Has anybody heard of Africa's new special economic zones? China is going about carving out designated special economic zones (SEZ) across the continent that are set to become Africa's new economic growth nodes. China's commercial strategy toward Africa also involves linking these SEZ's by building infrastructure corridors across the respective regions. Almost unprecedented in scale since the colonial period, Africa is set to receive a trans-national infrastructure network. Decisions made in Beijing and implemented by its state-owned firms in Africa will determine the growth trajectory of large parts of sub-Saharan Africa. It's incredulous that the most significant infrastructure projects on the continent are almost unknown. The reason is that they are being planned in Beijing.
Welcoming the Chinese
African governments have been welcoming of Chinese investment with energy-endowed economies having been the recipients of the largest inflows. The nature of their economies - commodity rich, pervasive state intervention in the economy, weak commercial law, and shaky public sector institutions - all lend themselves to rapid market entry. Chinese firms have rapidly been able to gain market traction in these economies. Chinese firms are trailblazing across the continent acquiring mineral assets. There are now over 800 Chinese state-owned enterprises (SOEs) present in Africa mostly in the extractive industries -representatives of China's foreign commercial policy toward the continent.
Considering all the merger and acquisition activity amongst China's leading state-owned firms, this number may have peaked. The same firms that are active on the continent will remain but will begin to better integrate their businesses with their previous Chinese counterpart competitors; this is most evident in the construction sector. Over time, this is likely to improve the competitive positions of Chinese firms even further. However, the greatest challenge they face are infrastructural shortcomings.
Deals are most often carried out at an elite political level. China's National Offshore Oil Corporation (CNOOC), was blocked by the US Congress when it attempted to acquire US energy firm UNOCAL. No such political opposition to Chinese firms taking over African assets has been shown. The conclusion drawn from this is that Americans are more concerned over the strategic implications of China's (almost inevitable) rise than are Africans.
Political factors also play a role. Keeping close commercial ties with African states prevents them from recognising Taiwan as an independent country and signals the end of Taiwan's relations on the continent. Taiwan's now only has diplomatic ties with four African states and this number will be whittled down in the coming years.
China's Growth Model Transplanted to Africa
China's reform programme began in the late 1970s with the creation of special economic zones - designated geographic areas with liberal policies and tax incentives to attract foreign companies. China embraced globalisation almost a generation ahead of most other developing nations. The SEZ's were so successful they were rolled out across the country. China's capitalist experiments became the model for the country and have underwritten China's phenomenal growth experience over the last 25 years.
In November 2006, at the Forum on China Africa Co-operation (FOCAC) summit held in Beijing, the Chinese committed to establishing a number of SEZ's in Africa. Ordinarily, these would be initiated by the governments themselves but over recent months the Chinese have approached various African states seeking investment concessions.
With no chance of tax or labour concessions being granted from the South African government, COEGA (industrial development zone in the Eastern Cape) will not be turning into a Chinese-style SEZ anytime soon. Whilst the South African government believes that good infrastructure and pleasant weather will attract foreign investors, our emerging market competitors in Asia, the Middle East and now Africa offer much more. Strategically, some key economies have been selected by Beijing that reflects its commercial priorities in Africa.
Metals Hub
China's first SEZ in Africa is to be in Chambishi, Zambia's copper belt region. The Chinese Government has committed
US$800m in investment credit for its firms to tap into. The zone's anchor investment will be a US$250m copper smelter for local beneficiation. Up to 60,000 jobs will be created in the SEZ that enjoys duty and tax incentives for Chinese firms. China's strategic supply line of copper will be secured through the investment. Other commodities that Chinese mining firms seek to secure in the region are cobalt, diamonds, tin, and uranium.
Trading Hub
The next Chinese SEZ was announced in mid-2007 in Mauritius. The US$500m manufacturing zone will house 40 Chinese businesses, creating 5,000 jobs for locals and 8,000 for Chinese contractors. Manufacturers in the zone will enjoy market access to the COMESA area as well as exporting their goods to South Asian markets. China's strategic presence in the Indian Ocean rim will be boosted.
Trans-shipment Hub
The third SEZ will be located in Dar es Salaam, Tanzania. Beginning in the copper belt region, this is where the Tanzam railway line, built by the Chinese in the 1970s, ends. The Chinese have already invested in the Dar es Salaam port as well as building the customs building; greater investment in the capacity port can be expected. The Dar es Salaam SEZ will be a trans-shipment hub for commodities mined in the copperbelt. Some local beneficiation will take place in the zone. Chinese firms are in the process of rehabilitating the 30-year-old Tanzam line which has fallen into a state of disrepair. Linking Zambia's mining regions to the coast, beginning in Kapiri Mposhi and ending in Dar, the Tanzam railway line is of high strategic importance to Zambia and Tanzania.
