How China Is Reshaping The Global Economy: Development Impacts In Africa And Latin America 019873851X, 9780198738510

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How China Is Reshaping The Global Economy: Development Impacts In Africa And Latin America
 019873851X,  9780198738510

Table of contents :
The transformation of the Chinese economy --
The workshop of the world --
A voracious dragon? China and global commodity markets --
Going global: Chinese firms abroad --
The world's wallet? China's role in global finance --
China's economic expansion in sub-Saharan African --
China's economic impacts on sub-Saharan Africa --
Social, political, and environmental impacts in sub-Saharan Africa --
China's economic expansion in Latin America and the Caribbean --
China's economic impacts on Latin America --
Social, political, and environmental impacts in Latin America --
A comparative perspective on China's involvement in sub-Saharan Africa and Latin America and the Caribbean --
Conclusion.

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How China is Reshaping the Global Economy

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How China is Reshaping the Global Economy Development Impacts in Africa and Latin America Rhys Jenkins

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Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © Rhys Jenkins 2019 The moral rights of the author have been asserted First Edition published in 2019 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2018949663 ISBN 978–0–19–873851–0 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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To my grandchildren, Tom, Mat, and Kit, who will experience the consequences of China’s re-emergence as a global economic power.

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Preface and Acknowledgements

I first became interested in the impact of China’s economic growth on the Global South in 2004, when I was commissioned by the UK Department for International Development (DFID) to prepare a paper for a conference in Beijing at the launch of the Inter-American Development Bank’s study of the opportunities and challenges that the emergence of China presented for Latin America and the Caribbean (Devlin et. al., 2006). This was the first time that I had visited China, and it began a period when my research was mainly focussed on questions posed by the rise of China. Much of my previous work had been about the impact of globalization, starting with studies of transnational corporations and trade liberalization in Latin America and then extending to work on the environmental and socioeconomic implications of globalization in Latin America, South Africa, Vietnam, and Malaysia. By the mid-2000s, it was already becoming clear that the dramatic growth of China and its re-incorporation into the global economy was a key feature of globalization in the twenty-first century. The accession of China to the World Trade Organization in 2001 sparked a number of studies looking at the likely impacts that this would have in both the North and the South. My own interest developed through further studies for DFID on the impacts of China on Asia, Africa, and Latin America, carried out with my colleague Chris Edwards. I was also involved in a network of scholars who studied the impacts of the Asian Drivers (China and India) on the Global South and published special issues of the IDS Bulletin and World Development on this theme (Kaplinsky, ed., 2006: Kaplinsky and Messner, eds., 2008). Some of my subsequent research on the impact of China on Latin America, on Brazil, and on South Africa was funded by the UK Economic and Social Research Council (ESRC),1 and this allowed me to go into greater depth on the impacts of China on specific countries. I worked with a number of colleagues on these projects and I am particularly grateful for their contributions. They include Jonathan Barton, Enrique Dussel-Peters, Andrés Lopez, Alexandre de

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ESRC grant numbers RES-165-25-005; RES-238-25-0006; and ES/1035125/1.

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Preface and Acknowledgements

Freitas Barbosa, and Lawrence Edwards. I was also fortunate to receive a Leverhulme Research Fellowship that enabled me to start work on this book. As I delved deeper into the impacts of China on Latin America and the Caribbean (LAC) and Sub-Saharan Africa (SSA), I became aware that I needed to obtain a better understanding of the drivers of Chinese growth and global projection. Thus, although the book was originally planned as a study of the impacts of China on the two regions, I realized that it needed to begin with developments in China. Although I do not claim to be an expert on Chinese economic development, I hope that Part I of the book will provide the reader with sufficient background to make sense of the impacts on LAC and SSA. I am very conscious that one limitation I faced in writing the book is that I do not read Chinese. This may have led to the underrepresentation of some points of view. I have tried wherever possible to refer to official Chinese documents that are available in English and to the work of Chinese academics that has been translated into or published in English. However, this probably does not do full justice to the range of Chinese views on LAC and SSA, and it may mean that Chinese perspectives that are more critical are not fully represented. On the other hand, I have drawn on a range of sources from both LAC and SSA to ensure coverage of views from within both regions. I would like to thank colleagues who have read and commented on parts of this book for their invaluable feedback. They include Enrique Dussel-Peters, Chris Edwards, Raphie Kaplinsky, Bereket Kebede, Diego Sánchez-Ancochea, and John Thoburn. Michael Abou-Sleiman provided research assistance in putting together the database and carrying out the econometric analysis that is reported in the book. Finally, Sally Sutton’s editing work on the manuscript helped put it into a coherent and presentable form. I acknowledge all their contributions, while accepting ultimate responsibility for the contents and any errors that remain.

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Contents

List of Figures List of Tables List of Boxes List of Acronyms

Introduction: China’s Re-emergence as a Global Economic Power

xi xiii xv xvii 1

Part I. China and the Global Economy 1. The Transformation of the Chinese Economy

13

2. The Workshop of the World

33

3. A Voracious Dragon? China and Global Commodity Markets

52

4. Going Global: Chinese Firms Abroad

72

5. The World’s Wallet? China’s Role in Global Finance

92

Part II. China and Sub-Saharan Africa 6. China’s Economic Expansion in Sub-Saharan Africa

113

7. China’s Economic Impacts on Sub-Saharan Africa

149

8. Social, Political, and Environmental Impacts in Sub-Saharan Africa

183

Part III. China and Latin America and the Caribbean 9. China’s Economic Expansion in Latin America and the Caribbean

223

10. China’s Economic Impacts on Latin America

254

11. Social, Political, and Environmental Impacts in Latin America

284

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Contents

Part IV. Comparisons and Conclusions 12. A Comparative Perspective on China’s involvement in Sub-Saharan Africa and Latin America and the Caribbean

321

13. Conclusion

337

Statistical Databases

347 349 395

References Index

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List of Figures

2.1. China’s Share of World Manufacturing Value Added (MVA) and World Manufactured Exports, 1980–2014 (%)

33

2.2. Share of China’s Manufactured Exports by Technology Level, 1995–2014

45

3.1. Index of commodity prices in constant 2010 US$ (2010=100)

57

4.1. Chinese stock and annual flow of outward FDI and turnover of contracted projects fulfilled, 1982–2014 (US$ billion)

74

4.2. Geographical distribution of value of completed projects, 1998–2000 and 2013–15

77

5.1. China’s foreign assets, 2004–15 (US$ billion)

95

6.1. China’s trade with SSA, 1995–2015 (US$ billion)

115

6.2. Shares of different products in imports from SSA, 2013–15

116

6.3. Chinese outward foreign direct investment (OFDI) stocks and flows in SSA, 2003–15 (US$ million)

118

6.4. Chinese contracts in SSA, 2003–15 (US$ million)

120

6.5. Sectoral distribution of the value of Chinese project contracts in SSA, 2005–16

121

6.6. Chinese Official Financial Flows to SSA, 2000–14 (US$ million)

123

7.1. Share of Chinese imports in apparent consumption of manufactured goods in selected countries, 2000–10

161

9.1. China’s trade with Latin America, 1995–2015 (US$ billion)

225

9.2. Shares of different products in imports from Latin America, 2013–15

226

9.3. Chinese OFDI in Latin America, 2003–15 (US$ million)

228

9.4. Sectoral distribution of the value of Chinese project contracts in LAC, 2005–16

231

9.5. Chinese loans and projects in Latin America, 2005–15 (US$ million)

231

10.1. 11.1.

China’s share in apparent consumption of manufactures in selected Latin American countries, 2000–13

262

Coincidence of voting between Latin America, China, and the US, 2000–15

299

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List of Tables

0.1.

Examples of possible impacts of China on developing countries

3.1.

China’s significance in commodity markets, 2000, 2015 (%)

6.1.

6 55

Determinants of Sino-SSA economic relations

143

Significance of economic relations with China by country in SSA

148

Percentage of exports of wood products at high risk of illegality, by destination, 2013

211

A8.1.

Effects of voice and accountability on Sino-SSA economic relations

217

A8.2.

Effects of control of corruption on Sino-SSA economic relations

217

A8.3.

Effect of political stability on Sino-SSA economic relations

218

A8.4.

Impact of economic relations with China on governance

219

A6.1. 8.1.

9.1.

Key actors in Sino-LAC economic relations

234

9.2.

Determinants of Sino-LAC economic relations, 2002–15

248

A9.1.

Significance of economic relations with China by country in LAC

253

10.1.

Industries with the highest level of Chinese import penetration

263

11.1.

Estimated impact of trade with China on manufacturing employment in Latin America, 1995–2011

286

11.2.

Shares of Latin American trade with China and the US, 2015 (%)

298

Determinants of voting coincidence with China

318

Summary of China’s major impacts on SSA and LAC

331

A11.1. 12.1.

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List of Boxes

4.1.

Problems in measuring China’s OFDI

73

6.1.

The Angolan model

124

6.2.

The Sicomines agreement in DRC

125

7.1.

China’s impact on SSA exports of textiles and garments

162

8.1.

Debate on labour conditions in Chinese copper mining in Zambia

190

9.1.

Argentina and China: the soybean connection

240

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List of Acronyms

ABC

Agricultural Bank of China

ADB

Agricultural Development Bank (China)

AGOA

African Growth Opportunities Act

AIIB

Asian Infrastructure Investment Bank

ATC

Agreement on Textiles and Clothing

BOC

Bank of China

CADF

China-Africa Development Fund

CARI

China Africa Research Initiative

CBRC

Chinese Banking Regulatory Commission

CCB

China Construction Bank

CCICED

China Council for International Cooperation on Environment and Development

CDB

China Development Bank

CGGC

China Gezhouba Group Company

CIC

China Investment Corporation

CNMC

China Nonferrous Metal Mining Corporation

CNOOC

China National Offshore Oil Corporation

CNPC

China National Petroleum Company

COFCO

China National Cereals, Oils and Foodstuffs Corporation

CREC

China Railway Engineering Corporation

CSR

Corporate social responsibility

DAC

Development Assistance Committee

DFA

Department of Foreign Assistance

DPP

Democratic Progressive Party

DRC

Democratic Republic of Congo

EITI

Extractive industries Transparency Initiative

EIZ

Eastern Industrial Zone

EPRDF

Ethiopian People’s Revolutionary Democratic Front

ETDZ

Economic Trade and Development Zone

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List of Acronyms Exim Bank

Export-Import Bank of China

FDI

Foreign direct investment

FOCAC

Forum for China Africa Cooperation

FSC

Forest Stewardship Council

FTA

Free trade agreement

GDP

Gross domestic product

GHG

Greenhouse gas

GM

Genetically modified

GMO

Genetically modified organism

GPN

Global production network

GVC

Global value chain

HRW

Human Rights Watch

IADB

Inter American Development Bank

ICBC

Industrial & Commercial Bank of China

IEA

International Energy Agency

ILO

International Labour Organization

IMF

International Monetary Fund

ISI

Import substituting industrialization

ISIC

International Standard Industrial Classification

JSCB

Joint-stock commercial bank

LAC

Latin America and the Caribbean

M&A

Mergers and acquisitions

MEP

Ministry of Environmental Protection

MFA

Multi Fibre Arrangement

MOF

Ministry of Finance

MOFA

Ministry of Foreign Affairs

MOFCOM

Ministry of Foreign Commerce

NDB

New Development Bank

NDRC

National Development and Reform Commission of the People’s Republic of China

NGO

Non-governmental organization

NSSF

National Social Security Fund

OBOR

One Belt, One Road

ODA

Official development assistance

OECD

Organization for Economic Co-operation and Development

OFDI

Outward direct foreign investment

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List of Acronyms OOF

Other Official Finance

OPEC

Organization of the Petroleum Exporting Countries

PRC

People’s Republic of China

R&D

Research and development

REER

Real effective exchange rate

RMB

RENMINBI

RTRS

Round Table on Responsible Soy

SAFE

State Administration of Foreign Exchange

SASAC

State-owned Asset Supervision and Administration Commission

SEPA

State Environmental Protection Administration

SEZs

Special Economic Zones

SIC

SAFE Investment Company

SINOSURE

China Export and Credit Insurance Corporation

SOE

State-owned enterprises

SPR

Strategic Petroleum Reserve

SSA

Sub-Saharan Africa

SSI

Sinope Sonangol International

SWF

Sovereign wealth fund

TNC

Transnational corporation

TVE

Township and village enterprise

UN

United Nations

UNCTAD

United Nations Conference on Trade and Development

UNIDO

United Nations Industrial Development Organization

VAT

Value added tax

WGI

World Governance indicator

WTO

World Trade Organization

xix

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Introduction China’s Re-emergence as a Global Economic Power

The re-emergence of China as a major economic power has been a central feature of globalization over the past four decades. It constitutes a significant shift in the world economy’s centre of gravity to East Asia. In terms of gross domestic product, China is now the world’s second-largest economy after the US, which it is predicted to overtake by 2026 (EIU, 2015, p.3). It is the world’s leading exporter, and a significant destination for, and increasingly a source of, foreign direct investment (FDI). It has become a major centre of global industrial accumulation, accounting for almost a quarter of worldwide manufacturing output. It is the most important consumer of many minerals and industrial raw materials, and is an increasingly significant user of energy and contributor to carbon emissions. It has the world’s largest foreign exchange reserves and plays a growing role in international financial markets. All this has profound effects on countries around the world. The economic rise of China can be looked at through two lenses. The first, looking from the outside in, emphasizes changes in the global capitalist economy that have led to the geographical reconfiguration of the world economy. The second approach, looking from the inside out, emphasizes the internal changes in China which have led to its economic transformation since the introduction of economic reforms at the end of the 1970s (Hung, 2008). The ‘outside-in’ approach sees China’s economic growth as primarily externally driven, reflecting a new phase of globalization. In this view, capitalist accumulation faced increasing barriers in the developed world in the 1970s as a result of falling profitability, rising wages, and an increasingly mobilized working class (Hart-Landsberg and Burkett, 2007; Harvey, 2005). This led to the abandonment of the Keynesian policies of the post-war consensus and the adoption of neo-liberalism, particularly under Reagan in the US and

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How China is Reshaping the Global Economy

Thatcher in the UK. One of the strategies used by capital to restore profitability was to move labour-intensive production offshore in order to reduce production costs. This had started to happen in the 1960s, but it accelerated in the 1980s. In East Asia the ‘flying geese’ pattern in which certain Japanese industries relocated to the newly industrializing countries, South Korea, Taiwan, Hong Kong, and Singapore, had, by the 1980s, developed to a point where those industries were now looking to relocate once more in the face of rising wages. China’s economic reforms came at an opportune moment, and companies relocated initially to the special economic zones that were created after 1978, and then to other parts of the country. In contrast, the ‘inside-out’ approach takes as its starting point the changes that occurred in China after the death of Mao Zedong in 1976. The reforms to economic policy started by Deng Xiaoping in 1978/9 unleashed a dynamic process of growth and increased competiveness in China as it moved from a centrally planned to a market economy (see Chapter 1). High levels of investment and a rapid increase in exports led to China’s rising share of world output and trade. Rapid growth in China made it an attractive destination for foreign investors. Its eventual accession to the World Trade Organization in 2001 gave a further boost to export growth, which contributed to the accumulation of foreign exchange reserves. As Chinese firms accumulated technological capabilities, they began to invest and carry out construction projects abroad. China also became a more important player in global financial markets as a result of lending by Chinese banks, particularly the policy banks, and investment by its sovereign wealth funds. Both of these lenses provide important insights into the growing global significance of China. The post-1980 phase of globalization set the context within which the Chinese economy was able to grow so rapidly. A focus on shifts in global patterns of accumulation and the organization of global production networks is a reminder that the Chinese economy is part of a larger whole. This underlines the fact that China’s economic growth involves a range of Chinese and international actors, and has depended crucially on access to foreign markets and foreign inputs, capital, and technology. Without radical changes within China, however, it is unlikely that these changes in the global economy would have been accompanied by such spectacular economic growth. Internal changes also determine the characteristics of China’s ‘socialist market economy’, which have implications both domestically and internationally. Globalization set the context within which China was able to grow, but the drivers of economic growth were internal to China. It is, therefore, imperative to analyze at some length the key changes and stages of economic reform and development (see Chapter 1). 2

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Introduction

0.1 China, Sub-Saharan Africa, and Latin America and the Caribbean Both Sub-Saharan Africa (SSA) and Latin America and the Caribbean (LAC) have seen the influence of China increase significantly since the turn of the century. China is now SSA’s most important trading partner, accounting for more than a fifth of the region’s total trade. Chinese construction companies are building roads, railways, dams, and stadiums, and other public buildings across the region. China has also become an increasingly important source of FDI, loans, and official development assistance (ODA) to SSA. The Forum on China-Africa Cooperation, at which major announcements are made concerning China’s plans for increased trade with and finance to Africa, meets every three years. China is LAC’s second-largest trading partner after the US, and in several countries, including Brazil, Chile, and Peru, it has overtaken the US. China has lent more than $100 billion to countries in the region since 2007 and has made significant investments in oil and mining. It is also involved in major infrastructure projects in the region, most notably the planned canal in Nicaragua linking the Caribbean and the Pacific. In 2015 it formalized its relations with the region with the establishment of the Forum of China and Community of Latin American and Caribbean States. China’s growing involvement in SSA has been a source of intense debate (Mhandara et al., 2013). Critics of China’s relations with the region have portrayed it as a new colonial power extracting natural resources with little regard for the local population or the environment while supporting authoritarian regimes and intensifying corruption. As Lamido Sanusi (2013), former governor of the Nigerian Central Bank, wrote in the Financial Times: China takes our primary goods and sells us manufactured ones. This was also the essence of colonialism. The British went to Africa and India to secure raw materials and markets. Africa is now willingly opening itself up to a new form of imperialism.

These critics have been accused by their opponents of ‘China-bashing’ and of following a Western agenda which sees China as a threat to its interests in Africa (Hirono and Suzuki, 2014). They argue that on the contrary, the SinoSSA relationship is quite different from the colonial and neo-colonial relations that existed with the West. China is seen as providing SSA with capital and technology, as well as with a booming market for its exports, leading to the revival of economic growth in the region in the twenty-first century. Zambian economist Dambisa Moyo (2012a) writes: China’s rush for resources has spawned much-needed trade and investment and created a large market for African exports—a huge benefit for a continent seeking rapid economic growth.

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China’s commitment to non-intervention in the internal affairs of other countries and its provision of aid without any strings attached, in contrast to the use of economic and political conditionality by Western donors and the international financial institutions, is also emphasized (Wang and Ozanne, 2010). In the case of LAC, while the debate has been less heated it is, nevertheless, possible to discern significantly divergent views ( Jenkins, 2010a). A common criticism is that China’s economic involvement has led to the recommodification of the region’s exports and deindustrialization, thus reproducing the centre-periphery relations that historically characterized trade with North America and Europe (Gallagher and Porzecanski, 2010; Rosales and Kuwayama, 2012, Ch. II). There are also concerns, particularly on the political right in the US, that China’s growing presence is threatening US influence and encouraging left-wing governments in the region (Grudgings and Gardner, 2011). As in SSA, critics of China’s involvement have been accused of Sinophobia and of propagating myths about Sino-LAC relations (Harris and Arias, 2016). The alternative view of Sino-LAC relations emphasizes South-South cooperation, economic complementarity, and mutual benefits. This characterizes official pronouncements. such as the Chinese government’s policy papers on the region (PRC, 2008; 2016). Harris (2015) describes China in its relations with LAC countries as ‘a peaceful panda bear’, which he contrasts with the critics’ view of ‘a roaring dragon’. More specifically, China is seen as having made an important contribution to the region’s rapid recovery from the 2008 global financial crisis by coming to the rescue of LAC exports (ECLAC, 2010, p.10). In practice much of the academic literature on the impacts of China on SSA and LAC recognizes that the reality is more complex and varied than either of these extremes. There are both positive and negative impacts of the growing Chinese involvement in the two regions. In Latin America, particularly, some countries are identified as ‘winners’, and others as ‘losers’, as a result of China’s growth (Funakushi and Loser, 2005; Gonzalez, 2008). In SSA, too, there has been some recognition that different countries have been affected differently (Sindzingre, 2011; Zafar, 2007). However, much of the literature shares certain basic assumptions characteristic of both the critics and the defenders of China’s role. Although this debate is highly polarized, both sides are state centric in their focus on the actions of the Chinese state.1 They see China as a monolithic 1 As Alison Ayers (2013) notes in her analysis of the ‘new scramble for Africa’, ‘[t]he privileging of nation-states as the fundamental units of analysis is characteristic not only of realist and liberal perspectives in IR/IPE [international relations/international political economy] but also various critical perspectives that have sought to understand the rise of the BRICs [Brazil, Russia, India, China and South Africa], especially China’ (p.236).

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Introduction

actor which pursues its interests globally. These interests are seen as either benign, as portrayed in Chinese discourse on ‘peaceful development’ and the ‘harmonious world’, or as a challenge to the existing world order and an effort to expand China’s global power, as seen by those who emphasize the ‘China Threat’. Both sides also focus on the direct bilateral relations between China and SSA or LAC countries, neglecting the indirect impacts of China’s increased significance in the global economy. There is also a tendency in much of the debate on China’s impact to focus exclusively on Chinese interests and actions, and to see SSA and LAC as simply the beneficiaries or victims of China’s international expansion, ignoring the role of local actors within the two regions. Inevitably, given the politicized nature of the media coverage of China’s impacts on SSA and LAC, there is a tendency to present things in polarized terms, emphasizing either the negative side or win-win scenarios. There is also often a tendency on both sides of the debate to exaggerate the extent of China’s influence in the two regions. The challenge in analysing China’s growing significance for SSA and LAC is to provide an accurate picture of the extent of its influence and to develop a critical account of its impact while avoiding the ‘China-bashing’ that often characterizes media reports. This book tries to achieve this by avoiding a state-centric approach to China’s relations with SSA and LAC. It rejects the monolithic view of China as a unitary actor pursuing a clearly defined coherent strategy in its approach to the two regions. Although the Chinese government has issued two policy papers on its relations with each region these are very broad statements rather than coherent plans which the state implements (PRC, 2006, 2008, 2015, 2016). Chinese involvement is driven by the interests of a number of actors including different ministries, provincial and municipal governments, state-owned enterprises (SOEs), policy and commercial banks, and private companies. In analyzing the significance of China for SSA and LAC, this study recognizes that China’s growth has both direct impacts as a result of the countries’ bilateral relations, and indirect ones arising from China’s effects on global markets and prices. This implies that even those countries whose bilateral relations with China are limited can, nevertheless, be affected either positively or negatively by the global economic impacts of China.2 While detailing the bilateral economic relations between China and SSA and China and LAC, this

2 A similar point could be made in relation to China’s environmental impact on other countries, which can arise both directly from, for example, the polluting activities of Chinese firms in a host country, but also indirectly as a result of the contribution of Chinese greenhouse gas (GHG) emissions to global warming.

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study goes further to consider not only the direct impacts of China but also its indirect impacts on both regions. There is, perhaps inevitably, a tendency to focus more on Chinese actors and interests in a book which looks at the impact of China. However, it is important to recognize the role played by SSA and LAC actors in terms of both explaining the increased Chinese presence in the region and the impact of this.3 While it is true that states in SSA and LAC have been largely reactive in response to China’s growing involvement, it is also the case that the outcomes for host countries and different groups within them depend on the responses of local state and non-state actors.

Table 0.1. Examples of Possible Impacts of China on Developing Countries Direct Effects

Indirect Effects

Positive

Negative

Positive

Negative

Trade

Growth of exports to China

Increased world commodity prices

Competition from Chinese goods in third markets

FDI & projects

Inflows of Chinese FDI & technology

Displacement of local producers by imports from China Displacement of local firms by Chinese competitors

Integration into global production networks with Chinese firms

Finance

Additional resources for investment in infrastructure Employment creation by Chinese firms

Unsustainable increases in indebtedness

New modes of international finance

Diversion of OECD FDI from developing countries to China Global effects of Chinese financial instability

Displacement of communities by Chinese mines & dams Support for authoritarian regimes

Increased government revenues for social expenditure

Downward pressure on international labour standards

Chinese support for developing countries’ positions in international organizations Reduced cost of technologies for renewable energy

Less international protection of human rights

Social

Political

Increased policy space for SSA & LAC states

Environment

Transfer of technologies for renewables

Chinese firms operating in ecologically fragile areas

Chinese greenhouse gas emissions contributing to global warming

Source: Own elaboration based on Kaplinsky and Messner (2008, Fig. 6)

3 On the importance of recognizing the agency of local actors, see Mohan and Lampert (2013) and Corkin, 2013, Ch. 2) on SSA, and Levy (2015) on Latin America.

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Introduction

Finally, this book emphasizes the heterogeneous impacts of China’s growth on the two regions. Some of the policy-oriented literature discusses these impacts in terms of ‘threats/challenges and opportunities’4 or ‘competitive and complementary effects’ (Kaplinsky and Messner, 2008). This approach opens up the possibility of a more differentiated perspective on China’s impact which recognizes that it creates winners and losers both between and within countries. The framework used in this book recognizes both positive and negative impacts of China on SSA and LAC, and includes both direct and indirect impacts. Table 0.1 illustrates some of the potential impacts. The first three rows cover those related to the economic impacts of China’s growing involvement in trade, FDI, construction and engineering projects, and finance. The last three rows include possible social, political, and environmental impacts. The first two columns include the effects associated with China’s bilateral relations with SSA and LAC, while the last two columns describe indirect impacts arising from China’s effect on the global economy, governance, and environment. These are all discussed in detail in Parts II and III of the book.

0.2 Outline of the Book This book sets out to answer a number of questions regarding the growing involvement of China in SSA and LAC. First, is the hype regarding China’s role really justified? How much impact has China’s re-emergence as a global economic power had on the two regions? Next, what are the main channels through which China is affecting SSA and LAC? What is the relative significance of trade, FDI, engineering and construction projects, loans, and ODA within the relationships? Then, what are the key drivers behind China’s growing economic relations with SSA and LAC? Are the growing relations a result of the strategic diplomatic or strategic economic interests of the Chinese state or of the commercial motives of Chinese companies, and how are these linked? Finally, the book considers the economic, social, political, and environmental implications for SSA and LAC of China’s growing significance. It discusses how these impacts vary both between countries and between different groups within countries. The next chapter sets the scene by examining the transformation of the Chinese economy since the start of the reforms in the late 1970s that led to China’s integration into the global economy. It is not a comprehensive account of China’s economic development, but rather it concentrates on 4 See Devlin et al. (2006) and Lederman et al. (2009) on Latin America, and Ajakaiye (2006) and Knorringa (2009) on SSA.

