investment in the region in 2015, with projects valued at $7.4bn, $6bn of which comes from Eni’s investments. Asian countries invested in 11% more African FDI projects in 2015. Key investors were India and China, with China accounting for a 3% market share and 4% of the number of all inward FDI projects. Despite China ranking ninth by capital investment and seventh  by project numbers, it was the second most prolific job creator. In fact, China created 14,127 jobs across the continent in 2015.

Much of China’s outbound direct investment (ODI) in sub-Saharan Africa is closely linked to trade. Official figures from the Chinese Ministry of Commerce (MOFCOM) suggest that ODI to sub-Saharan Africa reached $2.52bn in 2012, and $3.4bn in 2013. In 2012, the total stock of Chinese ODI was $20bn, yet this accounted for just 5% of the total inward foreign direct investment stock in Africa. Meanwhile, the importance of sub-Saharan Africa and Africa as a whole in China’s total ODI stock remains below 5% and has not changed much since 2006. In other words, Africa has benefited from China’s rising ODI outflows, but no more so than other regions.

Indeed, Chinese investments have increased worldwide and mainly in Asia, China’s most important ODI recipient. This global trend is driven by the ambitious ‘One Belt, One Road’ (OBOR) initiative that would connect China, Europe and Africa. The initiative plans heavy investments in transportation infrastructure, mainly through Asia and eastern Europe. China’s ODI to countries along OBOR grew 23.8% year-on-year in 2015, and was up 60% year-on-year in the first half of 2016.

Throughout sub-Saharan Africa, China is investing most heavily in energy and the extractive industries, a pattern similar to its investment strategy in other parts of the world. In West Africa, however, Chinese ODI is unusually concentrated in the transportation sector. From 2005 to 2012, the West African transportation sector received 36% of China’s total ODI flows to the region, substantially higher the 14% average worldwide. Transport equipment is overwhelmingly related to mineral extraction, a sector where Chinese firms are highly concentrated. Transportation was followed by the mining and metallurgy sector with 32% of total regional investment, also well above the 16% average worldwide. Energy attracted the third-largest share of Chinese ODI at 28%, lower than the 46% worldwide average.

China’s economic involvement in Africa has taken many forms, and information about its financial and trade ties to the continent is not always easily comparable to that of other countries. While official development assistance (ODA) is defined by the OECD to include grants, interest-free loans and concessional loans, Chinese ODA includes the use of financing mechanisms that are outside the OECD’s definition, such as export credits, natural-resource-backed credit lines, subsidies for private investment, and so-called “mixed credits”, which are combined concessional and market-rate loans. Therefore, African leaders and governments portray Chinese engagement in the region as positive because of China’s contribution to infrastructure which impacts the economy.

One of the most critical questions facing African policymakers as a whole, and West African policymakers in particular, is how to maximize the benefits of their increasingly tight financial and trade integration with China. The expansion of natural resources sectors and the contraction or stagnation of the agricultural and industrial sectors are worrying signs of the Dutch disease effect.

It is true that Africa has benefited from a higher ODI inflow from China, however, it didn’t get more attention that other regions of the world, and the numbers are there to prove it.

Disclaimer: Chinese official outbound direct foreign investment (ODI) statistics may be distorted by the presence of stop-over destinations such as Hong Kong and offshore centres in the Caribbean.

Sarah Nassiri is an analyst intern at Infomineo.

Infomineo is a business research company, focusing on Africa and the Middle East. The company provides its clients, including the majority of the leading global management consulting firms and several Fortune Global 500 companies, with ad hoc data on countries, markets, companies and people gathered through primary and secondary research. For more information please contact [email protected] or visit