Bisecting the Continent
Whilst the Tanzam line links Zambia to the east coast, the Benguela line links the copper belt straddling Zambia and the DRC to the west coast. Starting at Luanshya in Zambia and ending at the Angolan port of Benguela, the Benguela line is also in construction by Chinese firms. Together, the Tanzam and Benguela lines bisect sub-Saharan Africa. The intent is to reduce supply-side risk for resource extraction.
The rehabilitation of the Tanzam and Benguela lines across the continent will - for the first time - create a functioning east-west infrastructure corridor across the continent. No longer dependent upon South Africa's rail links, the transportation of commodities will be diverted away from southern Africa. This will have some serious strategic repercussions for Transnet and South African ports such as Richards Bay.
The location of China's SEZs has been chosen in light of these infrastructure corridors. Although of lesser strategic importance to China, it is expected that the Chinese will also invest in Benguela's port in Angola. It is more convenient to ship the commodities out of Dar es Salaam than via Africa's west coast.
Angola is already receiving over US$6bn in funding from China's EXIM Bank to develop its infrastructure. Considering the large amounts of Chinese investment the country is receiving and President's Dos Santos' remark that up to three million Chinese could be immigrating to the country, Angola can be considered almost a Chinese economic protectorate. Its double digit growth rates certainly mimic those of China.
Nigeria is Next
The fourth SEZ will most likely be located in Nigeria at one of its port cities. The country is Africa's most populous having both vast energy deposits and a large consumer market. China Inc. has already made its largest foreign acquisition to date in Nigeria - CNOOC's acquisition of an offshore energy block for over US$2.2bn. But China's engagement of Nigeria goes beyond resource extraction. The SEZ will be a manufacturing and assembly operation for Chinese firms. Products will be sold domestically and re-exported to the West Africa region. Chinese firms are also investing over US$2bn into Nigeria's infrastructure.
China's Grand Plan for Africa
Even Africa's numerous former colonial powers did not have the commitment to invest so substantially in the continent's infrastructure and probably were unable to afford it anyway. China's rapid economic development, growing manufacturing capacity, population size and massive resultant demand has resulted in the government crafting a 'Grand Plan for Africa'. What then are the strategic drivers of China's foray into Africa? China needs commodity and energy assets. Without securing a predictable international supply chain of oil and key metals, China's economic growth will be undermined. With the possible exception of Iran, China is geo-strategically excluded from the Middle East. The US invasion of Iraq resulted in Beijing increasing the pace of its acquisition of African energy reserves. This is evident in Angola, Sudan and Nigeria where Chinese national oil corporations have a foothold in the energy sector.
The main strategic driver of China Inc.'s venture into Africa is Beijing's long-term strategy to remove its economy from international commodity markets. By acquiring commodity assets at source, negotiating prices with the recipient (African) government and securing long-term supply contracts, China seeks to establish parallel markets that are removed from international commodity markets where prices are set in either London or New York.
The mining majors - Anglo American, BHP Billiton, Rio Tinto and CVRD - will ultimately be selling to the traditional markets but will find new competition from state-owned Chinese trading firms. The market as we currently know it -itself an economic legacy of European colonialism in Africa - will be disrupted by China. Unlike Japan which became the world's second largest economy through playing by the rules of the global commodities markets, China seeks to change those rules.
Its state-owned banking sector allows the Chinese state to direct capital and purchase international resource assets, employing a risk model that is quite different from that of private entities. China is now leveraging the resources of the state to implement its commercial policy toward Africa.
The long-term success of this strategy is dependent upon China building and maintaining close ties with African countries. I doubt if most African states realise how strategically they are viewed by Beijing.
China's SEZ strategy is lifted from its own economic reform experience. Indeed, the Chinese learnt from the European colonialists who carved out free trade concessions in China in the 19thcentury. These capitalist enclaves became the trading hubs of the region and to this day are still the wealthiest cities in China - Hong Kong, Guangzhou, Macao and Shanghai. China is now re-employing what it learnt from those exploitative colonists in Africa. It worked for China. Will Dar es Salaam, Port Louis, and Lagos be Africa's leading cities in the future?