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those features that are essential to understanding the impacts that are discussed later in the book. These include the growth of trade and FDI, the development of the financial system, the changing nature of SOEs and the growth of the private sector, the increases in productivity and wages, and the effects of growth on natural resources and the environment. The remainder of Part I consists of four chapters which discuss the most important characteristics of China’s global economic integration. China is best known as a manufacturing powerhouse, and Chapter 2 analyzes the way in which it became a global centre for industrial production, paying particular attention to the factors that underlie its global competitiveness. It describes some of the key characteristics of its manufacturing sector, including its integration into regional and global production networks, the role played by inward investment, and the increasing technological sophistication of its production. The growth of industrial production and rising incomes in China led to a rapid increase in demand for natural resources and industrial raw materials, which was increasingly supplied by imports. China went from a marginal player in global commodity markets to a key consumer with a significant impact on their prices and organization. Chapter 3 documents its role in different markets and its contribution to the commodity boom from 2002. It discusses the strategies used to ensure a secure supply of key commodities, and the specific characteristics of the Chinese market that make it different from the developed-country markets to which SSA and LAC have traditionally exported. Not only is China a significant destination for FDI, but it has also emerged as a source of outward FDI, and of non-equity forms of international expansion, such as engineering and construction contracts. Chapter 4 documents this growth and analyzes state and firm actors’ motives for investing abroad. A key debate, the extent to which the internationalization of Chinese firms is primarily state or market driven, is discussed. The last chapter of Part I considers China’s growing role in international finance. There is some confusion in the literature on China over the distinction between Chinese ‘aid’ and other forms of official finances provided by Chinese banks. This has led to exaggerated accounts of the significance of China’s financial contribution to the Global South. The chapter clarifies some of these issues. Part II of the book analyses China’s impact on SSA. Chapter 6 sets the scene, documenting the growth of bilateral relations between China and the region, focussing on trade, FDI, Chinese construction and engineering projects, and financial flows, and it identifies the main actors involved in these relationships. The chapter discusses the role of China’s strategic diplomatic, strategic economic, and commercial interests in its growing involvement 8

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Introduction

in SSA, as well as African interests, before presenting an econometric analysis of the key determinants of the different types of Chinese involvement in the region. Chapter 7 focuses on the key economic impacts of the growth of China, considering both direct and indirect impacts on SSA. Particular attention is paid to China’s direct and indirect impact on commodity exports, the direct involvement of Chinese firms in infrastructure, and the direct and indirect impacts on the manufacturing sector. These overviews are followed by case studies of China’s economic impacts on Angola, Ethiopia, and South Africa. Part II concludes with a chapter discussing China’s social, political, and environmental effects on SSA. These effects have been a particular target for critics of China’s increasing influence in the region. On the social side, it has been claimed that Chinese firms have preferred to employ Chinese rather than African workers, and that wages and working conditions are poor and labour rights frequently violated. China is also often criticized for its involvement with undemocratic and corrupt regimes in SSA. Finally, China’s demand for resources and the operations of Chinese firms in the region are criticized for causing environmental degradation. The chapter considers these claims and shows that the impacts are not universally negative, as some critics suggest, and that local agency and context have an important effect on the outcomes in different countries. Part III is structured along the same lines as Part II to analyze Sino-LAC relations. Chapter 9 provides background information on China’s economic involvement in the region, the main actors involved, and the drivers of the relationship. Chapter 10 considers the economic impacts of these relations, with particular attention to the impact on commodity exports and prices and the effects on the manufacturing sector. It concludes with case studies of Brazil, Mexico, and Chile. Chapter 11 provides an analysis of the social, political, and environmental impacts. In terms of social impacts, particular attention is paid to that on local communities, while the section on China’s political influence includes case studies of Brazil and Venezuela. Latin America’s booming soybean industry is used to illustrate some of the environmental problems created by China’s growing demand. Part IV contains two chapters by way of conclusion. Chapter 12 provides an explicit discussion of the similarities and differences between China’s relations with and impacts on SSA and LAC, drawing on the two preceding parts. It reinforces the conclusion that these impacts are heterogeneous, and that specific local situations play an important part in determining the costs and benefits. The final chapter looks at recent developments in China which are likely to affect its relations with SSA and LAC in the future, paying particular attention to the change to a slower rate of growth and greater emphasis on 9

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household consumption and the quality of growth. It also considers the likely effects of the ‘One Belt, One Road’ strategy which has been closely associated with President Xi Jinping. Finally, it considers the prospects for resolving some of the problems which have characterized China’s relations with SSA and LAC in recent years. Several previous monographs and edited collections on China’s impact on SSA and on LAC have addressed some or all of these questions. Although there are many parallels between the two regions, no previous study has brought the two cases together in a systematic way, as here. By highlighting both the similarities and the differences between the two regions, this book brings out the importance of specific local contexts and agency in explaining the ways in which changing global patterns play out.

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Part I China and the Global Economy

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1 The Transformation of the Chinese Economy

The growth of the Chinese economy since the late 1970s has been spectacular. Gross domestic product (GDP) increased at an average of over 10 per cent per annum until 2011, when the growth rate began to slow down, although still achieving significant increases. At market exchange rates, China’s total GDP overtook that of Germany, in 2007, and of Japan, in 2009, and it is now the second-largest economy in the world. The Economist Intelligence Unit predicts that it will overtake the US in terms of total GDP by 2026 (EIU, 2015, p.3). In purchasing power parity terms, the Chinese economy is already larger than that of the US.1 Gross national income per capita in China increased more than twentyfold between 1979 and 2012, taking it from a low- to an upper-middle-income country in terms of the World Bank’s classification. This has led to a massive reduction in poverty. The proportion of the population living below the international poverty line fell from 88 per cent in 1981 to 6.5 per cent in 2012, reflecting an absolute reduction of over 500 million in the number of people living in poverty, according to the World Bank.2 Economic growth has been driven by high levels of investment and rapid export growth, which have led to significant structural change and productivity increases. Investment levels were high and increasing over the period, reaching over 40 per cent of GDP in the mid-2000s (Naughton, 2007, p.144). Exports grew at almost 17 per cent per annum between 1980 and 2010 (UNCTADStat). The share of industry in total output increased, particularly after 1990, to around 45 per cent of GDP (Naughton, 2007, Fig. 6.4). Estimates put total factor productivity growth in China in the period at around 3 per cent a year (Liu et al., 2014, pp.231–3).3 1 Purchasing power parity takes into account differences in countries’ price levels in order to compare GDP. 2 http://www.worldbank.org/en/country/china/overview#3 (Accessed 26 Aug. 2016). 3 ‘Total factor productivity growth’ refers to that part of the increase in output that is not explained by increases in inputs such as capital and labour.

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The remarkable performance of the Chinese economy over that period followed major changes in economic policy after the death of Mao in 1976. The period since then can be divided into four main phases. The first phase from the late 1970s initiated the transition from a centrally planned to a market economy, creating a ‘dual-track system’ Naughton, 2007. Table 4.1) describes this as a period of ‘reform without losers’. The second phase began in 1992 with the Communist Party declaring its support for a ‘socialist market economy’ and endorsing the extension of the market to all the major economic sectors. In contrast to the earlier phase, this created losers, particularly among state-owned enterprise (SOE) workers, as well as winners (ibid, pp.106–7). In 2001 China joined the World Trade Organization (WTO) marking the start of a third phase characterized by further integration with the global economy. Finally, since 2012, China has entered a new phase referred to as the ‘New Normal’, which is characterized by slower growth and greater emphasis on the quality of growth. The initial reforms introduced under Deng Xiaoping at the end of 1978 focussed on agriculture and created what became known as the ‘household responsibility system’. There was also an expansion of township and village enterprises (TVEs) that played an important role in the Chinese economy in the 1980s. These were not included within the plan, but they contributed significantly to rural industrialization by producing inputs for agriculture and basic consumer goods. Rural incomes increased rapidly, and the reforms proved popular with the majority of the population in rural areas. The success of reform in the rural areas encouraged Chinese policymakers to extend the process. SOEs were also allowed to sell production in excess of that required by the plan through the market, and to transact and cooperate with non-state enterprises, giving them greater flexibility. This model of reform in China in the 1980s has been described as a ‘dual-track system’ (Naughton, 2007, pp.91–2). It preserved the traditional system of central planning, which guaranteed stability, and allowed the government to achieve key targets, while at the same time allowing a market to develop for the allocation of particular goods. This led to a two-tier pricing system, with many goods having a low state-set planned price and a higher market price.4 The creation of Special Economic Zones (SEZs) in 1979 was a further example of the dual-track approach, which allowed foreign firms to enter China without affecting the industrial activities of SOEs. Several factors including rising inflation, anger at corruption, and growing expectations of political reform led to increasing urban discontent during 1988–9 that culminated in government repression at Tiananmen Square in 1989. 4 The pricing system created incentives for rent seeking and corruption, with SOEs sometimes able to buy inputs cheaply via the plan and then sell them at higher market prices.

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In the aftermath, conservatives attempted to reverse the reforms but were unsuccessful. In 1992 Deng Xiaoping’s Southern Tour launched a new phase of reform. In October 1992 the Communist Party supported a ‘socialist market economy’, endorsing the extension of the market to all the major economic sectors. The growing significance of market relations in the 1980s had rendered the system of central planning obsolete, and by the end of 1993, material balance planning had been abolished altogether, and the dual system disappeared with a reunification of prices. The second phase of reform saw China extending market relations domestically and negotiating to join the WTO internationally. The process of reforming state enterprises began with a new Company Law passed at the end of 1993. The state sector was also downsized to focus on strategic industries and large firms with the policy of ‘grasping the big and letting go the small’. Privatization, often through management buyouts, became common from the mid-1990s, and the significance of the private sector in the economy increased. The 1990s also saw significant changes in the banking and financial system with the creation of the Shanghai and Shenzhen stock exchanges in 1992. There were also major reforms related to the external sector as China prepared the way to join the WTO. In 1993 the foreign exchange regime was unified, and current account convertibility was established. Trade was further liberalized with significant tariff cuts and a reduction in the proportion of imports subject to quotas. A third phase of reform and development began in 2001 after China became a member of the WTO. The rate of economic growth accelerated, as did the growth of exports, until the global financial crisis in 2008. The boom in exports, coupled with continuing inflows of foreign direct investment (FDI), generated large balance of payments surpluses so that China accumulated foreign exchange reserves and the government began to relax some of the constraints on capital flows. Domestically, the period saw further growth in the private sector and changes in the way that SOEs were managed to increase their focus on profit and productivity. The position of SOEs in industries, which the government considered strategic, was consolidated, and a group of firms were identified as ‘national champions’. During this period, the government also began to encourage Chinese firms to ‘go global’ through outward foreign direct investment (OFDI). The global financial crisis of 2008 interrupted the spectacular growth of the Chinese economy, and exports fell in 2009. Growth resumed with a major stimulus package introduced by the government in 2008, and since this was targeted particularly at investment in infrastructure, it gave a boost to SOEs. With the growth of world trade slowing down, the Chinese government started to give greater emphasis to the expansion of the domestic market and consumption rather than investment and exports. This led to new phase of 15

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development referred to as the ‘New Normal’, with growth since 2012 of around 6 or 7 per cent a year as opposed to 10 per cent, and a rebalancing of the economy in favour of domestic consumption. There is more emphasis given to the quality of economic growth, particularly in terms of its environmental impacts, which had been largely ignored in previous periods. In 2013 President Xi Jinping gave further impetus to the international expansion of Chinese firms with the launch of the ‘One Belt, One Road’ initiative, a major infrastructure plan, that became a centrepiece of Chinese foreign policy. This chapter does not attempt a comprehensive review of Chinese economic development and economic policy. The focus is on those aspects which are particularly relevant to understanding China’s impact on the global economy. As such it begins with reforms that have affected trade and FDI, before discussing the changes in the financial sector, enterprise reform, and developments in the Chinese labour market. The final section considers the impact of rapid growth on the environment and the demand for resources in China.

1.1 Growing Integration with the Global Economy One of the most striking features of China’s economic transformation has been the increased integration with the global economy and its emergence as the world’s largest exporter, a major destination for inward FDI and a growing source of OFDI. During the Maoist period, China emphasized self-reliance, particularly after the break with the Soviet Union in the early 1960s. In the 1960s and 1970s, China was one of the most closed economies in the world, with total trade (exports plus imports) never exceeding 10 per cent of GDP (Naughton, 2007, p.377). The system of state control of foreign trade meant that the State Planning Commission’s import plan covered over 90 per cent of all imports, and that exports were also comprehensively planned (Branstetter and Lardy, 2008, p.634). Both inward and outward FDI were virtually non-existent during the Maoist period. In 1978 twelve state trading companies controlled by the Ministry of Foreign Trade were the only firms allowed to engage in international trade or invest outside China (ibid, Table 16.1). There were also severe restrictions on FDI in China during the 1970s. This started to change during the first phase of economic reform with a push to expand exports and attract foreign investment. One of the first steps taken was the creation of four SEZs in Shenzhen (next to Hong Kong), Zhubai (next to Macao), Shantou (on the coast facing Taiwan), and Xiamen (across the Taiwan straits from Taiwan). These zones were open to foreign investors who wanted to establish plants in order to export goods from China without 16

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being subjected to the restrictions on FDI and the bureaucracy and taxes that applied to investments elsewhere in the country. These experiments were extended from the mid-1980s with a second wave of liberalization which declared fourteen new Open Port Cities, all of which set up Economic Trade and Development Zones (ETDZs) that offered the same kind of incentives as the SEZs (Naughton, 2007, pp.406–10). In 1986 significant liberalization of FDI regulation was applied throughout China. These ‘22 Regulations’ reduced corporate tax rates for foreign firms and lifted restrictions on profit remittances. Export-oriented projects and those using advanced technology were eligible for further benefits. The result was a dual system, with a distinction drawn between ‘processing trade’ and ‘ordinary trade’. The latter applied to products for sale on the Chinese market or used as inputs for production for the domestic market which, after the removal of the state monopoly of foreign trade, were subject to a complex system of tariffs, quotas, and import licences which remained quite restrictive during the 1980s (Branstetter and Lardy, 2008, pp.634–5). ‘Processing trade’ which applied to exporters was largely free of restrictions on imports. Despite these measures, FDI inflows remained modest during the 1980s. Most FDI was in joint ventures, and wholly foreign-owned firms were only allowed in the SEZs. During the first phase of the reforms, FDI was largely confined to export manufacturing, and foreign firms had little access to the domestic market. Inflows were largely dominated by Hong Kong and Taiwanese firms relocating labour-intensive activities to the SEZs and to the southern provinces of Guangdong and Fujian, which received a number of concessions from the central government in the early 1980s to pursue their own, more market-oriented, policies (Thoburn et al., 1991). During the second phase of reform in the 1990s, steps were taken to open up the economy further in preparation for membership of the WTO. This involved significant reductions in the protection given to production for the domestic market. Average tariffs fell from 43 to 15 per cent, and the proportion of imports covered by quotas and licences from nearly half to less than 10 per cent between the late 1980s and 2001 (Branstetter and Lardy, 2008, p.635). The government also began to selectively open the domestic market to foreign investors in this period. Urban real estate was opened up to foreign investment. There was also a third wave of new ETDZs, with eighteen approved in 1992–3 (Naughton, 2007, p.409). In 1995, the dualistic system, which encouraged FDI in some sectors while protecting Chinese firms in others, was formalized with the publication of The Catalogue Guiding Foreign Investment in Industry, which listed those sectors where foreign investment was encouraged, restricted, or prohibited (Breslin, 2009, p.87). This led to a 17

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surge in inward investment in the 1990s with US, Japanese, and European firms now beginning to invest in China on a significant scale. Total inflows of FDI increased more than tenfold in current dollars, from $4.4 billion in 1991 to $44.9 billion a decade later, although a substantial part of this FDI consisted of ‘round-tripping’, which involved Chinese firms taking money out of the country to Hong Kong, Macao, and offshore financial centres, and bringing it back as FDI.5 China became a member of the WTO in 2001, and committed itself to further tariff reductions in subsequent years. Further liberalization of the Chinese FDI regime was also required in order to meet WTO membership requirements. Before joining the WTO, China had required foreign investors to meet certain local content requirement or balance their trade by offsetting their imports with exports. Approval of FDI projects was also often contingent on conditions regarding technology transfer or the establishment of a research centre in China. The WTO’s Trade Related Investment Measures Agreement outlawed many of these practices, and China agreed to abide by these rules when it became a WTO member (Branstetter and Lardy, 2008, pp.651–2). Despite this, China’s FDI policy remained restrictive compared to that of other countries.6 The decade that followed China’s accession to the WTO saw a substantial increase in its integration with the global economy. Exports grew rapidly because Chinese exporters could now access foreign markets under the same conditions as other WTO members. The average growth of exports doubled from less than 15 per cent per annum in the 1980s and 1990s to over 30 per cent in the mid-2000s (UNCTADStat). Although imports also grew rapidly, reflecting the growing demand for raw materials and the significant imported content of many of the manufactured goods that China exported, imports lagged behind exports and China’s trade surplus grew from around $30 billion a year in 2002–4 to $300 billion by 2008 prior to the global financial crisis. Despite the comparatively restrictive FDI regime, the size and growth of the Chinese economy has made it an attractive destination for foreign investment. Since joining the WTO, the stock of inward FDI in China has increased more than sixfold in current dollars, from $203 billion in 2001 to $1,221 billion in 2015. In 2014 China was the largest recipient of FDI in the world, ahead of the US, although the latter regained the top position in 2015 (UNCTAD, 2016, Fig. 1.4). 5 Estimates of the scale of round-tripping vary from around a quarter to more than a half of total FDI flows to China in the 1990s and early 2000s (Xiao, 2004). 6 According to the Organization for Economic Co-operation and Development (OECD) FDI Restrictiveness Index, which covers a number of OECD and non-OECD countries, despite a substantial reduction in the index for China since 1997, it remained the second most restrictive country after the Philippines in 2015 (OECDStat).

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Although China continues to be a major destination for FDI, the relative significance of foreign firms in the Chinese economy has declined. The stock of FDI as a share of GDP, and the share of foreign firms in industrial output, peaked in 2003 (Huang, 2014, Fig. 14.4; Davies, 2013, Fig. 4). This does not indicate a decline in foreign investors’ interest in China but rather the increased competitiveness and growth of Chinese firms. As a result of persistent trade surpluses and inflows of capital, China’s foreign exchange reserves grew more than tenfold in less than a decade (World Bank, World Development Indicators, n.d.). The bulk of the reserves were held in US Treasury bills, but with low interest rates, this was not a productive use of reserves, and the Chinese authorities have tried to diversify their holdings and find alternative ways of utilizing these surpluses (see Section 1.2). One of these ways was through encouraging OFDI. During the first period of economic reform, foreign exchange shortages and the priority given to domestic accumulation meant that OFDI policy was highly restrictive. In the 1990s the approval procedures were gradually eased, and it became easier for firms to obtain foreign exchange. However, in the aftermath of the 1997 Asian financial crisis, regulation was tightened once more, and it became more difficult to obtain foreign exchange for overseas investment. The Tenth Five Year Plan (2001–5) and the adoption of a series of decrees between 2000 and 2002 to regulate and promote OFDI (Shambaugh, 2013, pp.174–6) marked the start of the ‘Go Out’ or ‘Go Global’ policy of encouraging Chinese firms to expand abroad. Over the past decade, government policy towards OFDI has evolved in a number of ways (Rosen and Hanemann, 2009, pp.11–12; Sauvant and Chen, 2014). The state, although it can and still does intervene in high-profile investments, plays less of a directive role and acts more as a regulator, allowing firms to make decisions on commercial grounds. The approval procedures have been gradually eased, and some of the decision-making decentralized to local agencies. Access to foreign exchange for firms wanting to invest abroad has been eased by the State Administration of Foreign Exchange (SAFE). The government has also increased incentives and support to firms expanding abroad, including finance from the China Development Bank (CDB) and the Export-Import Bank of China (Exim Bank); subsidies through a fund managed by the Ministry of Finance (MOF) and the Ministry of Commerce; tax deductions and exemptions; investment insurance from the China Export and Credit Insurance Corporation (SINOSURE); and the provision of information on investment opportunities to Chinese companies. The Chinese government has also been extremely active in signing bilateral investment treaties, and in June 2013, it had agreements with 125 countries, second only to Germany (Sauvant and Chen, 2014, pp.153–4). 19

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These changes, together with the growing capabilities of Chinese companies, led to the rapid growth of OFDI since the early 2000s. This has considerably narrowed the gap between inward and outward FDI in China. Despite the relaxation of some of the approval procedures for OFDI, the state continues to have a considerable influence on the scale and type of investment carried out by Chinese firms. The incentives and other state support also provide an important means of influencing outward investment.

1.2 The Financial Sector During the pre-reform era, the People’s Bank of China was the only bank in the country, referred to as the ‘monobank’. The first phase of reform saw the break-up of the monobank in the early 1980s, to create four state-owned commercial banks: the Industrial and Commercial Bank of China, which was responsible for lending and deposit taking in urban areas; the Agricultural Bank of China, which did the same in rural areas; the China Construction Bank, focussing on project finance; and the Bank of China, which dealt with foreign trade and foreign exchange transactions. The People’s Bank of China, which had previously been both a central bank and a commercial bank under the MOF, became a separate entity, transferring its commercial banking operations to the ‘Big Four’ (Allen et al., 2008; Naughton, 2007, pp.454–6). The second phase of reform in the 1990s saw a new round of banking reforms beginning in 1994, to allow the commercial banks more independence from the government so that they could operate on a more commercial basis. At the same time, three ‘policy banks’, the CDB, the Exim Bank, and the Agricultural Development Bank, were created to carry out lending that was specifically related to government policy objectives and which would not necessarily generate a commercial rate of return. The CDB and the Exim Bank later expanded their international operations becoming the major channels for Chinese loans to Africa and Latin America. A number of new joint-stock commercial banks ( JSCBs) were also created in the late 1980s and 1990s, many linked to local rather than central government and with the participation of both SOEs and non-SOEs. Eleven JSCBs were created between 1986 and 2001, which increased competition in the banking system (Naughton, 2007, p.456). In 1998 the PBC was also restructured, and shortly afterwards, steps were taken to deal with problems arising from the weakness of financial supervision and build-up of non-performing loans in the state banking system (Naughton, 2007, pp.103–4). Further reforms to the domestic financial system took place after China joined the WTO. In 2003 the regulatory functions of the PBC were transferred to a newly created China Bank Regulatory Commission. As a result of its 20

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accession to the WTO, China agreed to allow foreign banks to operate in China from 2006. However, other restrictions have meant that the share of total banking assets controlled by foreign banks in China has remained minimal. The Chinese government attempted to insulate the domestic financial market from international capital markets, maintaining tight capital controls during the early years of economic reform up until the mid-1990s. There was a dual exchange rate with a high official rate and a much lower market-oriented rate that was available only to licensed foreign trade organizations. In 1994 these two rates were unified, and two years later, the government liberalized the current account, signing up to Article VIII of the International Monetary Fund and announcing its intention to fully liberalize the capital account by 2000.7 However, the East Asian Financial Crisis which broke out in 1997 led to a renewed strengthening of capital controls to clamp down on capital flight. A new round of liberalization of capital flows began late in 2002, following China’s entry into the WTO. China’s Balance of Payments current and financial account surpluses surged as both exports and inward FDI grew rapidly. As a result China accumulated massive foreign exchange reserves which came to US$3.9 trillion by 2014, the largest total of any country (World Bank, World Development Indicators, n.d.). Initially much of this was held in US Treasury securities, of which China has been the largest holder in recent years. However, the return on these was very low, and the depreciation of the dollar meant that the government was effectively suffering a loss through holding them.8 In recent years, therefore, it has sought to diversify its overseas holdings and encourage investment in assets which can generate higher returns. This partly explains the liberalization of outward investment discussed in the previous section, but it has also involved the relaxation of controls on other forms of capital outflows. Two sovereign wealth funds, the China Investment Corporation and the SAFE Investment Company, were set up to invest a portion of the country’s reserves. China’s policy banks and commercial banks also became increasingly involved in lending abroad through mediumand long-term loans and export credits. Despite the steps taken to liberalize foreign transactions, capital controls remain pervasive in comparison with other emerging markets, and most types of capital outflows either require approval or are subject to quota restrictions (Bayoumi and Ohnsorge, 2013, p.4). According to various indicators of 7 Article VIII of the International Monetary Fund requires currency convertibility for current account transactions, i.e. primarily those involving transactions in goods and services. 8 Hanemann and Rosen (2013), Figure 8, shows that the implied return on Chinese foreign assets in the late 1990s and early 2000s was only around 2 per cent. Santiso, ed. (2013) estimates that in real terms, China was incurring large losses on its foreign exchange reserves, which came to $125 billion in 2009 as a result of the depreciation of the dollar against the RMB.

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financial openness, China still has the least open financial sector of any major economy (Kroeber, 2016, p.148).

1.3 SOEs and Enterprise Reform Prior to the start of the reforms, virtually all industrial production in China was in the hands of the state, either through SOEs directly controlled by the relevant government ministry or in ‘collective enterprises’ nominally owned by the employees but in practice controlled by local government or other state organizations. A key feature of the transformation of the Chinese economy has been the change in the role played by SOEs and privately owned firms. It is clear that the private sector has become a much more significant economic actor since 1978 (Lardy, 2014). However, it is difficult to analyze this simply in terms of changes in the shares of SOEs and private firms in output, employment or assets since the boundary between them is blurred (Milhaupt and Zheng, 2015). First, Chinese statistics are often contradictory, and the distinctions between different forms of ownership are not always clear, with definitions changing over time.9 Second, changes in governance and managerial incentives may be as or even more important as changes in formal ownership in understanding the roles played by state and private firms, so that focussing merely on the shares of different types of firms may at best only give a partial picture. Third, firms which are formally privately owned may be highly dependent on their links with the state: ‘private but not independent’ (Breslin, 2010, pp.23–5). Fourth, state-owned firms may vary considerably in terms of the degree to which they are effectively controlled by the state. In contrast to the ‘Big Bang’ approach used in the former Soviet Union and Eastern Europe to transfer SOEs to the private sector, the Chinese government adopted a gradualist approach, concentrating initially on changing the way in which SOEs were managed and allowing alternative forms of ownership to grow up alongside them. In the 1980s state control was decentralized to the provincial, municipal, and township levels, which increased competition between different areas to attract resources (Guthrie et al., 2015, p.77). The government also reformed the incentive system, so that managers would become more concerned with increasing the efficiency and productivity of their firms. This gave rise to a more market-oriented approach in which managers had increased power to make key economic decisions (Naughton, 2007. pp.310–13). 9 See Lardy (2014, Ch.3) for a detailed account of the problems of estimating the share of Chinese production according to type of ownership.

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The adoption of a ‘socialist market economy’ in 1992 marked the start of a decade of radical change during which the state sector was subject to a wave of market-oriented reforms and SOEs were forced to adapt to market competition, shut down or move out of the state sector. The process of the corporatization of SOEs began in 1993, with the setting out of a blueprint for adopting what was termed a ‘modern enterprise system’. In 1994 a Company Law was passed, which provided a clearer separation between ownership and management in SOEs and made it possible to create better incentive systems for managers. In 1995 the Central Committee of the Communist Party announced the ‘grasping the large, letting go the small’ policy (Breslin, 2010, p.8). This maintained central government control of the ‘commanding heights’ of the economy while allowing competitive sectors that were of no strategic significance to be opened up to the private sector. Many locally owned SOEs and collective enterprises were privatized through employee buyouts.10 Tens of thousands of ‘zombie’ SOEs that had been kept in production by government loans and subsidies were closed down, and millions of SOE employees laid off. The number of SOEs fell from more than 100,000 in 1993 to less than 30,000 in 2002 (Song, 2014, p.189). By the early 2000s, the process of replacing a planned economy with a ‘socialist market economy’ was largely complete, and most prices were determined by market forces. This was followed by a period of consolidation. In 2003 the State-owned Asset Supervision and Administration Commission (SASAC) was created to hold the assets of central SOEs, and in 2004, local SASACs were set up at provincial level to own local-level SOEs. SASAC operated as a holding company, and this tended to increase the SOEs’ emphasis on profitability and shareholder value. SOEs were encouraged to merge and consolidate into large groups. By 2010 the number of core companies owned by SASAC had been reduced to 121, but the total number of companies under SASAC control came to 23,738, an average of almost 200 subsidiaries per core company (Naughton, 2015, p.53). In 2001 a target of creating between thirty and fifty national champions by 2010 was set (Pearson, 2015, p.33). Not all national champions were state owned: some, such as the Shanghai Automotive Industry Corporation, were owned by local authorities, and others, such as Huawei, were privately owned.

10 Although initially these involved worker buyouts, they were soon eclipsed by ‘elite’ forms of ownership transfers to managers and relatives of government officials (Breslin, 2010, p.9). Some nominally collective firms were in any case in fact privately run firms registered as collectives to take advantage of the benefits that this status brought. In 1998 the government issued a policy to encourage such firms to ‘take off the red hat’, leading to a significant reduction in the reported share of industrial production accounted for by collective enterprises in subsequent years (Song, 2014, p.189).

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The period saw further rapid growth of the domestic private sector, which increased its share of industrial output from less than 10 per cent in 2001 to almost 30 per cent in 2008.11 Foreign firms also continue to play a significant role in China, and despite the decline in their share in recent years, they account for 30 per cent of industrial output and almost half of Chinese exports. Over the same period, the share of SOEs in industrial output fell from 45 per cent in 2001 to less than 30 per cent in 2008 (Song, 2014, Fig. 12.5). Although there has been talk of ‘the state advancing and the private sector retreating’ in the aftermath of the global financial crisis, what in fact appears to have happened is that the pace at which the share of the private sector is increasing has slowed down (Kroeber, 2016, pp.106–7). The economic stimulus created by the government to deal with the effects of the financial crisis has been largely implemented through SOEs, giving them a boost (Fan and Hope, 2013, p.4). Pearson (2015) identifies three tiers of business in China. The top tier is made up of central SOEs in strategic industries such as defence, finance, oil and gas, petrochemicals, electricity, telecommunications, coal, civil aviation, and shipping. These industries are considered strategic in terms of national security. Indeed Chinese political leaders have increasingly used both traditional national defence and ‘economic security’ to justify public ownership in these sectors (Tsai and Naughton, 2015, p.9). These companies control the ‘commanding heights’ of the Chinese economy and are very large. In 2014, fifty-nine centrally owned Chinese SOEs were listed in Fortune’s Global 500 list of the largest firms in the world in terms of revenue (Kroeber, 2016, p.100). A middle tier is made up of firms in sectors which have been classified as ‘pillar industries’. These include heavy industrial machinery, automobiles, information technology, chemicals and pharmaceuticals, steel, and base metals. In this tier there is a mix of ownership, including some centrally owned SOEs, large provincial or municipally owned SOEs, and large privately owned firms (Pearson, 2015, p.34). Although on average, local SOEs are much smaller than those under central control, some, such as Shanghai Automotive Industry Corporation and Hebei Group, China’s largest steel producer, are very large companies. Twenty-three local SOEs are included in the Fortune Global 500 list. There are also a number of large privately owned companies such as Huawei and ZTE,12 and ten of these made it on to the Fortune list (Kroeber, 2016, p.100). The bottom tier comprises the vast majority of firms in China and is made up of largely competitive industries where barriers to entry are low. This tier is

These figures refer to firms with annual sales of more than RMB 5 million. ZTE is sometimes regarded as an SOE and sometimes as a private company (Milhaupt and Zheng, 2015, pp.674–6). 11 12

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made up of privately owned, mainly small and medium enterprises. The state is not directly involved in this tier, acting primarily as a regulator to protect consumers and workers (Pearson, 2015, pp.41–2). One of the major debates about SOEs in China concerns the extent to which they have the autonomy to pursue their own commercial interests or are subject to political control by the government and are used to fulfil the Chinese state’s strategic objectives (Kroeber, 2016, pp.103–4). On the one hand, both the corporatization of SOEs and SASAC’s emphasis on maximizing (government) shareholder value suggest that SOEs are likely to pursue commercial goals. On the other hand, the continuing role of the Communist Party in appointments to the top posts in many SOEs and the ‘revolving door’ of personnel between the Party, the state apparatus, and the SOEs suggest that SOEs’ strategies may well be subject to significant political influence. While the debate implies that SOEs are either instruments of the party/state or no different from large private corporations, the evidence suggests a more nuanced picture. First, SOEs in the middle tier are likely to be allowed more autonomy than those in the top tier of strategic industries (Pearson, 2015, p.35). Second, those firms that come under provincial or municipal authorities, if they are subject to state control, are more likely to be affected by the strategies of those local authorities than to follow a centrally mandated government policy (Breslin, 2010, pp.25–6).13 Even in the case of strategic sectors, SOE managers have been granted managerial autonomy and are far from being simply instruments of central state policy.14

1.4 Labour, Wages, and Productivity Under the centrally planned economy, there was no real labour market in China. Urban labour was allocated to different work units by the Bureau of Labour and Personnel in accordance with the plan. The work unit was not only responsible for paying wages to the workers but also for providing for their health, housing, retirement income, and other social amenities. This system was referred to as the ‘iron rice bowl’. It ensured full employment and job security. Workers often spent their entire working lives in the same unit, and labour mobility was very limited. Wages were set by the government, according to a national wage grid, which kept differentials low (Freeman, 2014). In the rural areas, peasants were organized into communes, 13 Although as Pearson (2015, p.40) points out, central government does have some leverage over locally owned SOEs because the National Development and Reform Commission of the People’s Republic of China (NDRC) maintains the formal right to approve large investments. 14 For further evidence of the extent of managerial autonomy of SOEs, see Milhaupt and Zheng (2015, pp.676–83).

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brigades, and work teams. The household registration system (hukou) tied people to their place of origin and was used, particularly after the failure of the Great Leap Forward (1958–60), to restrict rural-urban migration, which came to an almost complete halt in the 1960s (Naughton, 2007, pp.114–116). There was only limited change in the way that the urban labour market functioned during the first phase of reform after 1979. Although SOEs were allowed some flexibility in terms of hiring new workers, they were prevented from laying off workers, and official government pay scales remained the main determinant of workers’ pay (Cai et al., 2008, p.171). The main change during the first phase of the reforms was the substantial increase in off-farm employment in rural areas as a result of the growth of TVEs.15 Wages were kept low, and productivity growth was mainly driven by the reallocation of labour from low-to higher-productivity sectors, particularly from agriculture to nonagricultural activities (Yao, 2013, Table 5). This situation changed in the second phase of the reform from 1992. The demand for labour increased, and many city governments became aware of the benefits of migrant workers. From the mid-1990s, it became easier for migrants to stay and work in urban areas without possessing a formal urban hukou. As a result there was a continuous stream of migrants to the main industrial centres (Yao, 2013, pp.66–7). In 1994 the government passed a Labour Law which provided a unified framework for labour relations. While on the one hand, it protected core labour rights, it also allowed for no-fault dismissal of workers where economic circumstances required it (Cai et al., 2008, p.174). This set the scene for the economic restructuring that took place in the late 1990s, when, as discussed above, millions of SOE workers lost their jobs. Unemployment increased dramatically to reach over 11 per cent among urban residents in 2002 (Cai et al., Table 6.3). Employment was no longer guaranteed, and labour mobility increased significantly. By the turn of the millennium, the administrative system under which labour bureaus had assigned workers to jobs had largely disappeared, to be replaced by market forces as the key determinant of employment and wages (Freeman, 2014, p.106). The ‘iron rice bowl’ had been shattered. Despite the development of a labour market, the wages of unskilled workers in urban areas did not increase significantly, only starting to rise after 2000 (Freeman, 2014, p.110; Wang and Weaver, 2013). Several factors helped to keep unskilled wages low in the 1980s and 1990s. First, the population of working-age persons grew rapidly and significantly faster than the total population during the 1980s and 1990s (Naughton, 2007, p.174). Second, despite 15 According to Cai et al. (2008, p.171), employment by TVEs increased from 28 million in 1978 to 70 million in 1985 and 123 million by 1993.

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the hukou system, there was substantial rural-urban migration during the period.16 Third, in the late 1990s, the available labour force included large numbers of workers dismissed by SOEs.17 Productivity growth accelerated significantly after 1990, particularly in manufacturing (Yao, 2013, Fig. 12). Both the growth of foreign firms, which brought with them more advanced technology and increased SOE productivity as a result of changes in management, and the dismissal of millions of redundant workers contributed to the increase in manufacturing productivity in the 1990s. Since wages lagged behind productivity growth, unit labour costs fell significantly during the 1990s, contributing to the increased competitiveness of Chinese industry (Yao, 2013, p.67). In the twenty-first century, there have been changes in these conditions. The rate of growth of the working-age population slowed down, and the total numbers peaked in 2013 (Wildau, 2015). Although migration from rural areas continued, the growth rate of migrant workers slowed down compared to that in the 1990s (Li et al., 2012, p.69). Finally, the number employed in SOEs has stabilized since 2003 and so no longer constitutes a major source of surplus labour (Yueh, 2013, Table 3.2). These factors combined to create a situation in which labour shortages began to emerge in the more industrialized coastal areas. These were first identified following the Spring Festival holiday of 2003 and have continued since then (Pringle 2013). There was a sharp increase in labour militancy among private-sector migrant workers, reflected in an increased number of strikes as workers became aware of their greater bargaining power (Elfstrom and Kuruvilla, 2014). Following a wave of strikes in 2004 and 2005, the city authorities in Shenzhen increased the minimum wage substantially in 2005 and 2006 (Pringle, 2011, p.103). Wage increases also spread to other parts of the country.18

16 There are numerous estimates of the level of migration based on different sources and definitions. (See Cai et al., 2008, Table 6.7 for a number of these estimates.) According to the population censuses, the so-called long-distance ‘floating population’ increased from 7 million in 1982 to 22 million in 1990 and 79 million in 2000 (Naughton, 2007, p.130). 17 Again, there are different estimates of the numbers involved. The official figures indicate that 28 million SOE workers lost their jobs between 1993 and 2003. Naughton (2007, p.301) suggests that this is an underestimate, and Song (2014, p.191) gives a figure of 44 million between 1995 and 2003. 18 There has been intense debate over whether or not China’s economy has reached the ‘Lewis turning point’, when wages start to rise as the labour surplus in rural areas disappears. Nobelwinning economist Sir Arthur Lewis argued in the 1950s that economic growth involves a transfer of surplus labour from low-productivity agriculture to a more productive industrial sector (1954). The existence of ‘unlimited supplies of labour’ in the rural areas meant that industrial wages can be kept low and profits reinvested in industry. Eventually as the surplus labour in agriculture is absorbed, the economy reaches a turning point beyond which agricultural incomes and industrial wages start to rise. While some economists point to the increase in urban wages as evidence that the economy has already reached this turning point in China, others argue that there

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Productivity continued to grow during this period as firms faced increased competition and gained more access to advanced technology following China’s accession to the WTO. The bulk of productivity growth since 2000 has been the result of increases within sectors, rather than structural shifts to more productive sectors (Molnar and Chalaux, 2015; Yueh, 2013, p.64). However, since 2003, wages have grown faster than productivity (Ceglowski and Golub, 2012, Table 1). As a result unit labour costs in China have increased over the last decade, giving rise to a lot of discussion about ‘[t]he end of cheap Chinese labour’ (Li et al., 2012).

1.5 Natural Resources, Energy, and the Environment A major downside of China’s remarkable economic growth since the late 1970s has been the environmental degradation that it has caused.19 Problems of air pollution in Chinese cities were highlighted in the run-up to the 2008 Olympic Games in Beijing, when many polluting factories were required to suspend production in order to ensure an acceptable air quality. In January 2013 very severe smog (referred to as ‘the Airpocalypse’) descended on Beijing, with the concentration of particulates in the atmosphere reaching thirty times the level considered safe by the World Health Organization (Kroeber, 2016, p.155). Beijing is by no means the most polluted city in China. Almost 90 per cent of the large cities in the country failed to meet air quality standards in 2014, according to the Ministry of Environmental Protection, with the worst pollution in a number of cities in the province of Hubei, with its concentration of heavy industries (China Daily, 2015).20 Water pollution has also been a major problem in China. Many of the country’s river systems are highly polluted as a result of discharges of untreated industrial and municipal waste. The water quality of seven major Chinese rivers deteriorated significantly up to the early 2000s (He et al., 2012, Fig. 1). In 2005 an explosion at the Jilin Petrochemical Corporation led to a major spill of toxic chemicals (primarily benzene) into the Songhua River. This is only the most dramatic example of such pollution incidents in China in recent years. Problems of water quality are also accentuated by water shortages, particularly in Northern China. is still significant surplus labour in rural areas. Various attempts have been made to resolve this apparent paradox. 19 Various estimates have been made of the costs of environmental degradation in China, which vary from 2–6 per cent of GDP (World Bank, 2007). 20 http://www.chinadaily.com.cn/china/2015-02/02/content_19466412.htm (Accessed 2 Sept. 2016).

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Internationally, China’s growth has led to increasing attention being given to its role in greenhouse gas (GHG) emissions. In 2007 it became the world’s biggest emitter of GHGs, overtaking the US, although emissions per head of population remain much lower than in the US.21 Efforts to reduce the energy intensity of output and the share of coal in the energy mix have succeeded in reducing carbon emissions per unit of GDP since 2005, but total carbon emissions from China have continued to rise and are projected to keep on doing so until after 2020 (Liu et al., 2014, Ch. 20). Rapid economic growth inevitably brings with it increased levels of emissions and waste production, as well as increased demand for energy and resources. However, the extent to which it does so depends on the composition of output and on the technologies used in production.22 These in turn can be affected by a country’s overall strategy of development and the environmental policies that it applies. An emphasis on economic growth and industrialization at all cost, with little attention to the environmental impacts, tends to lead to high levels of environmental degradation and resource depletion. At the start of the economic reforms in China, a number of factors contributed to high levels of environmental degradation, resource use, and energy consumption relative to the country’s level of output. The emphasis on industrialization in the Maoist period meant that the share of industry in total output was far greater than that of other countries at the time, and that less polluting service sectors were much smaller. Moreover, the type of industry that developed in China tended to be heavy industries such as steel and cement, which are the most polluting and energy and resource intensive within the industrial sector. On top of this, the bulk of the country’s power came from coal, the most polluting type of energy. The SOEs, which accounted for the bulk of production, also tended to be inefficient in their use of energy and raw materials. Environmental regulation was not a priority under central planning. During the 1980s and 1990s, the changes in the Chinese economy had two opposing effects. On the one hand, the acceleration of economic growth increased demand for energy and resources and caused higher levels of pollution; on the other, changes associated with the economic reforms led to a reduction in resource- and energy intensity and in emissions per unit of output. There was a shift from heavy industry to light manufacturing of consumer goods, which is less polluting and energy and resource intensive 21 It should also be noted that a significant proportion of Chinese emissions are generated in the production of goods for export to other countries rather than for local consumption. 22 There is an extensive literature on this which distinguishes between the scale, composition, and process/technique effects in analyzing the environmental impacts of economic growth (Grossman and Krueger, 1995; Frankel, 2003).

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(UNCTAD, 2005, Ch. II; Naughton, 2007, Ch. 14).23 Greater efficiency in SOEs also contributed to a reduction in resource and energy intensity. As a result the level of emissions grew less rapidly than GDP. Nevertheless, this was not sufficient to offset the effects of the growth in output, so that the demand for energy and resources and the absolute level of emissions increased. Although the first Environmental Protection Law of the People’s Republic of China was passed in 1979, environmental policy had a very limited impact during the 1980s and 1990s. The emphasis was very much based on end-ofpipe measures (He et al., 2012). The National Environmental Protection Agency was only given ministerial status in 1998, when it was renamed the State Environmental Protection Administration (SEPA). Although several environmental measures and regulations were passed by the central government their implementation depended on local governments, which had little incentive to prioritize environmental protection and tended to focus on promoting their region’s economic development (Zheng and Khan, 2013, pp.759–61). Significant environmental measures tended to come about in reaction to major disasters. For example, in 1998, severe flooding in the Yangtze and Yellow River basins was attributed to deforestation as a result of the extensive logging of upstream watersheds. This led to the government setting up the Natural Forest Protection Program in 2000, which banned logging over a wide area and undertook the reforestation of affected watersheds. The fact that pollution and energy use did not grow as rapidly as output in this period was largely an indirect consequence of the economic reforms rather than a result of government environmental policies. This situation began to change in the late 1990s, following an increased level of investment, particularly in infrastructure, which meant that the leading industrial sectors shifted once more from light manufacturing to heavy and chemical industries (Naughton, 2007, Ch.14). These industries tend to be more polluting and resource- and energy-intensive, so that the gap between the growth of GDP and environmental impact narrowed. Since changes in the structure of the economy were tending to increase the negative environmental impact, the need for improvements in technology to offset these effects also increased. A more proactive approach to environmental policy has emerged since 2002 (He et al., 2012). In that year, the Cleaner Production Promotion Law marked a shift in environmental management away from end-of-pipe controls to a greater emphasis on pollution prevention and the notion of a ‘circular economy’. In 2005 a target was set to reduce the energy intensity of GDP by 20 per cent by 2010, and to move away from heavy reliance on coal (Kroeber, 23 The World Bank estimated that changes in the structure of production accounted for about two-thirds of the total reduction in energy intensity (1997, p.47).

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2016, p.160). The eleventh and twelfth Five Year Plans for 2006–10 and 2011–15 set a new tone, with planned investment in renewable energy and environmental infrastructure and a series of new environmental laws and policy instruments (Mol, 2011). In 2008 SEPA became the Ministry of Environmental Protection, although its influence was still subordinated to the economic interests represented by institutions such as the National Development and Reform Commission, other ministries (e.g. industry and agriculture), and the SOEs. Over time there has been a growth in environmental activism in China. Demonstrations and protests around environmental issues have become more frequent, and there has been an increase in the number of environmental nongovernmental organizations. Environmental problems are receiving more media coverage, and the costs of economic growth are getting more attention (Zheng and Kahn, 2013). This has contributed to more proactive government policy on the environment. One of the strategies of the Chinese government has been to increase the use of renewable energy,24 which has made China a world leader in hydropower, wind turbines, and solar panels. In 2012 its renewable energy capacity was roughly equal to that of the US and Germany combined (Wang and Zadek, 2016, Table 6). China has also become a major exporter of renewable technologies, and is the leading global investor in renewable energy infrastructure. However, domestically, it continues to rely heavily on highly polluting coal-fired power stations for much of its electricity output. It is one of the paradoxes of China’s recent development that while it still suffers from serious environmental problems at home and contributes to global environmental problems through its emissions of GHGs, it is also playing a leading role in the export of clean technologies around the world. However, there are signs of environmental improvement in some areas within China. Air quality in major Chinese cities has improved somewhat in recent years, with lower atmospheric concentrations of sulphur dioxide and particulates (PM10) (Zheng and Khan, 2013, Fig. 1; World Bank and Development Research Centre, 2013, Figs. 3.11 and 3.12). However, major challenges remain. The Chinese government is now giving more priority to environmental protection, as reflected in a new Environmental Protection Law that came into force in 2015, and measures to ensure more effective implementation of its policies such as incorporating environmental aspects into the performance evaluation of local officials, increasing fines for non-compliance, and expanding the right to information (UNDP China, 2015, p.12). It is no longer the case that the Chinese strategy is one of growth at all cost. However, even with the 24 This is also seen as a means of achieving domestic energy security in the face of growing demand (Zheng and Kahn, 2013, p.758).

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New Normal, with its emphasis on the quality as opposed to the rate of growth, Chinese demand for resources and energy will continue to grow in absolute terms for the foreseeable future.

1.6 Conclusion The Chinese economy has been radically transformed since 1979, from a closed, centrally planned economy to a much more market-based economy, which is highly integrated into the global economy in terms of trade and financial flows. In terms of ownership, it has changed from an almost exclusively state-owned to a mixed economy in which both private domestic and foreign capital play significant roles. It has gone from a low-wage, lowproductivity economy, in which workers remained with the same production unit and were guaranteed a basic standard of living via the ‘iron rice bowl’, to one in which there is a high degree of labour mobility, rapidly growing productivity, and an increasingly active labour movement which has seen wages rise in recent years. These impressive changes have not been without significant costs in terms of increased inequality and environmental degradation within China. China’s transformation has also had major impacts on the global economy over the past four decades. The next four chapters discuss these in detail. Chapter 2 looks at the impact of China’s emergence as a global manufacturing powerhouse. One of the impacts of China’s industrial growth has been to create massive demand for raw materials, and this is discussed in Chapter 3. Since the start of the millennium, Chinese firms have been ‘going out’, setting up subsidiaries and carrying out projects around the world, and the implications of this are analyzed in Chapter 4. Finally, China has also become increasingly involved in international finance as an investor, lender, and aid donor, as discussed in Chapter 5.

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2 The Workshop of the World

One of the most visible signs of China’s re-emergence as a global economic power has been the growth of Chinese industry, which has played a key role in China’s economic development over the past four decades. Since the late 1970s, Chinese industrial production has grown more than fortyfold, increasing its share of global manufacturing from less than 2 per cent in 1980 to almost 25 per cent in 2014 (see Figure 2.1). It now produces 50 per cent of the world’s steel (Lu, 2016), 60 per cent of its cement, 60 per cent of all shoes, 70 per cent of mobile phones, and 80 per cent of air conditioners (Economist, 14 Mar. 2015). China’s role as the ‘workshop of the world’ is also reflected in the growth and scale of its exports of manufactures. In 2009 it overtook Germany as the world’s largest exporter, and by 2014, it was responsible for almost a fifth of 25 20 15 10 5 0

1980

1985

1990

1995

2000

MVA

Exports

2005

2010

2014

Figure 2.1. China’s Share of World Manufacturing Value Added (MVA) and World Manufactured Exports, 1980–2014 (%) Source: MVA – UNIDO, Yearbook of Industrial Statistics, various years; Exports – WTO Statistical Database.

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global exports of manufactured goods (see Figure 2.1). Any cursory glance at the origins of the goods in our shops will turn up countless examples of products labelled ‘Made in China’. The first section of this chapter describes the ways in which Chinese manufacturing has grown and changed over the various phases of economic reform since 1979. The remaining parts of the chapter look at the factors that explain the competitiveness of manufacturing in China, the key characteristics of Chinese manufactured exports, and the ways in which China is integrated into global production networks. The chapter concludes with a brief discussion of the impact of China on the global economy through its effects on the production, export, and prices of manufactured goods.

2.1 The Development of Chinese Manufacturing How then did China go from being a minor industrial power at the end of the 1970s to become the ‘workshop of the world’ in the early twenty-first century? China was already relatively industrialized for a low-income country in the 1970s, with industrial production accounting for almost half of total output in 1978 (Naughton, 2007, p.154). This was mainly in the hands of state-owned enterprises (SOEs) and biased towards heavy industries such as cement, steel, and chemical fertilizers, which were capital intensive and technologically relatively complex. Production of simple labour-intensive consumer goods such as clothing and footwear was limited. Consumer demand was repressed by high taxes on goods regarded as luxuries, such as electric fans and wristwatches, and a number of products including soap, cloth, and bicycles were rationed (Naughton, 2007, p.81). Industrial output was characterized by the problems common in centrally planned economies, such as a focus on quantity rather than quality, lack of competition, obsolete products, and low levels of efficiency in terms of both resource use and labour productivity. In the late 1970s, manufactured exports were minimal, and they consisted mainly of textiles. The first phase of economic reform in China produced significant changes in the manufacturing sector driven by domestic demand. There was a rapid growth of production by township and village enterprise (TVEs) to meet the pent-up demand for consumer goods. Although collectively owned, TVEs were not subject to the same level of state control as SOEs, and their growth increased market competition. They were also much more labour intensive. As incomes increased in rural areas and growing numbers of workers migrated to urban areas in the 1980s, demand for simple consumer goods grew. As a result there was a significant shift in the structure of Chinese manufacturing, away from heavy industry and towards the production of labour-intensive consumer goods (Naughton, 2007, pp.329–32). 34

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Neither exports nor foreign direct investment (FDI) played a major role in manufacturing growth in the 1980s. Although manufactured exports grew five-fold in the 1980s, this was from a low base, and China’s position in global trade remained marginal, accounting for less than 2 per cent of world exports (see Figure 2.1). Even a decade after China adopted its open-door policy, foreign-invested firms accounted for less than 3 per cent of the value of industrial output (Davies, 2013, p.17), and 12.5 per cent of China’s total exports in 1990 (Lardy, 1995, Table 6). The bulk of FDI consisted of Hong Kong and Taiwanese firms relocating labour-intensive manufacturing activities in industries, such as textiles, garments, footwear, and toys, to the southern coastal provinces, including the Special Economic Zones (SEZs). Although manufacturing output grew rapidly in the 1980s, this was not associated with rapid growth in labour productivity, which increased little prior to 1990 (Yao, 2013, p.35). Output also failed to keep pace with the growing demand for consumer goods, which led to an increase in inflation in 1988–9. During the second phase of reform, China embarked on a major effort to attract FDI in the early 1990s. There was a substantial increase in foreign investment in manufacturing, as foreign firms were now given access to the domestic market. As incomes rose, consumer demand shifted from basic items such as food and clothing to durable consumer goods such as radios, TVs, and refrigerators. This led to a wider range of investors from the US, Europe, and Japan entering China so that by the early 2000s, foreign-invested firms accounted for around 30 per cent of manufacturing output (Song, 2014, Fig. 12.3). Foreign transnational corporations (TNCs) brought technologies that were more advanced with them, which helped to increase productivity in manufacturing. Also, as noted in Chapter 1, a major shake-out of SOEs occurred during the second phase of reform, which led to a large numbers of workers being laid off in the late 1990s, further contributed to increased productivity. The surge in inward FDI in the early 1990s also contributed to an acceleration of the growth of exports. The share of foreign-invested firms in exports increased from less than a third in 1995 to a half by 2001 (Lardy, 2014, Fig. 3.3). By the early 2000s, more than a quarter of industrial production was being exported.1 China’s share of world exports of manufactures increased from less than 2 per cent in 1990 to almost 5 per cent by 2000 (Figure 2.1). The composition of exports also shifted, with a growing

1

A significant proportion of these exports had a high level of import content and so exports were not as significant in terms of the value added in the manufacturing sector in China as their share of industrial output might suggest.

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proportion made up of electrical and electronic products assembled in China, as opposed to simpler consumer goods. Another factor that contributed to industrial growth in the 1990s was a major revival in infrastructure investment. During the 1980s this had lagged behind economic growth, but in 1993, there was a significant increase to around 6 per cent of gross domestic product (GDP). This received a further boost in the late 1990s, when the Chinese government increased public investment to offset the effect of the Asian Financial Crisis of 1997 (Naughton, 2007, Fig. 14.3). Since China joined the World Trade Organization (WTO) in 2001, investment has become a major driver of growth. The share of gross fixed capital formation in GDP has increased from an average of 33 per cent in the 1990s to 39 per cent between 2001–8 and then to 45 per cent from 2009–14 as a result of the fiscal stimulus introduced by the government in response to the global financial crisis (World Bank WDI database, n.d.). This reflected heavy government investment in infrastructure, including the expansion and modernization of ports to support the growth of exports, in electricity generation and in telecommunications. The highway network was also extended to the interior of the country (Kroeber, 2016, pp.83–4). Industrial policy sought to create a more integrated industrial structure by promoting local supply chains to reduce dependence on imported inputs. In the case of exports, there was a decline in the share of processing trade in total exports, and an increase in the proportion of Chinese inputs incorporated into exported products. This helped increase backward linkages within the manufacturing sector. As a result manufacturing has become increasingly capital intensive and oriented towards heavy and chemical industries (Ferchen, 2011). Another aspect of industrial policy in the period since China joined the WTO was an effort to upgrade local technology. This involved providing subsidies for research and development (R&D) and rewards for filing patents, as well as requiring foreign investors to transfer technology to Chinese firms as a condition of entry to China. In 2006 this was launched under the rubric ‘Indigenous Innovation’. R&D as a share of GDP more than doubled, from less than 1 per cent in 2000 to just over 2 per cent in 2013 (World Bank, WDI, n.d.). Joining the WTO in 2001 gave a significant boost to China’s exports of manufactures. Whereas exports had grown by 14.6 per cent per annum between 1991 and 2001, this increased to 27.3 per cent between 2002 and 2008, before being hit by the global financial crisis (Yao, 2013, p.24). As a result China’s share of world exports of manufactures rose from just over 5 per cent in 2001 to 12.7 per cent in 2008 (WTO Database, n.d.). Despite the global slowdown after 2008, Chinese exports continued to grow, albeit at a 36

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slower rate, so that by 2014, China accounted for 18 per cent of world exports of manufactures (Figure 2.1). Although China’s share of world exports of manufactures increased, this did not mean that its manufacturing became more dependent on exports. The share of industrial output that was exported remained constant at around a quarter up to the global financial crisis, and then it fell to a sixth in 2011.2 The structure of exports continued to evolve away from traditional labourintensive products such as textiles and clothing, towards electrical and electronic products, other types of machinery, and iron and steel. Whereas foreign-owned firms were the main drivers of industrial production in the 1990s, the domestic private sector became increasingly significant in the 2000s. The share of industrial output accounted for by domestic businesses increased from less than 10 per cent in 2001 to around 30 per cent a decade later (Song, 2014, Fig. 12.5). Foreign firms’ share of industrial output peaked in 2003 at around 36 per cent (Davies, 2013, p.17), and was overtaken by private Chinese firms in 2009 (Song, 2014, Fig. 12.5). Although local governments continued to compete to increase inflows of FDI, the priority for central government shifted to improving the quality of FDI, particularly in relation to technology. The large tax advantages that foreign firms received, compared to locally owned companies, began to be phased out from 2008. Leading TNCs were encouraged to locate R&D facilities in China, and high-technology sectors were targeted for investment (Davies, 2013, p.15). This period was one of increasingly intense competition as Chinese private firms competed with both foreign investors and SOEs in some sectors. High levels of investment led to a massive expansion of industrial capacity, particularly in large-scale capital-intensive industries. This has led to the emergence of excess capacity in a number of industries in China including steel, cement, flat glass, aluminium, leather, and textiles. The high level of competition and overcapacity have increasingly led firms to seek new markets overseas where there is less competitive pressure and to export underutilized plant and equipment. Since around 2012 the shift to a ‘new normal’ in China has marked a new phase in terms of the country’s industrial development. Economic rebalancing internally involves an increase in the share of GDP going to consumption, as opposed to investment and exports. Externally it involves a reduction in the large current account surpluses which China generated in the previous phase of development and which have been a cause of trade tensions with other countries. As far as industry is concerned, the ‘new normal’ implies a slower rate of growth, with services accounting for an increasing share of GDP. It also puts 2 Own calculation from UNIDO data on industrial output and WITS data on exports according to the International Standard Industrial Classification (ISIC).

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more emphasis on innovation and improving technological capabilities, as opposed to high levels of investment in fixed assets. It will see China moving up the value chain to obtain sustained productivity growth, a strategy set out in the twelfth Five Year Plan (World Bank, 2014, p.30) and developed further with the launch in 2015 of “Made in China 2025”, an ambitious plan to build one of the world’s most advanced and competitive economies based on innovative manufacturing technologies (Wübbeke, et. al., 2016). Although the rate of growth of both manufacturing output and exports is likely to be lower than in the past, they will continue to grow at a significant rate with major impacts on the global economy.

2.2 What Makes Chinese Manufactures so Competitive? What factors have made it possible for China to increase its share of the world market for manufactured products so dramatically since the early 1990s? In other words, what makes China so competitive internationally? This is a source of considerable debate, in particular over the extent to which export growth has been stimulated by an undervalued exchange rate and ‘unfair’ trade practices by the Chinese government (Kroeber, 2016, pp.59–64). The issue is highly political because many countries have used anti-dumping measures against Chinese exports.

2.2.1 Wages and Productivity A major factor in the competitiveness of Chinese industry has been relatively low wages, combined with significant technological catching-up with more developed economies. In 1978, when China began to open its economy, the average level of urban wages was only 3 per cent of US wages, and it was considerably below that in other Asian countries such as Thailand and the Philippines (Li et al., 2012, p.57). Wages increased very little in USD terms for the next two decades, and only began to increase significantly after 2000. Meanwhile productivity in manufacturing grew rapidly in the 1990s as a result of high levels of investment, reforms of SOEs, increased imports of technology, and the growing involvement of foreign investment (see Chapter 1). As a result unit labour costs in Chinese manufacturing fell significantly, both in absolute terms and relative to those in other countries.3 However, since the mid-2000s, the trend has reversed, with wages rising faster than 3

Between 1990 and 2009, unit labour costs in manufacturing fell by 66 per cent (Yao, 2013, p.67). Unit labour costs fell from over 70 per cent of US levels in the early 1980s to about 30 per cent in the mid-1990s (Ceglowski and Golub, 2007 cited in Li et al., 2012, p.63).

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productivity, and unit labour costs rising in both absolute and relative terms. Despite this, unit labour costs in China remained much lower than those in the US or neighbouring Asian countries, such as Malaysia, Thailand, and the Philippines (Ceglowski and Golub, 2012).4

2.2.2 Economies of Scale and Scope Other factors which are often cited as contributing to the competitiveness of Chinese production are the size of the domestic market and the development of specialized industrial clusters. These can reduce production costs through economies of scale and scope. However, since a large proportion of Chinese exports of manufactures comes from firms which produce mainly or exclusively for export, these are unlikely to be affected by the size of the Chinese market. Indeed it is very likely that products produced for export are quite different in terms of quality and specifications from those sold on the domestic market. The advantages of industrial clusters, which characterize some Chinese exporting industries, are more significant.5 There are many examples of specialized industrial clusters of for instance women’s underwear in Shantou (Guangdong), electronic products in Dongguan (Guangdong), transport equipment in Jinan (Shandong), and lighters in Wenzhou (Zhejiang). One estimate suggests that clustering explains almost a sixth of the price advantage of Chinese products (Navarro, 2006, Table 5). The factors considered so far reflect real cost advantages over its competitors that China enjoys. However, there is a commonly heard view that increased competition from Chinese goods is not just a reflection of economic realities but is largely created by ‘unfair’ practices on the part of the Chinese government. These views have been very prominent in the US over the past decade in response to the growth of imports from China and the large US trade deficit with China. This has led to accusations that China is a ‘currency manipulator’ and unfairly subsidizes exports and dumps its products in overseas markets.

2.2.3 The Exchange Rate The extent to which exports are competitive does of course depend not only on domestic cost conditions but also on the exchange rate. Many commentators have argued that China has maintained an undervalued exchange rate, and that this has been a crucial factor in its export success. Indeed, in recent 4

Since 2009 there have been significant increases in wages in China, which are likely to have reduced this advantage in terms of labour costs. 5 For a discussion of industrial clusters in China, see Frattini and Prodi (2013).

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years, the Chinese government has come under pressure, particularly from the US, to revalue its exchange rate in the hope that this would reduce the US trade deficit with China. The impact of the exchange rate on Chinese exports should not be exaggerated. The rapid growth of exports started well before complaints were made about undervaluation. The exchange rate before 1979 was highly overvalued, and a substantial devaluation occurred as part of the liberalization of the 1980s. In 1994 the RENMINBI (RMB) was pegged to the USD, and the rate remained basically unchanged for the next decade. The appreciation of the Japanese yen relative to the USD in the 1990s significantly increased costs in Japan and made China a more attractive base for production. In the first decade of the millennium, the RMB became undervalued relative to the USD. Although the exact extent of the undervaluation is difficult to calculate, some estimates suggest that it could have been about 20 per cent (Cline and Williamson, 2008 quoted in Knight and Ding, 2012, p.282).6 Since 2005, when the peg to the USD was removed, the RMB has appreciated considerably (Yao, 2013, pp.96–7). In 2015 the IMF announced that the Chinese currency was no longer undervalued (Mitchell and Donnan, 2015). The extent to which undervaluation contributed to the boom in Chinese exports during the 2000s is unclear. When China joined the WTO in 2001, this gave much better access to foreign markets because of lower tariffs, which would have boosted exports anyway. Also, as discussed in Section 2.3, because a large proportion of Chinese exports were made up of imported inputs, part of the advantage of an undervalued exchange rate would be lost because it would make imports more expensive in local currency.7

2.2.4 Government Subsidies The other common complaint against China is that it subsidizes producers in various ways enabling them to export at below the true cost of production. As well as direct export subsidies, which are not permitted under WTO rules, critics point to other government policies that also help to reduce costs for 6 Chin (2013) shows that estimates of RMB undervaluation vary considerably depending on the methodology and data used. By way of illustration of the difficulties of arriving at an exact figure, Morrison and Labonte (2013, p.21) quote four studies of the extent of undervaluation of the RMB relative to the USD in 2009 at 12, 25, 40, and 50 per cent. 7 Cheung et al. (2010) find no relationship between the RMB real exchange rate and exports in aggregate. However, when they separate out ordinary exports from processing exports (see Ch.1 for an explanation of the distinction), they find that the exchange rate does have the expected impact on ordinary exports. However, in the case of processing exports, the relationship is the opposite to what would be expected, with a depreciation of the exchange rate leading to a reduction in exports. This could reflect the increased cost of imported inputs when the RMB depreciates.

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exporters. These include subsidized water and energy, and the provision of land cheaply or for no cost at all. SOEs, in particular, were also provided with cheap loans and were subject to a soft budget constraint. Some critics also regard the system of value added tax (VAT) rebates for imported inputs as an export subsidy (Navarro, 2006, p.9). In fact, although providing access to imported inputs at world market prices free of any import duties and taxes was crucial in enabling certain export industries to develop in China, the VAT rebate system does not constitute ‘unfair’ support for exporters. Indeed, not providing such rebates would in effect be a tax on exports. The extent to which China subsidizes its exports and Chinese firms are able to export at below cost is highly controversial. More anti-dumping and antisubsidy complaints have been brought at the WTO against China than any other country. However, although these illustrate importing countries’ concerns about imports from China, they do not provide a real measure of the extent to which China’s exports have been a result of government subsidies. China has challenged many of these actions in the WTO, and in 2014, it successfully argued that twelve US countervailing duty investigations were not justified under WTO rules.8 While subsidies were important in the early stages of China’s export expansion, they have become less significant over time. Direct export subsidies were abolished with the country’s accession to the WTO. Other forms of subsidies, such as cheap energy and support for lossmaking firms, have primarily benefitted SOEs, but SOEs have accounted for a declining share of exports and by 2013, only contributed 11 per cent of the total (Lardy, 2014, Fig. 3.3). In summary, then, the competitiveness of Chinese exports has been based primarily on low production costs, reflecting the low level of wages and rapid productivity growth as a result of high levels of investment, technology transfer, economies of scale and scope, and skills upgrading. The role of state subsidies has become less significant since China joined the WTO, although it remains important to some firms and sectors.9 The exchange rate plays a role in that it determines the conversion of RMB costs to those in USD or other international currencies, but since the mid-2000s, the degree of undervaluation has declined.

8 See ICTSD, ‘WTO panel Grants China Victory in US Dispute over State-Owned Enterprises’, Bridges, 17 July 14. These cases all involved Chinese SOEs which, the US claimed, were being unfairly subsidized. 9 Girma et al. (2008) find that production subsidies had an impact on the level of existing exporters’ exports but a minimal effect on the probability of a firm becoming an exporter. They find that the effect of subsidies on exports has decreased since China joined the WTO. They also report that subsidies have most effect on exports in capital-intensive industries and on firms located in non-coastal regions.

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2.3 Key Features of Chinese Manufactured Exports There are three questions which need to be asked about China’s exports of manufactures when considering its role as the ‘workshop of the world’. First, given the high import content of such exports, is China better described as the ‘assembly line of the world’? Second, is it simply an exporter of low-cost, labour-intensive products or has it been able to upgrade its production to more technologically sophisticated products? Last, is China simply an export platform for foreign companies or have locally owned firms also become involved in production for global markets? It is certainly true that products carrying a ‘Made in China’ label may only be assembled in China from parts imported from other Asian and Western economies. The classic example of this is the Apple iPhone. Of the total value of an iPhone exported from China, the greatest proportion consists of parts and components from South Korea (43 per cent), the US (12 per cent), Taiwan (11 per cent), Germany (9 per cent), and the rest of the world (22 per cent). The share actually produced in China via the final assembly of the iPhone accounts for only 3.5 per cent of the export value.10 If the iPhone were representative of China’s exports as a whole, the figures discussed so far would greatly exaggerate the significance of China as a global manufacturing powerhouse. The question, as posed in a recent article by Koopman, Wang, and Wei, is ‘How much of China’s exports are really made in China?’11 This question arises because Chinese exports began to grow significantly with the establishment of SEZs, where firms were able to import inputs duty-free in order to produce for export, and because processing exports, which enjoyed the same privileges, account for a large share of exports. This suggests that a better way to look at Chinese exports is to measure the value added within China rather than the gross value of the exported product.12 Because of the high import content of processing trade exports, this figure is likely to be considerably lower than the reported value of Chinese exports. Estimates by the Organization for Economic Co-operation and Development (OECD) and the WTO show that for China, in 2011, the domestic

10 Own calculation from figures provided in OECD (2011) Box 2. For similar estimates for the iPhone and iPad, see Kraemer et al. (2011). 11 This was the original title of a 2008 National Bureau of Economic Research Working Paper (No. 14109), which was subsequently published as Koopman et al. (2012). 12 Trade flows are usually measured in gross terms; in other words, they measure the total value of products crossing national borders. This gives rise to an element of double counting when there is a lot of trade in inputs for use in products that are subsequently exported. When country A exports parts to country B for assembly, with the assembled product exported to country C, the value of the exports of parts is counted twice, first as exports from A to B and then as part of the value of the assembled product being exported from B to C.

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value-added content of manufactured exports was around 60 per cent of the gross value of exports, significantly lower than that of the US or Japan (78 and 82 per cent, respectively). Several other studies have also found that Chinese exports contain a high share of foreign content, and consequently only 50–60 per cent of the value of gross exports was actually created within China (Chen et al., 2012): Dean et al., 2011; Koopman et al., 2012; Upward et al. 2013). All of the studies which have looked at domestic value added in Chinese exports over time agree that the share has increased since the late 1990s. According to OECD–WTO figures, the share of imported inputs in Chinese manufactured exports fell from over half in 2000 to around 40 per cent in 2011, with most of the reduction coming after 2005. This is not surprising, since the share of processing exports in total exports has been falling since the late 1990s. There is also evidence that the share of domestic value added in processing exports has tended to increase over time (Koopman et al., 2012, Table 3; Chen et al., 2012, Table 1). One implication of the high import content of Chinese manufactured exports is that the figures on China’s share of global exports quoted earlier tend to exaggerate its role as a trading power. In 2009, for example, when China accounted for 9.4 per cent of global gross exports, its share of valueadded exports was only 8.3 per cent (Kwan, 2014, Table 1). Nevertheless, even when this is taken into account, it remains the case that China’s share of world exports has increased significantly over time, and it has become a major centre for global industrial production. Another important implication of looking at trade in terms of value added rather than gross trade flows is that it can significantly alter perceptions of bilateral trade balances between countries. For instance, China’s large trade surplus with the US is substantially reduced when account is taken of the fact that much of the value of Chinese exports is value added from other Asian countries. For example, in 2009, China’s trade surplus with the US, which was reported to be $189 billion, dropped by a third when calculated in value-added terms (Kwan, 2014, Fig. 1). When China began to export manufactured goods in the 1980s, the initial focus was on labour-intensive consumer goods such as clothing, footwear, toys, and sports goods. Over time the range of goods exported grew to include consumer durables such as laptops, mobile phones, and TVs; intermediate goods such as steel and chemicals; and capital goods including machinery, trucks, and locomotives. There has been a lively debate about the ‘sophistication’ of Chinese exports. The growing share of medium- and hi-tech products in China’s exports does suggest a process of upgrading in which they are becoming increasingly sophisticated. This debate has major implications, both for China itself in terms of the impact of exports on structural change and economic growth, 43

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and for other countries in terms of which economies and industries are likely to face serious Chinese competition. The ‘sophistication’ of exports can be defined in a number of different ways. There are several classifications of industries or products which identify those that use high, medium, or low technology. One commonly used classification is that of Lall (2000), which classifies products into primary products, resourcebased manufactures, and low-, medium-, and high-technology manufactures.13 Other measures that have been used are indices of similarity or dissimilarity between Chinese exports and those of developed countries (Schott, 2008; Wang and Wei, 2010) and the Hausmann et al. (2007) index of export sophistication (EXPY14) (Rodrik, 2006; Xu, 2010; Jarreau and Poncet, 2012). Figure 2.2 shows the share of China’s manufactured exports according to Lall’s classification of technology level. The share of high-technology products, accounted for mainly by electrical and electronic products, increased significantly between 1995 and 2005, while that of low-technology products fell by a similar amount. Since 2005, the shares of different product groups have remained constant. There is also evidence that China’s exports have become more like those of the developed countries over time (Schott, 2008, Table 12; Wang and Wei, 2010, Table 2.1) and that they have been characterized by an increasing EXPY ( Jarreau and Poncet, 2012). It has been claimed that China’s exports are more sophisticated than would be predicted from its per capita income, and that this has contributed to the rapid growth of the Chinese economy (Rodrik 2006). Claims about the sophistication of Chinese exports have been challenged on a number of grounds. First, although the range of products that China exports is relatively sophisticated, it tends to export low-quality varieties of each type of product, as indicated by lower prices than those charged by exporters from higher-income countries (Schott, 2008; Xu, 2010). Second, most of China’s exports come from the coastal provinces, which have considerably higher levels of income than the average for the country as a whole, which is used to predict the sophistication of exports (Xu, 2010). A third argument is that even though China is exporting high-tech products, such as laptops and mobile phones, the production processes that take place in China are relatively

13 The OECD has a classification of manufacturing industries which distinguishes between high-, medium-high-, medium-low, and low-technology industries, based on R&D intensity. This is more aggregated than the Lall classification. See Yang (2016), Tables 5 and 6. 14 This index assumes that countries with higher per capita income tend to export products that are more sophisticated. A product’s level of sophistication can, therefore, be calculated as the weighted average of the per capita income level of those countries that export the good (referred to as PRODY). The sophistication level of a particular country’s export basket (EXPY) is then the weighted (by share in exports) average PRODY of its export basket, so that the higher the share of high PRODY (i.e. sophisticated) products in its exports, the higher the value of EXPY.

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99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14

98

19

97

19

96

19

19

19

95

0.0%

Low tech

Medium tech

High tech

Figure 2.2. Share of China’s Manufactured Exports by Technology Level, 1995–2014 Source: Own elaboration from UNCTADStat data.

labour-intensive assembly and packaging rather than high-technology design and sophisticated component manufacturing (Amiti and Freund, 2010). This last argument is related to the importance of processing trade in Chinese exports, as discussed previously. It is clear that processing trade is particularly prevalent in higher-technology products such as computers, electronic components, telecommunications equipment, and audiovisual apparatus. As a result only about a third of the total value of exports of these products are made up of Chinese value added (Koopman et al., 2012, Table 6). One estimate comparing the distribution of Chinese exports according to their level of technology found that when the exports were measured in terms of their domestic content rather than in terms of gross exports, the share of high-tech industry fell from 30 to 10 per cent (Kuroiwa, 2014, Table 2). This lends further support to the view that conventional measures have tended to exaggerate the level of sophistication of Chinese manufactured exports. However, this does not imply that there has been no upgrading of Chinese exports over time. Although lower than when measured in terms of gross exports, the share of high-technology industries in Chinese exports measured in terms of domestic value added still doubled between 1990 and 2005 45

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(Kuroiwa, 2014, Table 2). Similarly, the other indices of export sophistication used in the literature also show that Chinese exports have become more sophisticated over time, and this cannot be attributed entirely to the role of processing trade. Wang and Wei (2010) conclude that the major factors contributing to the increased sophistication of exports have been the growth of human capital and the role of government policies. This is not surprising, given the rapid growth in incomes, increased levels of human capital, expenditure on R&D, and other government policies to encourage upgrading, such as the creation of High-Technology Development Zones since the mid-1990s (Yueh, 2013, p.258; Wang and Wei, 2010). This suggests that competition from China is likely to grow over time, particularly for upper-middle-income and highincome countries. Finally, as was pointed out in Section 2.1, foreign-invested firms played an important role in Chinese exports, especially processing exports. They have been particularly significant in exports of high-technology products such as computers, electronic components, office equipment, and telecommunications equipment, where they account for more than 80 per cent of exports (Koopman et al., 2012, Table 6). Many of the foreign firms exporting from China are from other Asian countries, particularly Taiwan, South Korea, Hong Kong, and Japan. The Taiwanese electronics contract manufacturer, Foxconn, has been China’s leading exporter since 2001 (Selden et al. 2013). On the other hand, foreign firms have very little involvement in exports of steel, fertilizers, ship-building, and railroad equipment (Koopman et al., 2012, Table 6). The share of foreign firms in total exports peaked at almost threefifths in the mid-2000s before falling to less than half in 2013, whereas the share of private domestic firms increased from 1 to 39 per cent in 2000–13 (Lardy, 2014, Fig. 3.3).

2.4 China’s Integration into Global Production Networks To understand the main characteristics of China’s exports of manufactures, namely the relatively sophisticated products exported, the significant role played by foreign-owned firms, and the high level of foreign value added incorporated into exports, it is necessary to consider the way in which Chinese industry is integrated into global production networks and global value chains,15 and more specifically into an Asian manufacturing network. 15

Although there are distinct intellectual traditions and bodies of literature associated with global production networks and global value chains, the two approaches have much in common. Since the discussion draws on both sets of literature, the terms are used interchangeably here.

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In the 1960s the so-called ‘flying geese’ model saw the spread of industry from Japan to the newly industrializing East Asian countries of South Korea, Taiwan, Hong Kong and Singapore as wages and other costs rose in Japan and more labour-intensive industries relocated to lower-wage countries. With rapid growth, increased technological capabilities and rising wages in the newly industrializing countries (NICs), they too began to upgrade production and move out of the more labour-intensive activities by the 1980s (Gaulier et al., 2007, p.30). This began as China was opening up for exportoriented manufacturing with the creation of the SEZs, and the 1980s saw a rapid relocation of industries such as clothing and footwear from the NICs to China. During the 1980s China replaced Taiwan as a major source of US footwear imports (Naughton, 2007, p.417), and Hong Kong relocated much of its garment production to the Pearl River Delta and elsewhere, to concentrate on logistics, marketing, and finance rather than unskilled manufacturing activities. While the relatively simple division of labour in traditional industries, such as clothing, footwear, and toys, meant that they relocated production wholesale to China, in more complex industries, such as electrical and electronic products, computers, and telecoms, standardization enabled firms to fragment the production process, while reductions in the costs of transport and communications made it possible for different activities to be carried out in distinct locations. This led to the emergence of a much more complex division of labour characterized by intra-product specialization. Initially China was able to participate in the more labour-intensive segments of the value chain, particularly in the final assembly of products using imported components. This was made possible by the processing trade regime and accounts for the very high share of foreign value added in Chinese exports of electrical and electronic products. Over time, China expanded from assembly activities to the production of lower-technology peripheral products, such as computer keyboards, and then to an increasing number of parts and components. As technological capabilities and skills in China increased and foreign firms’ confidence in moving production to China grew, China was able to upgrade its production, and Chinese-owned firms were able to become increasingly involved in some global production networks. The extent to which China is integrated into global production networks and global value chains can be measured by looking at the share of foreign value added in their exports (upstream links) and the extent to which their exports are incorporated into other products abroad and then re-exported (downstream links). On this basis, China is one of the leading developingcountry exporters to be integrated into global value chains, behind only its neighbours Singapore, Hong Kong, Malaysia, and South Korea (UNCTAD, 47

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2013, Fig. IV.13). It is far more integrated into global value chains than other large developing countries such as Brazil or India. Although this has so far been described as integration into global production networks or value chains, it would be more accurate to describe China as an example of integration into a regional East Asian network or value chain. One indication of this is that half of the processing trade imports to China in the mid-2000s came from Japan, South Korea, and Taiwan, and 70 per cent from East Asia as a whole. In contrast, the US and Europe, combined, accounted for less than 10 per cent of processing imports (Tong and Zheng, 2008, p.74). This has given rise to what has been described as a triangular trade pattern between East Asia, China, and the West, in which now, instead of exporting finished products directly, the East Asian economies export parts and components to China, which in turn exports finished products to the US and Europe (Tong and Zheng, 2008, p.73; Gaulier et al., 2007, pp.56–8). The picture is continually evolving, however, and China is becoming much more than simply a platform from which other East Asian countries export to developed-country markets. Increasingly there are two-way flows of trade in parts and components between China and its neighbours, so that imported inputs used in Chinese exports may themselves include some parts originally produced in China. China is now playing a much more central role in East Asian trade networks (Yang, 2016). Nevertheless it remains dependent on core technologies from other East Asian countries, particularly in high-tech industries (Tang and Zhang, 2009; Gaulier et al., 2007, Table 8). Viewing China in the context of its role within East Asian production networks has important implications. While the country’s rising share of manufactured imports to the US and the EU might appear to show that Chinese exports have displaced those of Japan and the NICs, the picture is more complicated. The value of these exports contains a significant proportion of imported inputs, which creates a complementary relationship between the export performance of China and that of other East Asian countries. It also suggests that the growing role of China in global trade cannot be understood solely in terms of Chinese macro-economic variables, such as the exchange rate, wage levels, and inflation, but also needs to be informed by an analysis of the evolution of global production networks/global value chains and the way in which China is integrated into these.

2.5 Global Impacts of the Growth of Chinese Manufacturing What has been the impact on the global economy of the emergence of China as a manufacturing centre? If it were just a case of foreign companies 48

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relocating the final stages of their value chains from other Asian countries, such as Hong Kong or Taiwan, to mainland China, the global impacts would have been limited to some reconfiguration of trade flows, with goods previously imported from elsewhere in Asia now apparently being imported from China. However, this would exaggerate the real changes in location that took place, since much of the value added embodied in Chinese exports would have been produced elsewhere. There would have been an impact on Asian countries off-shoring production to China, but this would not necessarily be negative since the relocated production processes would be relatively low skilled, and this could be part of a process of industrial upgrading by those countries. This indeed is what began to happen in the 1980s and continued into the 1990s with the transfer of production from Hong Kong, Taiwan, and South Korea to China. For example, the two major categories of goods imported to the US from China at the end of the 1990s were footwear and baby carriages, toys, and games and sporting goods. In the case of footwear, in the late 1980s, almost 60 per cent of US imports came from South Korea and Taiwan, with only 2 per cent from China, but by the end of the 1990s, these proportions had been reversed. Similarly, with baby carriages, toys, and games and sporting goods, the fall in the share of imports from Hong Kong, South Korea, and Taiwan from the mid-1980s almost exactly matched the increase in imports from China (Branstetter and Lardy, 2008, Figs. 16.11 and 16.12). Another reason why China’s impact on the global economy in the 1980s and much of the 1990s was limited was its relatively small share of global manufacturing value added (MVA) and global exports of manufactures (Figure 2.1). However, the situation began to change in the late 1990s, and China’s share of world MVA and world exports of manufactures increased fivefold over the next two decades. By the mid-2010s China accounted for almost a quarter of world MVA and a fifth of manufactured exports. It was no longer a minor player in terms of its impact on global manufacturing. The world began to take notice of China’s growing impact on the global economy at the time of its accession to the WTO in 2001. In the immediate aftermath of this event, a number of studies were published which analyzed the effects of its increased international integration on the rest of the world (Lardy, 2004; Yang, 2003; Rumbaugh and Blancher, 2004; Ianchovichina and Martin, 2004; Prasad and Rumbaugh, 2003). These were generally optimistic and emphasized the positive impacts of China’s growing role in the global economy in contrast to concerns expressed about the negative effects of increased competition from China in the media and some business sectors in both developed and developing countries . China’s growth since the early 2000s has affected the global economy in several ways. The rapid growth of its exports has had a major impact on the 49

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prices of the manufactured goods that it exports.16 This has been particularly marked in clothing and footwear, where prices have tumbled in recent years, but it is also affecting a much broader range of products. This price effect has a number of positive impacts, in that it helps reduce inflationary pressures in importing countries and raises the real incomes of consumers. Where China exports low-cost intermediate or capital goods, this can help raise profitability and reduce the cost of investment. On the other hand, falling prices have a negative effect on other exporters of similar products, leading to deteriorating terms of trade and the loss of export markets. At the same time, domestic manufacturers faced with increased competition from cheap imports may be forced to retrench, laying off workers or accepting smaller profit margins. China’s expansion also affects other countries’ levels of manufacturing output and exports. On the one hand, its swift growth and the opening up of its economy has created a rapidly growing market for exporters from other countries, particularly for more sophisticated consumer goods and capital goods. It has also led to an increase in imports of intermediate inputs for production for both the domestic market and exports. On the other hand, the highly competitive nature of Chinese manufacturing can displace producers in other countries’ domestic and export markets. This has caused concern about ‘deindustrialization’ in many countries. Such effects differ considerably across countries. As far as manufactured exports are concerned, countries which tend to specialize in the same products as China are most likely to be negatively affected, while those whose exports correspond most closely to Chinese demand for imported products stand to benefit. Initially, this meant that the main beneficiaries were the high-income countries and the more advanced Asian economies that are integrated into Asian production networks with China, while the losers were developing countries with significant manufactured exports competing with China, including lower-income Asian countries and Latin American countries such as Mexico and those of Central America. Countries which had developed textile and garment exports under the Multi Fibre Arrangement17 were particularly badly hit, as this was phased out in the early 2000s. Over time, as China upgrades its exports, middle-income and even some high-income countries are facing more competition in industries such as steel and transport equipment. 16 See Kaplinsky (2006) for evidence of the impact of Chinese imports on prices in the EU; Amiti and Freund (2010) on the impact in the US, and Fu, Kaplinsky, and Zhang (2012) on the impact in the EU, the US, and Japan. 17 The MFA was a system of export quotas for textiles and garments in force between 1974 and 2004, which restricted the exports of developing countries and led to the spread of the industry to new producing countries.

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As this analysis implies, there are considerable differences in the impact of China on different industries at different times. In the early 2000s, it was the manufacturers of labour-intensive products that were most affected by Chinese competition, but over time this has extended to medium-technology sectors such as steel and vehicle manufacturing. On the other hand, manufacturers of products such as laptops and mobile phones have been able to take advantage of low-cost labour in China to assemble their products, making them more competitive. The global effects of Chinese growth differ not only between countries but also in terms of the impact on different groups within countries. Since China has an abundant supply of unskilled labour, it is workers with low levels of education and skill who are most affected by Chinese competition in both developed and developing countries. This is consistent with the stagnation of wages and rising unemployment amongst the unskilled in the US and EU.18 As China moves up the value chain, these effects may also extend to the more skilled workers as they face more competition. In the immediate aftermath of the global financial crisis, continued growth in China as a result of the government’s stimulus package was seen as making a major contribution to preventing the global economy from plunging into a deep recession. More recently, however, it has become evident that, as seen earlier, large-scale industrial investment has led to substantial excess capacity in many industries. Since China now accounts for a major share of global production in industries such as steel, aluminium, leather, and textiles; it also contributes to a situation of global excess capacity. This has put further pressure on international prices in these industries and contributed to increasing trade tensions between China and other countries which have been particularly acute in the steel industry, where there is a threat that this could lead to a global trade war (Beams, 2016).

18 Despite earlier scepticism amongst economists regarding the effects of imports from developing countries on wages and employment in developed countries, several recent studies have concluded that competition from Chinese imports has affected either wages or employment or both. See, for example, Acemoglu et al. (2014) and Autor et al. (2013) on the US, and Auer et al. (2013) and Bloom et al. (2016) on Europe.

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3 A Voracious Dragon? China and Global Commodity Markets

China has not only transformed global manufacturing production but has also had a major impact on world commodity markets. It is often portrayed in the media as a ‘voracious dragon’ ‘prowling the globe in search of energy resources’, (The Guardian, 2005) and ‘scouring the world for minerals, no regime is off limits’ (Financial Times, 2006), with little regard for the interests of the countries that supply them (both quoted in Mawdsley, 2008, p.521). On the other hand, China’s demand for resources has also been seen as a major boon. ‘For commodity producers in Africa, Latin America and elsewhere, it primarily meant higher prices for their exports, thereby stimulating economic growth.’ ( Jacques, 2012, p.412) What lies behind both of these perceptions is the fact that China’s rapid economic growth and transformation into the workshop of the world has also made it a major factor in many international commodity markets. This chapter considers the implications for global commodity markets of the rise of China and the effects on China itself and the strategies it employs internationally. During the 1970s China was largely self-sufficient in terms of raw materials and foodstuffs. This, together with the way in which the state regulated the domestic market, separating it from international markets through its monopoly of foreign trade, meant that China had little impact on global markets. This began to change after the introduction of economic reforms, which gradually liberalized foreign trade, as described in Chapter 1. In the mid-1990s China became a net importer of some key commodities such as oil and soybeans (UNCTAD, 2005, Fig. 2.8). From the late 1990s, with changes in its industrial structure towards heavy and chemical industries, China’s share in the global consumption of many commodities increased, leading to it playing a more significant role in international markets. It also meant that the Chinese economy became more dependent on imported raw materials, giving rise to new government strategies to ensure the security of supplies.

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While China’s impact on global commodity markets is often discussed in undifferentiated terms, whether emphasizing its positive or negative aspects, in practice, commodities differ in terms of their demand and supply conditions and the institutional framework of the markets in which they are traded. China’s position in the market also varies according to the commodity concerned so that a more disaggregated approach is required. The effect of China on the oil market is not the same as its effect on the iron ore or wheat markets. Several different factors contribute to the growth of demand for commodities. The demand for food and beverages is directly related to consumer demand and is affected by rising incomes and population growth. It may also be affected by urbanization because consumption patterns differ between rural and urban areas. Growing food consumption also has an indirect effect on the vegetable oils and protein meals used as feed in livestock farming and aquaculture. On the other hand, demand for minerals and agricultural raw materials such as cotton or wood is driven by the speed and pattern of industrialization, which in turn is affected by the growth of exports and the level of investment, particularly in construction and infrastructure in the case of minerals and metals. Demand for energy commodities depends on both consumer demand for household heating, cooking, and transport, and industrial demand for power. On the supply side, commodities differ in terms of the length of time required to bring new production capacity on stream and the capital intensity and scale of production.1 Minerals and energy commodities involve long gestation periods and large capital investment. Often reserves are located in politically unstable countries, which can lead to the disruption of supply. On the other hand, the production of many agricultural products can be changed on an annual basis by switching between crops. However, agricultural production is also affected by weather conditions, so supply can fluctuate unpredictably from year to year. Tree crops have longer gestation periods, although these are not as long as the time required to bring new mines or oil wells into production. The production of agricultural commodities is less capitalintensive and less subject to economies of scale than that of minerals and energy. There are also significant institutional differences in the ways in which different commodity markets are organized. Some primary products are traded on commodity exchanges such as the London Metal Exchange, whereas the sale of others is based on direct trade between buyers and sellers involving longer-term contract negotiations. There are also differences in the major firms involved in commodity markets. Global mineral production is 1 See Farooki and Kaplinsky (2013, Ch.5) for an extended discussion of the factors that affect the supply of different types of commodities.

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dominated by transnational corporations (TNCs) such as BHP/Billiton, Rio Tinto, Vale, and Anglo American. While in the past this was also the case in the oil industry, reserves are now mainly in the hands of state-owned oil companies in the major producing countries. Global commodity traders such as ADF, Bunge, Cargill, and Louis Dreyfus (referred to collectively as ABCD) play a key role in trade in several agricultural products. Section 3.1 provides a disaggregated analysis of China’s importance in a number of global commodity markets, and the extent to which China depends on imports of different commodities. This is followed by a discussion of the impact of Chinese demand on global commodity prices. China’s impact on commodity markets is not confined to its effect on prices, so its non-price effects also need to be analyzed. These include the implications of Chinese strategies for ensuring a secure supply of key commodities, the effects of China’s industrialization strategy on the location of raw material processing, and the implications for exporting countries of a shift in the market from the Organization for Economic Co-operation and Development (OECD) countries to China.

3.1 China’s Significance in Commodity Markets Table 3.1 presents three different indicators of China’s position in global commodity markets and how this has changed since the turn of the century. Columns (1) and (2) show China’s share of global consumption of each commodity, which provides an indication of its potential effect on world prices.2 China’s share of world trade (Columns 3 and 4) provides an alternative indicator of its impact on global markets. This is particularly significant for commodity exporters, because the Chinese market differs from the traditional developed-country markets, for example, in terms of the standards which exporters are required to meet. Finally, Columns (5) and (6) show the import dependence of China in each commodity which indicates the strategic significance of imports for China itself. It is possible to distinguish several groups of commodities in Table 3.1. The first group is minerals and metals, where China clearly enjoys a dominant position in terms of both global consumption and world imports. It is also highly dependent on imports to meet domestic demand. The main driver of demand for minerals and metals is investment in manufacturing, construction, 2 Although a high share in global consumption of a commodity may mean that China has a significant effect on global prices, in some cases, government policies insulate the Chinese market from the world market so that the link between Chinese demand and international prices is broken, e.g. through the policy of self-sufficiency for wheat and rice.

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A Voracious Dragon? Table 3.1. China’s Significance in Commodity Markets, 2000, 2015 (%) Share of global consumption

Iron ore Copper Aluminium Oil Coal Gas Cotton Hides & Skin Roundwood Sawn wood Wheat Maize Rice Soybean Fishmeal Beef Pork Poultry Bananas Coffee Sugar

Share of world imports

2000

2015

2000

2015

19.6 12.4 13.4 6.1 38.5 1.0 26.2 17.8 9.7 2.5 18.3 19.0 32.3 17.1 26.3 9.0 44.9 18.0 8.4 0.3 14.1

53.7 50.4 55.4 12.6 60.0 5.7 31.9 25.3** 10.3 21.4 18.1 21.9 28.4 29.3 34.2 11.1 47.4 16.1 11.8*** 1.9 9.2

14.9 14.4 1.5 4.3 1.4 0 0.9 24.8 11.6 3.2 1.3 16.5 2.3 42.1 39.7 0.1 0.7 5.2 4.1 0.3 2.6

67.9 46.3 59.6 13.4 17.9 5.7 21.3 38.9** 34.4 19.8 1.1 18.1 13.0 62.0 37.7 5.2 12.9 3.5 2.6*** 2.3 8.8

Share of imports in China’s consumption 2000 39.9 64.6 0* 40.3 0.6 0 1.0 55.2 4.1 38.4 0.4 0.0 0.2 47.0 65.6 0.3 0.4 7.0 10.7 58.1 12.4

2015 88.5 66.4 46.4* 68.5 5.7 30.3 20.6 61.4** 11.7 27.7 1.3 1.1 4.1 86.8 65.7 7.4 1.6 2.2 4.1*** 95.6 30.1

*Share of imported bauxite in total bauxite consumption **—2014 ***—2013 Sources: Own elaboration from World Bank, Global Commodity Outlook; UNComtrade; World Steel Association, Steel Statistical Yearbooks; COCHILCO, Anuarios Estadísticos del Cobre y Otros Minerales; US Geological Services; BP, Statistical Review of World Energy, 2016; International Energy Agency, World Energy Statistics database; OECD-FAO, Agricultural Outlook 2016–25 Database; US Department of Agriculture, Foreign Agricultural Service; FAOSTAT; FAO, World Statistical Compendium for Raw Hides and Skins, Leather and Leather Footwear, various issues; FAO, Forestry Production and Trade Database.

and infrastructure (Roberts, et. al. 2016). Chinese demand for minerals and metals grew rapidly from the late 1990s onwards, as a result of urbanization and the accompanying residential construction and investment in transport and utilities including power generation. Since demand grew much faster than domestic supply, China became increasingly dependent on imports, so that by 2015, almost 90 per cent of iron ore and two-thirds of copper used in China were imported. A second group of commodities in which China is also an important consumer and depends on imports to a significant extent consists of soybeans, fishmeal, cotton, hides and skins, and sawn wood. The first two are feedstuffs, where the growing consumption of meat and fish as incomes rise has led to an increase in demand which could not be met by local production. The other three commodities are agricultural raw materials required by the textile and garment, leather and footwear, and wood and furniture industries. In contrast 55

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to feedstuffs, much of the growth of demand for these commodities has been driven by exports rather than domestic demand. As demand for feed and for wood in China continues to grow, its role in world markets is likely to increase; although, in the cases of cotton and hides and skins, shifts in the global location of the textile and garment and footwear industries are reducing China’s significance. Oil and gas constitute a third group of commodities for which, although China’s current share of global consumption and trade is relatively modest, domestic demand is growing rapidly as a result of increasing energy use and car ownership, and the country is highly dependent on imports. China became a net importer of oil in the 1990s and natural gas in the mid-2000s. This makes these commodities of particular strategic interest to China, which is likely to have a growing impact on world markets in the future. A fourth group consists of commodities of which China is a significant consumer in global terms because of either its large population (grains, pig meat, and poultry) or its energy mix (coal), but is largely self-sufficient owing to the government’s food security strategy or its large domestic reserves. China has maintained over 95 per cent self-sufficiency in rice, wheat, maize, pork, poultry, beef, and dairy products in recent years (PoultrySite, 2014, based on OECD-FAO, 2013). As a result its share of world trade in these products has remained relatively low and its impact on global markets is limited, although this could change with a significant shift in government policy.3 A final group consists of commodities of which China’s share of global consumption and imports are relatively limited, so that its impact on world markets is minimal. This includes tropical products, such as bananas, coffee, and sugar, and beef, although as incomes rise in China, beef consumption may grow significantly.

3.2 China’s Impact on Commodity Prices China’s accession to the World Trade Organization (WTO) in 2001 was followed by a decade-long boom in commodity prices (see Figure 3.1). This was interrupted in 2009 as a result of the global financial crisis, and resumed in 2010 and 2011. Since 2011 commodity prices have fallen significantly, although as of 2015, they remain higher in real terms than they were at the close of the twentieth century. That the commodity boom coincided with a period of rapid economic growth and growing integration with the global 3

Reports in 2014 that China was abandoning its policy of self-sufficiency in grain appear to have been exaggerated, according to Lockett (2015). If such a policy change were to take place, it would have a considerable impact on global grain markets.

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A Voracious Dragon? 140 120 100 80 60 40 20

14

12

20

10

Metals and Minerals

20

08

20

06

20

04

20

02

20

00

Energy

20

98

20

19

19

96

0

Agriculture

Figure 3.1. Index of Commodity Prices in Constant 2010 US$ (2010=100) Source: World Bank, Global Economic Monitor Database.

economy in China gave credence to the view that China was a main driver of the commodity boom. The recent decline in commodity prices coinciding with a slowdown in Chinese growth is seen as further evidence that the two are connected. On the other hand, the role of China in global markets differs considerably according to the commodity concerned, so the view of China as the key driver of commodity prices needs to be considered further. Demand from China is only one of the factors which have affected commodity prices. On the demand side, consumption in other markets plays a role, particularly in those commodities in which China’s market share is relatively modest. In some cases the growth of demand from China substitutes for demand from other countries, rather than adding to global demand. Many industries have shifted their production for world markets to China. Where the industries concerned are resource based, increased demand for resources in China will partly be offset by a reduction in demand in those countries where production was previously located, so the growth of Chinese demand will not have the same impact on commodity prices as in cases where the industry has developed to meet local demand. The extent to which changes in demand affect prices depends on the price elasticity of supply.4 This differs across commodities and affects the extent to 4 The price elasticity of supply is the percentage change in output that results from a 1 per cent change in the price of a good.

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which an increase in demand results in an increase in price or output. Commodities with a low elasticity of supply (e.g. minerals) will see prices increase more as a result of an increase in demand than those with higher elasticity (e.g. cereals). Commodity prices are also affected by changes in supply conditions including the weather, disruptions caused by political conflict or labour unrest in major producing countries, changes to the cost of inputs, technological change, and new resource discoveries. Many countries hold stocks of commodities either for strategic reasons or in order to stabilize prices. China, for example, has stockpiles of oil, copper, iron ore, wheat, rice, soybeans, cotton, and other commodities. These have the potential to affect global prices in the short term through destocking or decisions to increase reserves. In addition to the forces of supply and demand in the real economy, commodity prices are also affected by financial factors. Since commodity prices are normally measured in US dollar terms, changes in the value of the dollar can affect the dollar price of commodities. The effect of changes in the value of the dollar varies between commodities, with the most impact on oil and gold, followed by metals, and a negligible impact on grains (IMF, 2008, Box 1.4). The growing financialization of commodity markets can also affect prices. There is general agreement that there has been an increase in the significance of financial investment in many commodity markets in recent years (World Bank, 2009, Ch. 2; UNCTAD, 2009, Ch. 2), with considerable debate over whether or not this has had a significant effect on prices, in terms of their level or their volatility (UNCTAD, 2011; Cheng and Xiong, 2014). Again, it seems likely that the effect of financialization on prices differs across commodities (Farooki and Kaplinsky, 2013, Ch. 6).

3.2.1 The Commodity Boom To what extent, then, can the commodity boom be attributed to the growth of demand from China? Most of the studies of China’s impact on global commodity prices have concentrated on minerals and metals and energy, particularly oil.5 Fewer studies also cover the effect of China on the prices of agricultural commodities.6 Not surprisingly, given China’s large share of global consumption and imports of minerals such as iron ore, copper, and aluminium (Table 3.1), its 5 Studies of the effect of China on hard commodity prices include Cheung and Morin (2007), Streifel (2006), and Roache (2012) on minerals and metals and oil; USITC (2006) on oil and aluminium; Yu (2011) on minerals. 6 Both Jenkins (2011) and Farooki and Kaplinsky (2013) discuss a range of commodities, including examples of minerals, energy, and agricultural commodities. Villoria (2012) analyzes China’s effect on food prices.

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impact on prices has been most marked in minerals and metals. Rapidly growing demand from China, together with long gestation periods and a lack of investment in new mines over a number of years, combined to increase prices. Metal prices increased more than four-fold during the boom, faster than any other commodity group. Oil prices play the key role in energy markets, with gas and coal prices following, albeit with a time lag (IMF, 2015, p.38). Because China’s share of both world consumption and imports of oil is still relatively modest (Table 3.1), the impact of its growing demand on energy prices has been quite limited, despite its growing dependence on imported oil. While oil prices rose significantly during the boom, this was mainly a result of supply-side factors, including limited investment in exploration and new oilfields, and geo-political problems in major producing regions, particularly the Middle East (Streifel, 2006). The prices of agricultural commodities did not rise as much as those of minerals and energy commodities during the boom. One reason for this is that it is much easier to increase the supply of particular agricultural products in the short term since farmers can switch between crops and the investment requirements are lower and gestation periods shorter than for minerals, oil, and gas resources.7 Even where Chinese demand is growing rapidly, the impact on prices is, therefore, likely to be less pronounced than for minerals. In the case of food and tropical beverages, China’s share of world consumption either did not increase significantly, as in the case of grains; was relatively low (coffee and sugar); or was largely supplied by domestic production (meat products and bananas) (see Table 3.1). The few studies of such products have concluded that Chinese demand was not a significant factor in the rise in food prices during the commodity boom (Headey and Fan, 2010; Jenkins, 2011; Villoria, 2012). In the case of grains, the higher prices in the late 2000s were mainly driven by growing Western demand for biofuels rather than by demand from China. China is likely to have had a more significant effect on the price of feedstuffs such as soybeans and fishmeal, owing to its substantial and increasing share in both consumption and imports of these commodities (Table 3.1). Fishmeal prices tend to be linked to soybean prices because fishmeal is a substitute for soybean as animal feed. Although demand in China has grown significantly, the effect on prices has been counteracted by increased production, especially in Argentina and Brazil. So while the impact on prices of feed has been greater

7 This is particularly true for annual crops, although some tree crops such as coffee have a longer gestation period between planting and production.

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than that on food and beverages, it has been nowhere near as significant as the impact on minerals (Jenkins, 2011). Although China accounts for a significant share of world consumption and imports, in the case of agricultural raw materials, such as cotton, and hides and skins (Table 3.1), the impact of Chinese demand on prices has been relatively limited. Because demand was mainly driven by the relocation of textile and garment and footwear production to China, growing demand from China did not add significantly to global demand. In fact the prices of hides and skins fell as other commodity prices were increasing, and cotton prices did not rise above the levels of the late 1990s until 2010. Timber price increases were also relatively modest during the commodity boom. In conclusion then, it is clear that growing demand in China did make a significant contribution to the commodity boom as far as minerals and metals are concerned. The rapid growth in demand after a period of low mining investment which resulted in capacity limits being reached was a key factor in the surge in prices. The other commodities in which China played a part in the boom were feedstuffs. These all belong to the first two groups of commodities characterized by China’s significant share in world consumption and trade. The commodities in these two groups where there was little evidence of China fuelling a commodity boom were cotton and skins and hides, where the growth in demand from China was mainly the result of a shift in the location of the textile and garment and footwear industries to China. In the case of energy, the surge in prices was mainly due to supplyside factors rather than growth of demand from China, reflecting the country’s relatively low share of world demand and imports of oil and gas. Finally, China’s impact on the prices of foodstuffs and tropical beverage was also limited because of the government’s policy of food self-sufficiency that restricted imports, or because China was a relatively small consumer of these products.

3.2.2 The ‘New Normal’ and Chinese Demand for Commodities The commodity boom ended in 2011, and since then, commodity prices have been in decline. This coincided with a declining rate of growth in China and a shift in development towards the ‘New Normal’ of lower growth and a rebalancing of the economy away from its heavy dependence on investment and exports and putting greater emphasis on consumption. The ‘New Normal’ has also included the growth of the service sector and greater attention being devoted to the environmental consequences of economic activities. What then are the likely consequences of these changes on China’s demand for commodities and global commodity prices? Both a lower rate of growth in China and a shift in the structure of output towards services will tend to 60

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reduce the growth of demand for commodities, which was linked to the growth of infrastructure, energy, and manufacturing sectors. A declining share of investment would tend to reduce demand for metals particularly, whereas increased consumption would create more demand for some food products, particularly meat, feedstuffs, and possibly tropical fruit and beverages. Growing environmental concerns could lead to restrictions on the growth of highly polluting metal industries and coal-fired power stations. They could also have a significant effect on the demand for timber. It should be noted, however, that although growth has slowed down in China, it is still rapid compared to other countries. Although the rate of growth of demand for commodities has declined, in most cases, Chinese demand is still increasing, both in absolute terms and as a share of global consumption. It would be a mistake, therefore, to attribute declining prices to a fall in demand from China. As the discussion of the commodity boom has shown, Chinese demand contributed to significant price increases of only some commodities, because in many cases, the country’s share of global consumption or trade remained relatively low. For commodities with only limited Chinese demand, it is unlikely that even if there were a decline in demand, there would be a significant effect on prices. In practice, it seems that other factors explain the fall in prices since 2011, even of commodities for which Chinese demand contributed to the boom. In the case of metals, there was a substantial increase in supply as a result of investment in new mines made during the period of high prices coming on stream (IMF, 2015). This was bound to put downward pressure on prices, which was increased by the slow growth in demand. In the case of oil, where China’s impact on demand was in any case less than for minerals, supply-side factors, including the decision by the Organization of the Petroleum Exporting Countries to stop trying to maintain the price of oil, and the increased production of oil and gas from unconventional sources (shale and tar sands) in North America, were major causes of falling energy prices. Falling oil prices also affected the price of agricultural commodities, both directly by reducing the cost of inputs, and indirectly because biofuels became a less attractive alternative with lower energy prices, which released land for other crops. It is of course true that had Chinese demand continued to grow at the same rate as it had before 2011, commodity prices would (other things being equal) be higher, particularly in the case of minerals and metals. It is also true that a ‘hard landing’ in China, in which gross domestic product growth fell to around 3 per cent a year, would have a more significant impact (Gauvin and Rebillard, 2015). However, this does not mean that the reversal of the commodity boom was a result of changes in China since 2011. 61

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3.3 Non-price Impacts of China’s Demand for Commodities The impact of China’s growing demand for resources goes beyond simply the effect (or lack of effect) on commodity prices. These other effects are a result partly of the resource-security and industrialization strategies pursued by the Chinese state, and partly of the specific characteristics of the Chinese market.

3.3.1 Strategies to Secure Supplies As Table 3.1 shows, there are a number of commodities whose imports account for more than half of China’s total consumption and whose import dependence has increased over time. These include oil and key minerals, such as iron ore and copper, as well as feedstuffs, such as soybeans and fishmeal.8 China’s growing dependence on imported resources has led to concerns over the security of its supplies. This has led the Chinese government to adopt a variety of strategies to reduce the risks to supply. Dependence on imports from a small number of countries, particularly where these are concentrated in the same region, is seen as a potential threat to security. Thus one strategic objective is to diversify the sources of imports where possible. This applies not just in terms of countries but also of suppliers of commodities where a small number of foreign firms have a dominant position in global markets. Here diversification can help to increase the bargaining power of Chinese buyers. Another strategy has been to obtain long-term supply contracts with foreign countries, often involving the provision of Chinese loans and/or aid. Chinese state-owned enterprises (SOEs) have also been encouraged by government policies to acquire foreign resource companies, explore for new sources, and invest in foreign mines and oil wells, in the belief that such ownership will increase the security of supply. Many of China’s imports of commodities come by sea, and a large proportion pass through the Straits of Malacca. This has led to concern about interruptions to supplies by sea and efforts to develop alternative overland supply routes. Another means of reducing the risk of disruption to supply has been to develop strategic stockpiles of key commodities. China has such stockpiles for crude oil, copper, iron ore, aluminium, nickel, tin, zinc, and soybeans.

8 Imports also account for more than 50 per cent of Chinese leather consumption, but this does not have the same strategic significance as the other commodities discussed here.

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The above strategies have been most extensively used in the case of energy, especially oil. China became a net oil importer in 1993, and since 2009, it has relied on imports for more than half of its total consumption, which is projected to increase to almost four-fifths by 2030 (Jiang and Sinton, 2011, pp.9, 11). The debate on energy security in China escalated in 2000, when oil imports increased sharply (Downs, 2004, p.22). The debate involved a number of participants including the State Development Planning Commission, the state oil companies, the Ministry of Foreign Affairs, the military, and various government think tanks. The focus of the debate was very much on the supply side, with little attention to measures to reduce the demand for energy in China. Strategies to increase security discussed included the diversification of sources of imports, investment overseas by Chinese oil companies, the creation of a Strategic Petroleum Reserve (SPR), the construction of international oil pipelines, and building closer links with oil producing countries. Historically, China has depended on imports from a small number of countries, particularly in the Middle East. The effort to diversify sources of supply has been an important part of the state’s strategy to reduce the risk of supply disruption, which would have major adverse effects on the country’s growth trajectory. Given the volatility of the Middle East, the government has tried to reduce its dependence on the region by developing alternative sources of supply (Qian, 2013, p.397). Although four countries (Saudi Arabia, Angola, Iran, and Russia) account for more than half of China’s imports of crude oil in recent years (Camus et al., 2013, Fig. 4.4), their share has declined significantly since the mid-1990s, as China has diversified its suppliers to include other African countries, Central Asian suppliers, and Latin American producers (ibid., p.12). The largest Chinese oil SOEs, China National Petroleum Company (CNPC), China Petrochemical Corporation (Sinopec), and China National Offshore Oil Corporation, began to invest abroad in the early 1990s before energy security became a major policy concern (Meidan, 2016, pp.19–21). The companies became key advocates of overseas investment as a means of increasing China’s energy security, a strategy which coincided with their own interest in international expansion. CNPC, asked to prepare a report on national oil security for the Chinese leadership in 1997, proposed foreign investment as a strategy for obtaining resources (Downs, 2004, p.25). The Chinese government’s subsequent adoption of the Go Global strategy (see Chapter 1) was in fact a ratification of what the oil companies were already doing (Jiang and Sinton, 2011, p.13). By 2013 Chinese oil companies were operating in more than forty countries and producing 2.1 million barrels a day abroad, equal to half the domestic production and a fifth of oil demand in China in that year (Jiang and Ding, 2014, p.7). 63

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Another strategy used by the government to mitigate the risk of supply disruption was the creation of an SPR. This was included as part of the Tenth Five Year Plan (2001–5); by 2020, China plans to have one-hundred-days’ supply in reserve (Shambaugh, 2013, p.162). The oil companies regarded this strategy as costly and ineffective, and were concerned that they would be required to bear part of the cost (Downs, 2004, pp.32–4). Nevertheless, China’s SPR has grown substantially, and the government has taken advantage of the slump in oil prices to increase its size. A specific strategic concern in China is the country’s dependence on the Straits of Malacca, through which 77 per cent of oil imports into China pass. This is seen as a source of vulnerability, and the Chinese government has built oil pipelines through Central Asia and from Russia and Myanmar. These will reduce the proportion of Chinese oil imports passing through the Straits of Malacca to 54 per cent, although the absolute level of imports through the Straits would continue to grow (Jiang and Sinton, 2011, p. 35). Another way in which the Chinese government has attempted to secure its oil supplies has been through so-called ‘loans-for-oil deals’. This involves loans from the Chinese policy banks (see Chapter 5) to either governments or foreign state-owned oil companies, which are repaid through future oil exports. This method of making loans to foreign governments which are serviced via long-term oil exports are known as the ‘Angola mode’ because it was used to finance substantial Chinese aid to rebuild and develop Angola’s infrastructure after the civil war (see Chapter 6, Box 6.1). Other countries which have benefitted from such energy deals include Bolivia and Venezuela (Jiang and Sinton, 2011, Annex 2). Foreign state oil companies that have received Chinese loans in recent years include Petrobras in Brazil, PetroEcuador in Ecuador, Rosneft and Transneft in Russia, Kazmunai Gas (KMG) in Kazakhstan, Turkmengaz in Turkmenistan, and GNPC in Ghana (Jiang and Sinton, 2011, Annex 2). The effectiveness of these strategies in increasing energy security in China has been questioned (Downs, 2004; Chen Shaofeng, 2011). A large share of the oil produced abroad by Chinese companies is not shipped to China but sold on international markets. Oil pipelines may be as vulnerable to attack as sea routes in the case of a military conflict. Countries can renege on international loans, even when they are backed by oil. Nevertheless, these strategies have been an important aspect of the way in which the growth of Chinese demand has affected the global oil industry. MINERALS AND METALS

There are similar trends in minerals. Iron ore and copper are the two key minerals on whose imports China is most dependent (see Table 3.1). In 2011 iron ore accounted for 75 per cent of all China’s imports of mineral ores, and 64

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copper for a further 10 per cent (Camus et al., 2013, Fig. 3.3). China holds significant stockpiles of both commodities. Australia and Brazil are the world’s major exporters of iron ore, accounting for more than half of global supply. Three companies, Rio Tinto, BHP Billiton, and Vale, dominate global iron ore production and account for up to 60 per cent of China’s iron ore imports (Du, 2012). China obtains almost 70 per cent of its iron ore from Australia and Brazil, but is keen to diversify its sources and is increasing its imports from smaller suppliers. The National Development and Reform Commission published a report recently calling for more investment in overseas mining projects in order to reduce the monopoly power of the Big Three producers (SMH, 2014). China has also diversified its sources of copper imports since the mid-1990s (Camus et al., 2013, Fig. 4.10). Chinese mining companies have expanded overseas, although not on the same scale as the Big Three oil companies. Whereas the oil companies are central-government-controlled SOEs, some of the mining companies operating abroad come under provincial authorities or are private.9 They tend to be smaller than the oil companies and less subject to state policies because they are not seen as being of such strategic significance. Nevertheless, companies such as Minmetals, Chinalco, Shanghai Baosteel, and Wuhan Iron and Steel have invested substantially in overseas mines. There are a few examples of ‘loans-for-mineral’ deals involving China, although not on anything like the scale of those for oil. The most significant is the Sicomines agreement on copper and cobalt with the Democratic Republic of Congo (see Chapter 6, Box 6.2). Elsewhere, Minmetals has entered into an arrangement with the Chilean state company CODELCO to supply copper, and in Zimbabwe, profits from diamond mining have been linked to Chinese loans. SOYBEANS AND FISHMEAL

The main agricultural commodity for which China depends heavily on imports is soybeans (see Table 3.1). The major suppliers of imports to China are the US, Brazil, and Argentina, which dominate the global market, accounting for 88 per cent of world soybean exports (Camus et al., 2013, p.19). This has meant that China has little scope for diversifying its sources of supply. Given its large share of world imports, it does enjoy considerable monopsonistic power in the soybeans market. This was illustrated when it suspended imports of soybeans from Argentina in 2010, allegedly because of contamination but

9

Jinchuan Group, China’s largest nickel producer, comes under the Gansu province government, and Nanchuan/Bosai, in bauxite, and the steel and mining Luanhue Industrial Group are both privately owned (Shankleman, 2009, pp.23–5).

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widely believed to be in retaliation for Argentine restrictions on imports of manufactured goods from China. Recent claims that China has been involved in so-called ‘land grabs’ globally as a means of securing agricultural supplies are greatly exaggerated (Smaller et al., 2012, p.2). The scale of Chinese FDI in agriculture is relatively limited, comprising only 1 per cent of all Chinese FDI (ibid., p. 5). China has started to invest in soybean production abroad, but this is insignificant in relation to the scale of its imports, and is unlikely to have much impact in terms of security of supply.10 One important development has been the emergence of China National Cereals, Oils and Foodstuffs Corporation (COFCO) as an important global player, promoted by the government as a means of reducing the control of the four large commodity traders: ADM, Bunge, Cargill, and Louis Dreyfus over agricultural trade. In 2014 COFCO acquired control of the Dutch company Nidera and Noble Agri Limited in Argentina, giving it access to core world grain value chains (Turzi, 2015). China is also highly dependent on imports of fishmeal, which is used as feed in aquaculture and for pigs and poultry. It is not as strategically important as soybeans, but there have been reports recently that several Chinese feed companies are interested in acquiring overseas fishmeal producers to gain more control over both the limited availability and the high cost (Gao Fu Mao, 2016). One of the best-known examples of Chinese investment in fishmeal is that of the China Fishery Group which, through a series of acquisitions since 2006, now controls around a sixth of Peruvian fish exports (Fairlie, 2014).11 IS CHINA ‘LOCKING UP’ GLOBAL SUPPLIES?

China’s efforts to enhance the security of its supplies of raw materials has led to concern that it is locking up key resources, making it more difficult for the West to gain access to them.12 This is a zero-sum view of the effects of China’s 10 A major investment planned by the Beidahuang Group of $1.4 billion in irrigation infrastructure in return for a 20-year contract to grow corn, wheat, soy, and dairy in Rio Negro province of Argentina fell through (Smaller et al., 2012, Annex 1). A Jilin Grain Group project for 1 million hectares of soybean production in Kazakhstan is in the planning stage (Smaller et al., 2012, Annex 1). Several projects have also been announced in Brazil (CEBC, 2011, Appendix 2). 11 Peru is the world’s leading producer of fishmeal. China Fishery Group recently experienced financial problems and put its Peruvian operations up for sale, but reports suggest that they are likely to be bought by another Chinese company (Peru Reports, 2016). 12 This has been a concern of the US-China Economic and Security Review Commission of the US Congress for a number of years. See, for example, USCC (2012). An alternative view sees China’s raw material strategy as a reflection of its vulnerability and insecurity rather than as a predatory grab for resources (Jiang, 2009, p.58). As a latecomer to the global energy and mineral market, China has had to concentrate its efforts on countries which have potential for increasing reserves in the future and whose existing reserves are not already under the control of others.

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strategy, but the reality is more complex. In many cases China’s involvement, whether through FDI or loans linked to resource procurement, has expanded and diversified sources of supply and made markets more competitive globally (Moran, 2010; Kotschwar et al., 2012). Even if such arrangements were to effectively lock up part of the global production of a commodity, their size is relatively limited so that only a small part of the global supply would be affected. The impact of China’s growing significance on key global commodity markets is by no means uniform (Economy and Levi, 2014, pp.36–45). International trade in some commodities such as copper and oil is still largely conducted through spot markets, and this has not changed as a result of China’s increased involvement. However, China’s presence has transformed the iron ore market. In the past, annual contract negotiations took place between the three major mining companies (Rio Tinto, BHP Billiton, and Vale) and the largest Japanese, South Korean, and Taiwanese steel companies, and these determined the prices at which iron ore was traded. In the mid2000s a consortium of Chinese companies, led by Baosteel, began to lead negotiations on the steel side. At the same time, many smaller Chinese companies bought steel on the spot market, and this resulted in the growth of the significance of trade at flexible market prices.13 This led to greater price volatility and was one factor behind the interest of China’s steel companies and the government in acquiring equity shares in iron ore mines abroad. What the case of iron ore illustrates is that although the growth of China is having an impact on commodity markets, it does not always do so in predictable ways. China is not necessarily able to exercise control over commodities of which it is a major consumer, and its presence has often led to increased competition. The fear that it is able to lock up resources is exaggerated.

3.3.2 Industrialization Strategies One of the ways in which countries have traditionally sought to promote their domestic manufacturing activities is through providing more protection to downstream processing activities, while allowing imports of raw materials at low or zero tariff rates. China is no exception, and it applies higher tariffs to processed manufactured products than to semi-processed products (WTO, 2010, Chart III.3). It has also used a variety of other industrial policy measures to promote local processing activities, including support for SOEs expanding their processing, preferential credit for favoured sectors, favourable

13 There is also evidence of a similar shift to more flexible market-based pricing in bauxite in recent years (Economy and Levi, 2014, p.40)

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government procurement policies, subsidized energy provision, cheap access to land, and tax incentives (Harrison, 2014). There are many examples of this leading to China’s imports of certain products becoming increasingly concentrated at the earlier stages of the value chain, while imports of more processed products decline in significance and China even becomes a net exporter of more processed products. China went from a net importer of steel before 2004 to a significant net exporter, based on its massive imports of iron ore (Song and Liu, 2012). A similar move backwards along the value chain has occurred with aluminium products, with first the development of primary aluminium and then the replacement of imported alumina with the growth of alumina smelting capacity within China. These developments were not confined to minerals; they can be found in soft commodities as well. In the late 1990s, China imported large amounts of plywood. Between 1994 and 2004, domestic plywood production increased more than eight-fold, and in 2001, China became a net exporter. It now imports large quantities of raw logs and barely processed wood products to feed its plywood industry (White et al., 2006, p.6). In the soybean value chain, China embarked on a major expansion of crushing capacity from the late 1990s, building new plants in the coastal provinces to process imported soybeans. As a result, imports of soybeans grew rapidly while imports of soybean meal fell (Lopez et al., 2010, pp.18–19) A similar trend occurred in the cassava value chain, where China’s capacity to produce modified starch increased massively from the early 1990s onwards (Kaplinsky et al., 2011). As a result of such strategies, China’s imports from developing countries came to be increasingly concentrated on unprocessed primary products as opposed to more processed, resource-based products. Whereas between 1996 and 2001, its imports of primary products and resource-based manufactures from developing countries were almost equal in value, by 2001–5 imports of primary products were more than 25 per cent greater, and by 2011–15, more than 50 per cent greater than those of resource-based products.14 There have been some signs in the past few years that China has become more willing to accept more processed raw materials, partly as a result of growing domestic environmental concern about the high levels of pollution generated by processing industries. Hebei Province, where some of China’s most polluting industries are located, is planning to relocate parts of its steel, cement, and glass production overseas in response to central government imposing rules to reduce pollution (Zhang Yu, 2014). 14 Own elaboration from UNCTADStat data using the Lall (2000) classification of primary products and resource-based manufactures (see Chapter 2).

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Another factor which is encouraging more processing in the countries where the resources are located is concern in developing countries about the colonial nature of their bilateral trade with China, based on the exchange of primary products for Chinese manufactured goods. This pattern of trade runs counter to the emphasis on South-South cooperation between China and other developing countries. Investing in downstream processing can be a way of gaining credibility with the governments of the host countries. Jiang and Sinton (2011, p.14) give the example of Chinese oil companies investing in refineries as a means of strengthening their relationship with host governments. Chinese companies have also made promises regarding investment in alumina and aluminium smelting in countries with large reserves of bauxite, as a means of securing supplies (Hendrix, 2014).15 Although it is too early to say how far these changes will lead to a shift in the composition of China’s imports from developing countries, the figures do indicate a fall in the ratio of primary products to resource-based manufactures since 2012, which if continued could prove significant in terms of the opportunities that the Chinese market offers to resource-exporting economies.

3.3.3 Characteristics of the Chinese Market The fact that China is a developing country affects not only supply conditions but also the nature of the demand faced by exporters. In particular, it is likely that the standards required of exporters to developing countries are less demanding than when they export to developed-country markets. This applies to firm-driven standards on quality, government-driven standards on product safety, sanitary and phytosanitary measures, and civil-society-driven standards on environmental impacts and labour issues (Kaplinsky et al., 2011). Because many of these standards tend to increase with a country’s income level, it is not surprising to find that they are lower or less-effectively enforced when it comes to exports to developing countries. Chinese standards tend to be less demanding than those required for sales to the OECD countries. In the case of forestry, for example, the pressure on producers to promote biodiversity and sustainable production which exporters to the EU face is largely absent in China, and there is evidence that a significant portion of imported timber is in any case produced illegally (Kaplinsky et al., 2011). Less stringent standards can make it easier for exporters to sell to the Chinese market than to the developed countries. Chinese companies operating overseas are much less likely to come under pressure at home over their environmental impact or violations of labour and 15 This has been prompted by the ban on exporting unprocessed minerals imposed by the Indonesian government in 2014. Indonesia was a major supplier of bauxite to China.

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other human rights. This is reflected in comparisons of corporate social responsibility (CSR) performance by Chinese companies with those of the OECD countries. A study by the UN Secretary General’s Special Representative for Business and Human Rights found that Chinese companies recognized fewer labour and human rights and generally recognized them at a lower level than companies from developed countries (Ruggie, 2007). A generally lower level of concern about such issues is also behind the frequent claims that Chinese companies are more willing to operate in countries with undemocratic regimes and where human right violations are common. Although Chinese companies lag behind those from the North in terms of CSR, over the past decade, there has been a significant growth in CSR amongst leading Chinese firms. This has partly been a result of their increased involvement in global markets, but it has also been encouraged by the Chinese government, which has introduced a variety of guidelines for Chinese companies operating abroad (Wang and Zadek, 2016, pp.46–54).

3.4 Conclusion Although it has often been claimed that China’s growth was a key factor in the commodity boom and China has been blamed for the more recent drop in commodity prices, the evidence provided in this chapter indicates that this is an oversimplification. It applies most clearly to the case of minerals, with China accounting for a large share of global consumption and imports, but other factors have played a more significant role in energy and soft commodities. The corollary is that the economic slowdown in China cannot explain the fall in prices since 2011. China’s demand has continued to grow, and even in the case of minerals and metals, where its contribution to the earlier boom in prices was most evident, increased supply rather than reduced demand from China has been the main factor causing prices to fall. Although economists have tended to concentrate on prices, China has also had other impacts on commodity markets. Political analysis has drawn attention to the strategic implications of China’s growing presence. Some see its efforts to secure supplies of key raw materials as a threat that could lead to Western countries being locked out of these markets. The discussion in this chapter indicates that such fears are exaggerated. Another feature of the growth of Chinese demand has been the reorientation of trade from the traditional South-North pattern, with an increasing share of South-South trade. Although the rhetoric of South-South trade implies a more equitable trading relationship than that which historically characterized North-South trade this is not necessarily the case, as for most developing countries trade with China involves exporting primary commodities and 70

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importing manufactured goods. In several value chains, there is evidence that the shift in the market to China has in fact led to the downgrading of exports to less-processed raw materials. This has been a common source of concern about trade relations with China. A second characteristic of the Chinese market is that standards tend to be lower than or not as strictly enforced as in the West. While this may make it easier for exporters to access the market, it can have negative effects in the exporting country.

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4 Going Global Chinese Firms Abroad

China’s growing presence in the global economy is reflected not just by its involvement in world trade in manufactures and commodities, as discussed in Chapters 2 and 3, but also by the activities of Chinese firms ‘on the ground’ through foreign direct investment (FDI) and infrastructure projects. This chapter documents the scale and growth of outward investment and projects, and the main Chinese actors involved, paying particular attention to the key factors that have led to the international expansion of Chinese firms.

4.1 China’s Outward FDI There is no doubt that China’s outward foreign direct investment (OFDI) has grown rapidly since the start of the twenty-first century and the adoption of the Go Global policy. However, quantifying the scale and significance of this growth is made difficult by problems associated with the available statistics (see Box 4.1). Figure 4.1 shows that Chinese OFDI was very limited throughout the 1980s, increased somewhat during the 1990s, and then grew rapidly, following China’s accession to the World Trade Organization (WTO) in 2001. There was a further increase in OFDI following the global financial crisis in 2008, which led to a spate of mergers and acquisitions by Chinese firms. China’s share of global investment flows has increased from negligible levels in the 1980s and 1990s to around 0.5 per cent in the early 2000s and around 9 per cent in 2014 and 2015 (UNCTADStat, n.d.). This made China the third-largest investor in the world, after the US and Japan, in 2015 (UNCTAD, 2016, Fig. 1.6).

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Going Global Box 4.1 PROBLEMS IN MEASURING CHINA’S OFDI The official source of data on OFDI is the Ministry of Commerce (MOFCOM), which since 2003, has adopted the OECD and IMF definitions and methodologies for estimating foreign investment. These figures may underestimate the true level of Chinese FDI, because only information from firms registering their investment with MOFCOM is collected, and many firms, particularly smaller ones, do not do so (Shen, 2013). In addition, as was mentioned in Chapter 1, there was significant ‘round tripping’ by Chinese firms because the advantages enjoyed by foreign firms investing in China made it profitable for companies to export capital from China to bring it back as foreign investment. By its very nature, it is difficult to know the extent of round tripping, but estimates suggest that it might have accounted for 15–20 per cent of total OFDI in the mid-2000s (Lunding, 2006, p.3). The tax advantages given to foreign firms were withdrawn in 2008, reducing the incentive for Chinese firms to practice round tripping. The data problems which affect the figures on aggregate OFDI from China are multiplied when it comes to the level of investment in individual countries. Official statistics only record the initial and not the ultimate destination of OFDI. Because so much Chinese investment is channelled through Hong Kong and various tax havens, investment in other countries is underestimated (Garcia-Herrero et al., 2015). When China’s reported figures on outward investment in OECD countries are compared with those of partner-countries on inward investment from China, the average stock according to China’s figures is 40 per cent lower (OECD, 2008, Box 3.1).

Since China has only recently become a significant player in terms of outward investment, its share of the global stock of OFDI lags some way behind its share in new flows. By 2015 China’s total stock of FDI, over US $1,000 billion, accounted for 4 per cent of the global stock (UNCTADStat, n.d.) making it the tenth-largest economy in the world in terms of total OFDI stock. These figures suggest that despite the hype surrounding China’s investment, it has not yet achieved a leading position in global terms. Given the problematic nature of official data on Chinese OFDI, is it possible that this conclusion is based on gross underestimation of the real level of China’s international engagement? Other evidence suggests not. Between 2008 and 2015, China’s share of the value of global cross-border mergers and acquisitions (M&As) and greenfield FDI came to about 8 per cent and less than 5 per cent, respectively (UNCTAD, 2016, Annex Tables 3 and 6). Taking both M&A and greenfield FDI together, China’s share over the period comes to less than 6 per cent, suggesting that it is still only a middle-ranking country in terms of its involvement in FDI. Another indicator of the extent of China’s overseas expansion is the number of Chinese companies ranked amongst the world’s leading transnational corporations. Although the number of Chinese firms on lists of the world’s

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1000

US$ billion

800

600

400

0

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

200

FDI Flow

FDI Stock

Value of Contracts

Figure 4.1. Chinese Stock and Annual Flow of Outward FDI and Turnover of Contracted Projects Fulfilled, 1982–2014 (US$ billion) Source: UNCTADStat and China Statistical Yearbook, 2016.

largest companies, such as Forbes’ and Fortune’s, has grown significantly in recent years, this is due to the scale of their production in China itself. Relatively few Chinese companies can be considered truly transnational corporations (TNCs) in the sense of having extensive overseas operations. Only two Chinese corporations are in the top 100 non-financial companies in the world, ranked in terms of their foreign assets in 2015: the China Ocean Shipping Company and the China National Offshore Oil Corporation (CNOOC) (UNCTAD, 2016, Annex Table 24). Despite the recent growth in operations abroad, major Chinese companies such as China National Petroleum Company (CNPC), Sinopec, Sinochem, Minmetals, and Lenovo have not yet made the list of the world’s largest one hundred TNCs. The main destination for Chinese OFDI is Hong Kong, which has consistently accounted for more than half the total stock. Although some of this involves the acquisition of assets in Hong Kong by Chinese companies, there 74

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is a question of whether Chinese investment there should be regarded as foreign investment at all. First, a significant part involves round tripping by Chinese firms (see Box 4.1). Second, since Hong Kong reverted to China in 1997, although it is treated as a separate economic entity for both regulatory and statistical purposes, Chinese investment there is different from OFDI as normally conceived. Tax havens, particularly the Cayman Islands and the British Virgin Islands, have also been an important destination, accounting for around a quarter of the total stock of Chinese OFDI in 2006, although their share has fallen since then (MOFCOM, 2016, Table 2). Since much of this investment either represents round tripping or is in holding companies, the ultimate destination of the investment is unknown. Leaving aside investment in Hong Kong and the Caribbean tax havens, the share of Chinese OFDI going to developed countries has increased in recent years and now accounts for half of the total stock (MOFCOM, 2016, Table 2). However, developing countries still account for a larger share of OFDI from China than from the OECD countries. State-owned enterprises (SOEs) have played a key role in the growth of Chinese OFDI. In 2006 centrally controlled SOEs accounted for more than four-fifths of the stock of outward investment. The remaining fifth was shared between locally controlled SOEs and various types of non-SOEs, including limited liability companies, private firms, wholly foreign-owned companies, and joint ventures between Chinese and foreign firms (OECD, 2008, p.77). Although the share of central SOEs had fallen to just over a half of the total stock by 2015 (MOFCOM, 2016, Fig. 16), when local SOEs and subsidiaries are added it is clear that the state still controls the bulk of Chinese FDI. The continued dominance of SOEs in Chinese OFDI is reflected in the list of China’s largest firms ranked by foreign investment. In 2015, nineteen of the twenty largest companies from China, ranked by FDI, were SOEs, as were forty-five of the largest fifty.1 The Chinese companies with the largest presence overseas included the major oil companies, CNPC, CNOOC, Sinopec, and Sinochem, and mining companies such as Aluminum Corporation of China and Minmetals, all of which are state-owned. The most important private firms in terms of their investment overseas were Huawei and Midea Group, which ranked thirteenth and twenty-third in 2015. Foreign investment by private firms is growing, and private firms are now in the majority in terms of the number of firms investing overseas, but because of their smaller scale, they account for a much lower share of the value of OFDI.

1 Own elaboration from list of largest non-financial Chinese TNCs ranked by OFDI stock (MOFCOM, 2016, Table 12).

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4.2 Overseas Projects by Chinese Companies Although much of the research on the international expansion of Chinese companies focuses on OFDI, this is by no means the only way in which Chinese firms have internationalized. Indeed some of the most controversial examples of foreign involvement by Chinese companies, such as the Merowe Dam in Sudan, have not involved OFDI at all. Such large-scale infrastructure projects, although they involve the presence of Chinese companies for a number of years while the project is under construction, do not lead to a permanent establishment that defines FDI. As Figure 4.1 shows, the annual value of overseas projects completed by Chinese firms has been somewhat higher than OFDI flows since the early 1980s. The origins of China’s involvement in projects abroad were part of the government’s aid programmes under Chairman Mao.2 Before 1979 such projects were agreed on a government-togovernment basis and carried out by Chinese ministries through their construction enterprises. The projects were located in a relatively small number of countries.3 One of the best-known examples was the TanZam railway, which was built in the 1970s to give Zambia an alternative route to the sea avoiding white minority-ruled Southern Rhodesia (Zimbabwe), after the latter’s unilateral declaration of independence from Britain. Projects continued to be closely tied to Chinese aid until the mid-1980s, when central government SOEs were allowed to bid for international projects, which weakened the link with China’s aid programme. From then onwards SOEs were able to expand internationally for commercial ends, and were successful in bids for World Bank and Asian Development Bank projects. The number of countries in which Chinese firms had contracts increased to over a hundred by the late 1980s. In the 1990s there was further expansion as a growing number of Chinese firms, including provincial SOEs and other regional firms, became involved in overseas projects, so that by the late 1990s, they had contracts in more than 180 countries. The number of Chinese workers employed on these projects increased from 20,000–30,000 in the 1980s and early 1990s to more than 400,000 by 2015 (NBS, 2016, Table 11.21). The total value of contracts completed in 2015 came to $154 billion, over 20 per cent more than the OFDI flow in that year. Despite their significance, such projects have received much less academic attention than Chinese OFDI.

2 See Low and Jiang (2003) on the development of the international activities of Chinese construction companies. 3 In the period 1976–9, contracts were signed with only eleven countries (NBS, 1996, Tables 16–18).

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Going Global Rest of the World 7%

1998–2000

Latin America 1% Africa 23%

Rest of the World 8%

2013–2015

Hong Kong 2%

Latin America 10% Hong Kong 27%

Rest of Asia 42%

Africa 36%

Rest of Asia 44%

Figure 4.2. Geographical Distribution of Value of Completed Projects, 1998–2000 and 2013–15 Source: National Bureau of Statistics of China.

Developing countries have always been the focus of Chinese economic cooperation projects with over 90 per cent of the value of completed projects, reflecting the original link with Chinese aid. In the 1980s the Middle East became an important destination, reflecting the construction boom in the oilexporting countries. Neighbouring countries in Asia were also significant markets. While Asia remains the most important market, the shares of Africa and Latin America have both increased in recent years (see Figure 4.2). As was the case with OFDI, SOEs have played a major role in the growth of overseas projects. Soon after the start of the reform four large SOEs were identified to specialize in engineering and construction projects abroad (OECD, 2008, pp.81–2).4 The number and size of Chinese contractors operating overseas grew steadily from the mid-1980s. They have been able to leverage the experience gained at home with the Chinese government’s massive infrastructure programme to build capabilities which make them formidable competitors internationally.5 They are now among the largest in the world in terms of their overseas operations. A total of sixty-five Chinese companies were ranked in the top 250 international contractors in terms of their international revenue in 2014, more than from the whole of Europe and twice as many as from the US (ENR, 24–31 Aug. 2015, p.40).

4 These were the China State Construction Engineering Co. Ltd, the China Civil Engineering and Construction Corporation, the China Road and Bridge Engineering Co. Ltd, and the China Complete Set Equipment Import and Export Co. Ltd. 5 For example, China Gezhouba Group Corporation was set up in 1970 to build the Gezhouba Dam, the first large-scale hydropower project in China. Similarly, the Three Gorges Corporation was founded in 1993 to build the project of the same name. These are now among the leading international dam builders (Hwang et al., 2015).

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SOEs continue to play a leading role in international contracting. In 2010, eighty-five centrally owned SOEs accounted for 36 per cent of the value of foreign projects (Ohashi, 2013, p.92). The remainder is dominated by companies under provincial or local government ownership. Of the largest twenty Chinese companies in terms of their international contracting revenues, only one, Qingjian Group Co. Ltd, is privately owned. Forty-five of the largest fifty contractors are SOEs.6 The largest Chinese companies operating abroad were the China Communications Construction Group, the Power Construction Corporation of China, the China State Construction Engineering Corporation, the China Railway Group, and the China National Machinery Industrial Corporation, which are all in the international top thirty; they are also all state-owned companies.

4.3 Strategic Objectives of the Chinese State in Going Global Discussing relations between China and the Global South, Breslin (2013) distinguishes between the strategic diplomatic or political objectives and the strategic economic objectives pursued by the Chinese state, and the commercial objectives of Chinese firms. This section considers the state’s strategic aims in relation to the international expansion of Chinese companies, while Section 4.4 discusses the commercial factors which have led these firms to operate beyond China’s borders.

4.3.1 Political Objectives In terms of political factors, Chinese firms’ operations abroad can be seen as a means of extending China’s ‘soft power’ and rewarding friendly regimes. Several authors point to the importance of political considerations during the early period of growth of Chinese FDI after 1980 (Cai, 1999; Hong and Sun, 2006). Moreover, because in the 1980s Chinese projects were mainly linked to China’s aid programme, these were also likely to be particularly influenced by political considerations. Investment and infrastructure projects in Hong Kong in the 1990s were seen as a means of strengthening the Chinese government’s political influence there in the lead up to the UK returning the territory in 1997. This also influenced China’s involvement in some strategically significant Third World countries. One of China’s long-term diplomatic objectives has been to isolate Taiwan. Paradoxically, although Taiwan is a major investor in mainland China, with 6 Own elaboration from the Chinese companies included in the Engineering News-Record (ENR) list of the Top 250 International Contractors (ENR, 2015).

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more than US$50 billion invested, there was no recorded investment from the People’s Republic of China (PRC) in Taiwan until 2010, and levels have remained low since then. Relations with Taiwan have also affected Chinese FDI in other countries, since a number of countries recognize Taiwan and, therefore, under the PRC’s One-China policy, cannot have diplomatic relations with the mainland. All projects targeting Taiwan and the countries that recognize it are subject to a separate approval procedure, regardless of the size of the project, and have to be reported to the State Council (OECD, 2008, p.88). The election in Taiwan of President Ma of the Kuomintang Party in place of the more nationalist Democratic Progressive Party (DPP) in 2008 led to an informal truce between Beijing and Taipei in terms of competition for diplomatic recognition. During Ma’s time in power, there were no further switches of diplomatic relations. The return to power in Taiwan of the DPP following the 2016 presidential elections brought this truce to an end, and since then, several countries have broken off diplomatic relations with Taiwan and recognized the PRC.

4.3.2 Strategic Economic Objectives Although there have been significant changes in the framework governing outward investment and overseas contracts, the state’s strategic economic objectives have remained unchanged. These are to build up globally competitive Chinese companies, and to contribute to China’s national economic development. While the ways in which Chinese firms’ foreign operations contribute to China’s economic development may change over time, the overall aim has remained the same. During the early years of China’s economic reforms, policy on outward investment remained highly restrictive. There was debate over the desirability of OFDI amongst the Chinese leadership, with some arguing that it would encourage corruption, capital flight, and capitalist influence (Economy and Levi, 2014, p.48). The need to conserve scarce foreign exchange and the priority given to domestic accumulation meant that OFDI was not encouraged. Firms that wanted to invest abroad needed to earn foreign exchange before they could do so. Until the mid-1980s, only state-owned foreign trade corporations could engage in OFDI. In 1979 the China International Trust and Investment Corporation was created as a ministerial-level corporation which was allowed to invest abroad (OECD, 2008, pp.81–2). OFDI projects were considered on a case-by-case basis, and there was no overall framework governing outward investment until 1984–5 when firms other than trading corporations were allowed to apply for projects; however, the availability of foreign exchange remained a constraint, and OFDI was limited (Rosen and Hanemann, 2009, Appendix 2). 79

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On the other hand, the scarcity of foreign exchange was a factor which encouraged China to bid for projects abroad (Ohashi, 2013). After the reform the government tapped into the experience acquired through earlier aid programmes and began to encourage projects and labour service contracts to generate foreign exchange and create employment opportunities. In 1978 the Ministry of Foreign Economic Liaison and the State Capital Construction Commission produced a ‘Report on the Development of Overseas Construction Contracted Projects’. This was approved by the State Council in 1978, and four SOEs which had been involved in earlier aid projects were put in charge of such projects. In 1979 these companies had orders for projects worth over $50 million in countries such as Egypt, Somalia, and Hong Kong (Ohashi, 2013, p.89). The Chinese government began to encourage OFDI more actively during the second stage of reform in the 1990s. It became easier for firms to obtain foreign exchange and the approval procedures were gradually eased. Between 1991 and 1997 the State Council identified over a hundred SOEs in strategic industries such as energy, mining, automobiles, electronics, iron and steel, chemicals, and pharmaceuticals as potential ‘global industry champions’ to lead the internationalization of Chinese business (OECD, 2008, p.120). The firms were given preferential access to finance to help them to expand abroad and increase their international competitiveness. Efforts to promote global Chinese companies were given further impetus with the adoption of the Go Global policy at the turn of the century with the Tenth Five-Year Plan (2001–5) and a series of decrees between 2000 and 2002 to regulate and promote FDI (Shambaugh, 2013, pp.174–6). The Tenth FiveYear Plan on Inward and Outward FDI specifically referred to the development of internationally competitive multinational enterprises as one of the objectives of the Go Global strategy (quoted in Sauvant and Chen, 2014, p.142). The nature of the contribution of Chinese firms’ international expansion to China’s development has varied over time as the strategic needs of the economy have evolved. In the 1980s a shortage of foreign exchange required the concentration of resources on promoting domestic accumulation, and there was little scope for capital outflows. In the 1990s exports came to play an important role in China’s development strategy, with OFDI and overseas contracts favoured when they could help to open up markets and promote exports of goods and labour. In a speech to the Fifteenth Party Congress in 1997, President Jiang Zemin said: ‘We should encourage and help relatively competitive enterprises with various forms of ownership to invest abroad in order to increase export of goods and labour services’ (quoted in Shambaugh, 2013, p.175). When the Go Global strategy was explicitly adopted in the Tenth Five-Year Plan its contribution to Chinese development included investment in natural 80

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resources. This coincided with the growing dependence on imported raw materials and concerns about resource security discussed in Chapter 3. Acquiring resources abroad through OFDI was seen as a way of ensuring more secure supplies. Chinese energy companies were required by the National Development and Reform Commission (NDRC) to obtain upstream supplies through acquisitions abroad (Salidjanova, 2011, p.7). In 2004 the government introduced subsidized loans for priority projects that developed natural resources in short supply in China, or that led to exports of domestic technology, products, equipment and labour, and for M&A projects with potential for strengthening Chinese firms’ international competitiveness (OECD, 2008, p.85). Since then a further strategic objective has emerged, namely obtaining foreign technologies through the acquisition of, or joint ventures with, more technologically-advanced companies in the West. As China seeks to upgrade technologically it has not only sought to increase R&D within China but also encouraged Chinese firms to set up R&D activities abroad and collaborate with foreign R&D institutions and innovative enterprises (Sauvant and Chen, 2014, p.143). This was set out explicitly in the Twelfth Five-Year Plan on Inward and Outward FDI, published in 2012, which identified three priority areas for OFDI. These are natural resource projects to secure stable, sustainable supplies of energy and raw materials; investments that help to promote technological upgrading in China through the acquisition of foreign know-how and brands; and investments to expand China’s presence in overseas markets (NDRC, quoted in Sauvant and Chen, 2014, p.144). One indicator of the state’s strategic priorities in terms of promoting the international expansion of Chinese firms is the distribution of government loans to finance OFDI and build-own-operate-transfer projects.7 Irwin and Gallagher estimate that the acquisition of natural resources has been by far the state’s most important objective, since almost four-fifths of such loans made since 2003 have been for oil and mining projects. They estimate that about 15 per cent of loans were motivated by market access, particularly to support infrastructure projects in power, while only 4 per cent were related to technology acquisition (Irwin and Gallagher, 2014, p.23).

4.4 The Commercial Objectives of Chinese Firms It is possible to identify a number of commercial motives that lead firms to expand abroad. The literature on FDI distinguishes between four types of 7

The latter only includes projects where the Chinese company has a long-term involvement and is not just a contractor providing goods and services rather than investing (Irwin and Gallagher, 2014, p.7).

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investment: natural resource seeking, market seeking, efficiency seeking, and strategic asset seeking (Dunning and Lundan, 2008, Ch.3). Resource-seeking investment often occurs when growth at home outstrips domestic sources of raw material supplies. Market-seeking investment takes place to supply foreign markets, often where trade barriers or high transport costs make it difficult to access the market through exports. Efficiency-seeking investment occurs to exploit national differences in production costs, particularly labour costs, or to take advantage of economies of scale by locating particular stages of production in different countries to supply global markets. Finally, strategic asset-seeking investment involves M&As made by firms seeking to broaden their range of capabilities. It has been noted particularly in the case of investment by firms from emerging markets in more advanced economies. How important have each of these motives been in the international expansion of Chinese firms? How significant are commercial factors relative to strategic diplomatic and economic drivers in explaining OFDI?

4.4.1 Resource Seeking Acquiring oil and mineral rights abroad is not only a strategic economic objective of the Chinese government; it is also an important commercial objective for Chinese firms. Like other companies in the extractive industries, Chinese SOEs need to acquire new reserves to expand and to replace the reserves that they deplete. Given increasing resource scarcity, it is difficult for them to do so within China. Downs (2008, p.79) quotes PetroChina’s chief financial officer saying in 2003: ‘We can hardly expect big production increases at home. Overseas production will become the new driving force in the future’. They also need to expand the number of countries in which they operate, in order to diversify their operational risks. Before 1991 most of China’s resource-seeking investment was in developed countries, particularly Australia and Canada. Since then, and particularly since the start of the new millennium, there has been a shift in emphasis towards developing countries, which now account for the greater part of Chinese OFDI in natural resources. Resource-seeking investment is undertaken by two types of firms: those that are themselves based in the primary sector and those whose major operations are in downstream industries that depend on particular raw materials. The Chinese oil companies CNPC, CNOOC, and Sinopec belong to the first group, and have established a wide range of operations outside China including oil exploration, service provision, the operation of oilfields, and oil refining (Shankleman, 2009). The upstream part of the business has tended to be the most profitable, and this has been accentuated in China by price controls on refined products, which squeeze downstream profits. This means that the 82

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companies could raise their overall profitability by expanding upstream production overseas to mitigate the losses that they were making on their refining operations in China (Downs, 2008, p.79). There are numerous examples of the second type of firm investing in mining abroad. For example, several of China’s major steel companies have acquired iron ore mines to supply their manufacturing plants in China. The first major investment by a Chinese company in Latin America was the Shougang Group’s acquisition of the Marcona mine in Peru in 1992, to ensure adequate supplies of iron ore for its expanding steel industry (GonzálezVicente, 2013). Other Chinese steel firms which have invested in mines abroad include the Baosteel Group Corporation, Sinosteel, and Wuhan Iron and Steel (Shankleman, 2009, Tables 6 and 9). One indicator of the importance of resource seeking is the proportion of Chinese OFDI and overseas projects going to extractive industries. Unfortunately, because the official Chinese statistics on OFDI do not record the ultimate destination of investment, they do not provide an accurate indication of the distribution between sectors. According to the Ministry of Commerce (MOFCOM) statistics, the most important sector for Chinese FDI is leasing and business services, but this category includes holding companies which invest in third countries, regional headquarters, and special-purpose vehicles, making it is impossible to identify which sectors are really involved (OECD, 2008, p.76). Leaving aside leasing and business services, between a quarter and a fifth of remaining Chinese OFDI is in mining, although the share has fallen in recent years.8 These figures probably underestimate the real level of Chinese OFDI in extractive industries. Data drawn from company-level information indicate that more than half of Chinese FDI between 2005 and 2016 went into the energy and power or metals sectors (Scissors, 2016, Table 4). A similar figure was arrived at from a classification of foreign investment projects approved by NDRC since 2003, according to their primary motivation (Huang and Wang, 2013, Table 3). The significance of resources as a determinant of Chinese OFDI is also borne out by a number of econometric studies of the geographical distribution of investment, which find that resource-rich countries receive relatively high levels of Chinese investment (Buckley et al. 2007; Cheung and Qian, 2009; Kolstad and Wiig, 2012; Wang and Yu, 2014, Zhang and Roelfsema, 2014; Dollar, 2017). This factor is particularly significant in explaining Chinese

8 Zhan (1996, Fig. 3) estimates that 24 per cent of Chinese OFDI between 1980 and 1994 was in natural resources. Data that are more recent, from MOFCOM, shows the share of mining at 25 per cent of the stock of OFDI in 2006 and falling to 21 per cent in 2015. Agriculture, forestry, and fisheries account for a further 1–2 per cent of the total.

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investment in developing countries. Some of these studies also find that the role of resources in explaining the pattern of investment has become more significant in the twenty-first century. This reflects the Chinese economy’s growing dependence on imported resources, as discussed in the Chapter 3. More direct evidence of the motives of Chinese firms investing abroad is provided by firm surveys. These have found that resource seeking is important for a substantial minority of firms. In a 2005 United Nations Conference on Trade and Development (UNCTAD) survey of Chinese firms, 40 per cent of firms regarded this as an important motive (UNCTAD, 2006, p.168, n.61). Another survey by the China Council for the Promotion of International Trade (CCPIT) (2011) reported that 28 per cent of firms considered accessing natural resources a decisive or important factor in their investment decisions, and this was the third most important decisive factor identified.9 One limitation of these surveys is that they do not take into account the scale of investment involved. Since resource-seeking FDI tends to be dominated by large SOEs, the proportion of the value of investment motivated by resource seeking is likely to be greater than the proportion of firms citing it as a motive.10 In the case of international projects carried out by Chinese firms, only a minority can be directly identified as resource seeking from the point of view of the firms concerned. According to the China Global Investment Tracker, the oil, coal, and gas industries accounted for over a fifth of the value of Chinese projects since 2005.11 It is of course possible that projects are indirectly linked to the acquisition of resources, as in the case of resources for infrastructure deals, but the commercial objective of the firm building the infrastructure, as opposed to the strategic objective of the Chinese state, is not to obtain resources.

4.4.2 Market Seeking Market seeking has also been a significant motive for Chinese firms abroad. Initially this involved investment in local branches or distribution centres to facilitate exports from China (Cai, 1999, p.85). Later, manufacturers that faced trade barriers invested in setting up local assembly plants or production facilities. Whereas most firms from emerging markets tend to engage in 9 Note that these surveys do not require firms to identify the most important motive for OFDI, and that they may select several important factors. 10 Huang and Wang (2013, Table 3) report that whereas over 40 per cent of the number of projects covered were motivated by resource seeking, these accounted for more than 50 per cent of the value of investment. 11 There may have been some projects in mining, but most of what is classified as metals appears to be steel and aluminium plants rather than mining.

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market-seeking investment in neighbouring countries because China’s major export markets are in developed countries, it has also been involved in extensive market-seeking investment in the North (UNCTAD, 2006, p.158). The Haier Group, for example, has set up plants in the US and Europe to avoid quota restrictions and potential anti-dumping measures (OECD, 2008, p.98). Intense competition in the Chinese market has led to falling profit margins in some sectors, motivating firms to look for new markets abroad. This has been particularly significant in mature industries such as textiles and garments, footwear, bicycles, and electrical appliances, with significant excess capacity (OECD, 2008, p.98).12 The Chinese construction industry also experienced a high degree of competition at home, which has contributed to the expansion of operations overseas (Corkin, 2008). Another type of OFDI which can also be classed as market seeking has occurred where Chinese producers have taken advantage of other countries’ preferential access to developed-country markets. In the period up to 2005, when the WTO Multi-fibre Arrangement was in force, plants were set up to take advantage of the unused quotas held by some countries, while investors in Africa looked to supply the US market on preferential terms through the African Growth Opportunities Act. Chinese textile manufacturers have invested in Turkey to supply the EU market and have set up clothing factories in Fiji for the Australian market (OECD, 2008, p.98). Studies of the geographical distribution of Chinese OFDI have generally found a positive relationship with the size of the market (as measured by gross domestic product) and/or with Chinese exports to the country (Buckley et al. 2007; Cheung and Qian, 2009; Cheng and Ma, 2010; Kolstad and Wiig, 2012; Wang and Yu, 2014, Zhang and Roelfsema, 2014). This supports the significance of market-seeking investment, and is particularly associated with Chinese OFDI in the OECD countries (Kolstad and Wiig, 2012), and investment by private firms (Ramasamy et al., 2012). Firm surveys confirm that market seeking is an important motive for Chinese firms investing abroad: 85 per cent of those responding to the UNCTAD survey in 2005 regarded it as important or very important (UNCTAD, 2006, p.167, n. 48). In the 2010 CCPIT survey, 86 per cent of firms considered the market potential of the host country either a decisive or an important factor in their decision to invest (CCPIT, 2011, Table 1.2). Other factors included in the survey related to market-seeking motivation were circumventing trade barriers (66 per cent) and a sluggish domestic market (57 per cent).

12 Overcapacity in China’s home-appliance industry has been estimated at over 30 per cent for washing machines, 40 per cent for refrigerators, 45 per cent for microwave ovens and 87 per cent for televisions (OECD, 2008, Ch.3, n.67) which has put pressure on manufacturers to find new markets.

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The bulk of the engineering and construction projects carried out by Chinese firms abroad can be considered to be primarily market seeking. The most important sectors in which Chinese contractors are involved are transport, housing construction and power engineering, which accounted for more than three-fifths of the value of completed projects in 2014 (CAITEC et al., 2015, Fig. 2.7). By its very nature, infrastructure can only be supplied locally. Faced with intense competition at home, Chinese construction companies have been keen to obtain new markets abroad, which has led them to bid for contracts around the world, and not just those that are financed by the Chinese government.

4.4.3 Efficiency Seeking Not surprisingly, given the low wages and high productivity of Chinese manufacturing, offshoring to lower-cost locations (efficiency-seeking investment) has not been a major feature of Chinese FDI up to now.13 A study of 293 foreign projects by 216 firms approved by the NDRC between 2003 and the first half of 2011 found only seven that can be classified as efficiency seeking, and these accounted for only 0.7 per cent of the total value of investment (Huang and Wang, 2013, Table 3). Surveys of Chinese firms have consistently found that factors associated with efficiency seeking, such as low labour costs in host countries, have not been very important.14 In the case of foreign construction projects, the clearest evidence that these are not motivated by a desire to exploit cheap labour in the host country is the fact that one of the most common complaints against Chinese firms is that they bring their own workers rather than creating employment opportunities for locals. While the extent to which this takes place may have been exaggerated by some critics, the fact that it takes place at all indicates that cheap local labour is not a motivating factor for Chinese construction companies. Following the sharp increases in wages in coastal areas of China since the mid-2000s, some Chinese companies have set up in neighbouring countries, such as Vietnam and Cambodia,15 where wages are lower than in China. Some authors, including former World Bank Chief Economist Justin Lin, have suggested that such investment could also occur in Africa in the foreseeable future (Lin, 2011). However, there is little evidence of this occurring on a 13 The econometric studies discussed earlier do not discuss the efficiency-seeking motive as an explanation for Chinese OFDI. 14 Access to low-cost labour was the least significant of nineteen factors driving OFDI, according to the first survey of Chinese FDI by the Asia Pacific Foundation of Canada and the China Council for the Promotion of International Trade (APFC/CCPIT, 2005, p.16). 15 Examples include Wuxi Huanyauan Garment Co. Ltd, which operates a textile factory in Vietnam, exporting to the European and US market, and Ningbo Shenzhou Knitting Co. Ltd, which exports clothing from Cambodia to the US (OECD, 2008, Ch.3, n.72).

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significant scale to date (see Chapter 7). The latest APFC/CCPIT survey of Chinese investors ranked ‘making use of overseas low-cost labour’ last of twenty-one objectives of future planned investment by Chinese firms (APFC/CCPIT, 2013, Fig. 21).

4.4.4 Strategic Asset Seeking Strategic asset seeking arises when firms invest abroad in order to acquire assets such as technology or brands to overcome the disadvantages that arise from being latecomers in global competition. It has received a great deal of attention in the literature on Chinese OFDI (Child and Rodrigues, 2005; Deng, 2007, 2009). One of the best-known examples is that of Lenovo, which became a major global PC producer as a result of its acquisition of IBM’s PC division in 2005. Other examples include Nanjing Automotive’s takeover of MG Rover in 2005, and Geely’s purchase of Volvo from Ford in 2010 (Salidjanova, 2011, p.9). This type of investment usually involves OFDI in more developed economies. It also tends to take the form of mergers or acquisitions of assets rather than greenfield investment. As discussed earlier, M&A has been a significant form of Chinese firms’ OFDI in recent years. How significant is strategic asset seeking in the overall picture of Chinese OFDI? Over a quarter of the projects approved by NDRC since 2003 could be classified as technology seeking, and these have made up over 20 per cent of the value of investment (Huang and Wang, 2013, Table 3). Although there are several high-profile examples, the fact that the same cases crop up time after time suggests that they may be more the exception than the rule. Sutherland (2009, p.23) concludes that ‘to date strategic-asset-seeking OFDI has been rather limited, even from the select national team business groups’. Turning to overseas contracts, it is highly unlikely that these have involved a significant level of strategic asset seeking. Whereas this motive is usually associated with activities in more developed economies, as noted previously, over 90 per cent of the value of Chinese projects has been in the Global South. The econometric evidence on strategic asset seeking is mixed. Buckley et al. (2007) and Wang and Yu (2014) find no evidence that such a motive affects the pattern of OFDI, but Zhang and Roelfsema (2014) do find that their indicator of the technology intensity of host countries has a positive impact on Chinese investment, and that this appears to be stronger following the adoption of the Go Global policy. Using firm-level data, Ramsamy et al. (2012) find that strategic asset seeking, as proxied by technology level, is a significant driver of SOE investment abroad, although not for private Chinese firms. One limitation of these studies is that they refer to the period before the global financial crisis. The crisis opened up new opportunities for Chinese 87

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investors to acquire Northern companies, so while the picture may have changed somewhat, strategic asset seeking probably remains less important than resource-seeking or market-seeking investment.16 Looking to the future, ‘upgrading its own brand in international markets’ was cited as the most important driver of intended OFDI by Chinese firms in 2013 (APFC/CCPIT, 2013, Fig. 21), which suggests that strategic asset acquisition is becoming a more significant factor. Although the evidence discussed so far shows that market-seeking, naturalresource-seeking, and strategic-asset-seeking motives have all been significant factors in the growth of Chinese investment, this does not imply that overseas expansion by Chinese firms does not respond to the government’s strategic priorities. In fact the various surveys of Chinese firms consistently rank the Go Global policy as one of the major factors that led them to invest abroad.17 This highlights the fact that the Chinese government’s strategy sets the context within which firms make their decisions, even if they are pursuing their own commercial interests.

4.5 Is the International Expansion of Chinese Firms State Driven or Market Driven? What lies behind the international expansion of Chinese firms in recent years? Given the significant role of SOEs in Chinese investment and overseas projects, has it been motivated primarily by strategic political and economic factors? Alternatively, given the increasing autonomy of SOEs and the growing involvement of non-state enterprises, is the key driver investing firms’ commercial interests? Blanchard (2011) identifies two perspectives in the Western literature on Chinese multinational corporations. The first, emphasizing the role of political and strategic considerations, he terms the ‘Beijing as Puppeteer’ camp. It sees foreign expansion as primarily determined by a coherent state strategy rather than by market forces. The second view, which stresses commercial interests, is described as the ‘Business of Business is Business’ or ‘BBB’ camp. This implies that the decisions taken by Chinese firms are primarily motivated by their desire to maximize returns and can be analyzed in much the same way as FDI from other countries. 16 The analysis of NDRC-approved projects by Huang and Wang (2013, Table 3) supports this. When classified according to their primary motivation, resource seeking accounted for 51.3 per cent; market seeking for 28.4 per cent; and technology seeking for 20.1 per cent of the value of investment between 2003 and 2011. 17 In the CCPIT survey for 2010, the Going Global policy and relevant favourable support’ was rated as either a decisive or an important factor in the investment decisions of more than 90 per cent of those questioned (CCPIT, 2011, Table 1.2).

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The international expansion of Chinese firms cannot be explained simply in terms of a single universal driver, as the Beijing as Puppeteer and BBB views tend to do. The reality is far more complex (Blanchard, 2011). The dominant factors can and have evolved over time. Chinese OFDI and overseas projects have become increasingly heterogeneous, in terms of both ownership and the sectors involved. The relative importance of political, strategic economic, and commercial factors is likely to differ according to whether a firm is a centrally controlled SOE, a local SOE, a large private firm, or a small or medium-sized enterprise. It can also differ according to the sector concerned. The influence of state strategy, and firms’ interests, can also shift with the stages of the investment cycle. Several writers have suggested that the dominant motives have changed over time, with political considerations more important in the early years but strategic economic and commercial considerations dominating more recently (Cai, 1999; Hong and Sun, 2006). In the 1980s OFDI was relatively limited and subject to a strict approval process, which meant that only projects favoured by the government went ahead. Overseas projects were more important than OFDI in terms of the annual value of finance. Since these projects were largely funded by the government, they were also politically driven. In the 1990s, government promotion of OFDI came to be more explicitly determined by strategic economic considerations, particularly in terms of supporting investments and projects that would promote exports from China. The government continued to exercise control over the direction of investment. These strategic economic motives became much more explicit with the adoption of the Go Global policy in the early 2000s. The commercial interests of individual companies also became more important during this period. Further liberalization of the outward investment regime reduced the degree of control exercised by the government. The reforms to the SOEs discussed in Chapter 1 gave them more autonomy to pursue their commercial interests at home and abroad, and the increasing significance of private firms in China’s international expansion meant that commercial factors came to play a more significant role. There is evidence that ownership matters in Chinese firms’ overseas activities. Whereas SOEs tend to be resource seeking, investment by private Chinese firms is more likely to be market seeking. SOEs are more likely to engage in strategic asset-seeking investment than private companies are. There is also evidence that private firms are more risk averse than SOEs in terms of the countries where they invest (Ramasamy et. al, 2012). The central government is more likely to play a significant role in investment decisions in a strategic sector such as oil than in, say, the footwear or furniture industries. It is no accident that despite the changes in ownership that have occurred within China, SOEs continue to dominate key sectors. 89

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Within the state sector, the government clearly regards some industries as more strategic than others, and the oil industry stands out in this respect. On the other hand, in domestic appliances, firms such as Haier and Galanz have significant foreign investment and although they have received government support, they are more likely to be primarily motivated by commercial interests in securing access to markets. There may also be a cycle over the period of a foreign investment’s life. At the time when an investment is being planned, the government may play a significant role in determining which sectors and countries firms invest in. Once a firm is operating abroad, the ability of the government to control the activities of the foreign subsidiary is likely to be much more limited, and commercial factors are likely to play a more important role in decisions. For example, the government played an important role in encouraging Chinese oil companies to expand overseas and even influenced which countries were targeted, but once established, the companies make decisions on commercial grounds concerning where to sell the oil that they produce, and do not necessarily export all their output to China.18 In practice, it is difficult to separate strategic economic and commercial drivers in China’s international expansion. This is particularly evident in the case of investment in natural resources, which can reflect the Chinese state’s interest in ensuring secure supplies but also corresponds to the interests of the companies involved in expanding their reserves. Although oil is of particular strategic significance for China, and the government encouraged the major companies to expand abroad in the 1990s as China became a net oil importer, as discussed in Chapter 3, the first overseas investments by CNPC were a corporate initiative and preceded concerns over energy security in government circles (Meidan, 2016, pp.19–20). The company was later able to use the banner of energy security to lobby the government for greater autonomy and simpler approval procedures for its activities abroad. Thus the strategic interests of the government and the commercial interests of the oil companies have become intertwined. A similar issue arises with the acquisition of technology. This has been identified as a strategic economic objective of the Chinese government, which wants to develop a stronger national technological base. It can also correspond to a firm’s interest in acquiring strategic assets in order to strengthen its competitive position. The relationship between the state and business in China is an increasingly complex one. It is no longer a case of the state imposing a strategy on business in a top-down manner, whether in relation to SOEs or to the private sector. As 18 Downs (2008, p.88) estimates that 40 per cent of the production of Chinese SOEs was sold outside China in 2007.

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noted, SOEs have been given greater autonomy to pursue their commercial interests, and are even encouraged to do so. At the same time, business leaders have more opportunities to influence government decisions on OFDI and have called for the approval process to be further liberalized (Sauvant and Chen, 2014, p.142). Political, strategic economic, and commercial objectives have all played a part in the overseas expansion of Chinese firms over the past thirty years. Given the fact that the Chinese government has played such a major role in promoting and regulating FDI, and that much of the investment is in the hands of SOEs, the role of the state cannot be ignored. Over time, as SOEs have become more independent and private firms have increased their share of OFDI, the balance between commercial, strategic economic, and political considerations in investment decisions has probably shifted somewhat towards the first of these, but strategic political and economic considerations still play a role. They are also likely to be particularly important in the case of resource-seeking and strategic asset-seeking investment.

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5 The World’s Wallet? China’s Role in Global Finance

At the height of the Eurozone crisis in 2011, China was heralded as the solution to Europe’s debt crisis (The Economist, 2011). European governments were approaching China, cap in hand, for financial support. This is one indication of China’s growing importance in global financial markets. How has a country with an income per capita far below that of even the poorest countries in the Eurozone acquired the means to be seen as the zone’s saviour? Another often-cited indication of China’s global financial prowess is its role in lending to developing countries. It is widely claimed that China is now lending more than multilateral and regional development banks to developing countries, and that it is giving more aid than other donor nations. How did a country that was a net recipient of foreign aid until the mid-2000s become a major donor within a decade? How has it gone from a junior partner in institutions such as the World Bank and Asian Development Bank to the force behind the creation of new financial institutions such as the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB)? It is the massive growth in China’s foreign exchange reserves that has made the country a significant player in global financial flows. After joining the World Trade Organization in 2001, China’s balance of payments surplus surged, as both exports and inward foreign direct investment (FDI) grew rapidly. As a result China accumulated foreign exchange reserves which came to US$3.9 trillion in 2014, the largest total of any country, according to the World Bank, World Development Indicators. Rather than simply accumulating reserves, the Chinese government has taken steps to relax some of its restrictions on capital outflows and has increased foreign investment and lending abroad. Outward financial flows other than outward foreign direct investment (OFDI) have taken a variety

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of different forms. These include portfolio investment, non-concessional loans and credit lines to foreign governments, export credits, and loans to Chinese companies to support overseas expansion, as well as official development assistance (ODA), which includes grants, interest-free loans, and concessional loans. This chapter considers these capital flows under three main headings: portfolio investment, bank loans and trade credits, and foreign aid.

5.1 Portfolio Investment In 2007 the State Council decided to invest about 20 per cent of its foreign exchange reserves in domestic and foreign alternative investments, and put $270 billion into two sovereign wealth funds, the China Investment Corporation (CIC) and the State Administration of Foreign Exchange (SAFE) Investment Company (SIC) (Thomas and Chen, 2011). These, together with the National Social Security Fund (NSSF), which was authorized to invest abroad in 2005 in order to diversify the fund’s assets (Herd et al., 2010, p.35), became important vehicles for Chinese portfolio investment abroad.1 CIC was set up in 2007 with initial capital of $200 billion from China’s foreign exchange reserves. It was created after economists from the Ministry of Finance (MOF), the National Development and Reform Commission, and the State Council’s Development Research Council criticized SAFE’s management of foreign exchange reserves (Koch-Weser and Haacke, 2013, p.15). It was established with ministerial rank and reports directly to the State Council. In terms of operational control, the MOF has most influence within the CIC, and its first chair, Lou Jiwei, was a former Vice Minister of Finance who subsequently became Minister of Finance. In 2015 CIC was the world’s second largest sovereign wealth fund (SWF), with total assets under management of more than $800 billion (SWF Institute, 2017). Its international portfolio increased from $56 billion to $250 billion between 2008 and 2015 (Sovereign Wealth Center, 2017). In 2015 SIC, the other major Chinese SWF, managed assets of around $500 billion, making it the sixth-largest SWF in the world (SWF Institute, 2017). The SAFE Investment Company was set up in Hong Kong in 1997 as a subsidiary of SAFE, which is responsible for managing China’s foreign exchange reserves,

1 Portfolio investment refers to investment in stocks and shares, which, unlike foreign direct investment, does not give the investor managerial control over the company in which the investment is made. The International Monetary Fund (IMF) regards investments where the holding represents more than 10 per cent of the company as direct investment, and those with less than 10 per cent as portfolio investment.

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with an initial capital of $20 billion. SIC makes both direct and portfolio investments abroad. Although the bulk of its assets are in government bonds, cash, and other liquid assets, it has also invested in oil and gas, with a stake in Total Société Anonyme. During the global financial crisis SIC invested $150–$200 billion in US, European, and Australian shares. It has also invested in property and utilities in the UK. At the end of 2012, it was estimated to hold at least $21 billion in FTSE 100 stocks (Santiso, 2013, p.48). NSSF was created by the Chinese government in 2000 as a strategic fund to support future social security expenditure. In 2015 it was also ranked as one of the top ten SWFs in the world, with assets of $236 billion.2 NSSF was only allowed to invest 7 per cent of its assets abroad until 2009, when the allowance was increased to 20 per cent, giving it a capacity to acquire $30–40 billion in overseas assets (Koch-Weser and Haacke, 2013, p.24). The China-Africa Development Fund (CADFund) was announced by President Hu Jintao at the 2006 Forum on China-Africa Cooperation, and set up in the following year under the auspices of the China Development Bank (CDB), with a specific mandate to finance investment by Chinese firms in Africa. It is much smaller than the other three Chinese SWFs, with assets of $5 billion,3 and is the only one that focuses exclusively on developing countries. Although it is an SWF, its investments do not qualify as portfolio investments as defined by the International Monetary Fund (IMF). It was originally set up to acquire majority shareholdings in Chinese investments in Africa, but this was subsequently modified so that it can hold shares of between 10 and 40 per cent (Grimm and Schickerling, 2013). It has invested in a cotton cultivation project in Southern Africa, power generation in Ghana, and manufacturing in Ethiopia. CADFund also provides advice and information to Chinese companies considering investing in Africa. In 2011 these four funds between them accounted for about a quarter of the total assets managed by all SWFs in the world (Koch-Weser and Haacke, 2013, p.8). However, SWFs only accounted for 3.6 per cent of the total global management fund industry in that year (ibid. Table A3), so the share of Chinese SWFs in global funds would be less than 1 per cent. Rather surprisingly in view of the rapid growth of Chinese SWFs over the past decade, Figure 5.1 shows that Chinese portfolio investment has not grown in recent years and is now slightly lower than before the global financial crisis. A major reason for this is that the two main Chinese SWFs are managed out of Hong Kong, so their investments are not included in data for

2 Available at http://www.swfinstitute.org/sovereign-wealth-fund-rankings/. Accessed 15 June 2018. 3 It was reported at the sixth meeting of FOCAC in Johannesburg, in 2015, that this would be increased to $10 billion.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Portfolio Investment

Trade Credits

Loans

Figure 5.1. China’s Foreign Assets, 2004–15 (US$ billion) Source: PRC State Administration of Foreign Exchange, 2017, The Time-Series Data of International Investment Position of China available at: http://www.safe.gov.cn/wps/portal/english/Data/Invest ment (Accessed 22 Nov. 2017).

the mainland. Portfolio investment from Hong Kong increased almost threefold over the decade to 2015, and was almost five times the level of reported investment from the mainland (IMF, 2016a). However even the total sum invested by the People’s Republic of China (PRC) and Hong Kong (after netting out bilateral flows to avoid double counting) is fairly small, accounting for only 2.5 per cent of the global portfolio investment of over $46 trillion, according to the IMF (2016a). Chinese finance is popularly perceived as going mainly to the developing world, but this is certainly not the case with portfolio investment. The bulk of investment has gone to developed countries, Hong Kong, and the Caribbean tax havens. At the end of 2015, the most important destination was the US, which accounted for two-fifths of the total. A further fifth went to Hong Kong, and a tenth to the Cayman Islands and the British Virgin Islands. The other top destinations were the UK, Japan, Australia, Germany, France, and Switzerland.4 This pattern is also reflected in the distribution of the overseas assets of China’s main SWF, the China Investment Corporation, mainly in the US and other developed countries (CIC, Annual Report 2015, p.28).

4 Calculated from IMF (2016a). China only began reporting this data in 2015, so it is not possible to see how the pattern has changed over time.

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5.2 Bank Loans and Trade Credits Chinese assets held abroad other than direct and portfolio investment consist mainly of bank lending and trade credits. As Figure 5.1 shows, both have grown significantly faster than portfolio investment in recent years. At the end of 2015, outstanding trade credits stood at more than $500 billion and loans at over $450 billion. China has used export credits extensively to secure foreign markets.5 In 2013 worldwide export credits came to $153.3 billion, of which China accounted for $44.5 billion, more than three times as much as the US ($14.5 billion) (Snell, 2015, p.31). Globally it has been estimated that China accounted for about two-fifths of all official trade-related finance in 2013 (Snell, 2015, Table 2). Overseas lending by Chinese banks has also grown significantly in recent years, particularly since the global financial crisis. According to the Chinese Banking Regulatory Commission, while eleven Chinese banks had assets abroad of $227 billion in 2006, by 2012, sixteen banks held total assets of more than $1 trillion.6 The two main policy banks and the four largest commercial banks in China between them had $730 billion in foreign loans at the end of 2013 (OECD, 2015, p.15). The Chinese policy banks, the CDB and the Exim Bank, play a key role in Chinese lending abroad. The largest of the policy banks is the CDB, which has full ministerial rank and comes under the State Council. Its original role was primarily to fund major government infrastructure and industrial projects within China such as the Three Gorges Dam, the South-to-North Water Diversion Project, the West-East Natural Gas Pipeline, and the Qinghai-Tibet Railway (Downs, 2011, p.18). It also provides loans to many local governments within China. It is able to provide funding on a much longer-term basis than the commercial banks because of its quasi-sovereign nature. It does not, however, provide concessional loans. From the outset, the CDB’s mandate has been to break through bottlenecks in Chinese economic and social development. While initially these were conceived in terms of financing infrastructure and large-scale industrial projects within China, as the economy became increasingly dependent on imports of key raw materials, a natural extension of its role was to help to ensure access to foreign sources of energy and minerals.

5 In 2005–2008, the total medium and long-term export credit agency financing as a share of merchandise exports was 3.2 per cent in China compared to 1 per cent or less in Canada, Germany, Japan, the UK, and the US (Massa, 2011, Table 1). 6 These figures include those from Hong Kong, Macau, and Taiwan. Since most Chinese banks do not break down their foreign assets by country, it is impossible to say what proportion of total assets abroad these represent, although for one bank that does provide figures, they make up 60 per cent of loans (IIF, 2014).

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Since the government’s adoption of the Go Global policy in the early 2000s, the bank has become involved in lending outside China in a significant way. Between 2005 and 2015, its foreign currency loans grew more than twenty-fold from $16 billion to $328 billion (Kong and Gallagher, 2016, Fig. 5). It was estimated that at the end of 2015, the CDB accounted for 29 per cent of foreign lending by Chinese financial institutions (Kong and Gallagher, 2016, p.21). Nevertheless, domestic lending still represents most of its business.7 Although it was decided to commercialize the CDB in 2008, this was put on hold as a result of the global financial crisis and was reversed in 2015. Its role as a key financier of the Go Global strategy was a factor used to justify retaining its status as a policy bank (Downs, 2011, p.23). It is the only Chinese bank apart from the Central Bank (the People’s Bank of China) to enjoy full ministerial rank, which reflects the centrality of its role in China’s economic development strategy (Downs, 2011, p.6). The Exim Bank was also set up in 1994, with a mandate to ‘facilitate the export and import of Chinese mechanical and electronic products, complete sets of equipment and new and high-tech products, assist Chinese companies with comparative advantages in their offshore project contracting and outbound investment, and promote international cooperation and trade’ (China Exim Bank, Annual Report, 2015, p.5). Like the CDB, it also comes under the State Council. The Exim Bank is now the largest export credit agency in the world. It is, however, considerably smaller than the CDB, both in overall size and in terms of its operations outside China. In 2013 its overseas lending came to $96 billion compared to the CDB’s $261 billion (OECD, 2015, p.15). It is the only Chinese bank that provides concessional loans, making it the conduit for a significant part of China’s ODA (see Section 5.3), as well as providing preferential export credits. The four state-owned commercial banks have also played a growing role in lending abroad. The largest of these banks in terms of total assets is the Industrial & Commercial Bank of China, which accounts for an eighth of the Chinese banking system’s assets (Saldias and Grigaliunas, 2014). It is also the most internationalized of the commercial banks, operating in thirty-nine countries in 2013, with foreign loans of $123 billion. Both the Bank of China and the China Construction Bank lent around a $100 billion abroad in that year, whereas the Agricultural Bank of China is the least internationalized

7 In 2015 only 14 per cent of CDB loans were made outside mainland China (CDB, Annual Report, 2015, p.9).

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with foreign loans of $51 billion. However, for all of them, more than 90 per cent of their lending is within China (OECD, 2015, p.15). Although they have significant government ownership, they are expected to operate on a commercial basis. They are also publicly listed and have more diversified shareholdings than the policy banks do, which increases the pressure on them to maximize short-term profits.

5.3 China as an Aid Donor Chinese aid can be traced back to 1950, when it began providing material assistance to its neighbours North Korea and North Vietnam. Since 1954 China’s external relations have been couched in terms of the Five Principles of Peaceful Coexistence. These comprise respect for territorial integrity and state sovereignty, mutual non-aggression, mutual non-interference in internal affairs; equality and mutual benefit, and peaceful coexistence. Despite all the changes that have taken place in China over the past six decades, these principles are still cited. In the 1950s China was a net recipient of foreign aid but became a net donor after the Soviet Union cut off its aid in 1960. In 1964, Chinese Premier Zhou Enlai announced the Eight Principles for Economic Aid and Technical Assistance to Other Countries in a speech during a tour of African countries. These sought to distinguish Chinese aid from that given by the Western powers. They again emphasize equality, mutual benefit, and respect for the sovereignty of recipient countries. They also stress China’s support for countries wishing to embark on the road to self-reliance and independent economic development, and the need to transfer technology effectively. China expanded its aid programme in the 1960s and 1970s, and aid to Africa grew significantly. This period was characterized by a number of largescale Chinese projects, most notably the Tanzam Railway linking Zambia and Tanzania, which was started in 1970 and completed in 1975. It also saw China build a number of turnkey factories to produce textiles, refine sugar, etc., and to provide support for agricultural development. By the mid-1970s, foreign assistance was becoming a significant burden on the Chinese government’s budget. In the Fifth Five-Year Plan (1976–80), a ceiling was placed on aid spending, which led to a sharp reduction in aid in the late 1970s and early 1980s. The major changes that took place in China in the late 1970s led to a new phase in Chinese aid. First, China reverted to being a net recipient of aid as a result of significant assistance from Japan, following the signing of the Treaty of Peace and Friendship between the two countries in 1978. Second, although 98

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China continued its aid programme, it did so on a much-reduced scale.8 Third, the nature of China’s aid programmes changed, with much greater emphasis on mutual benefit through economic cooperation. The reforms in China led to a greater emphasis on economic efficiency and the need to generate foreign exchange, and this was reflected in China’s aid programme, with more attention given to economic benefits and opportunities for earning foreign exchange. Some of these changes were reflected in the Four Principles of Economic and Technological Cooperation announced by Premier Zhao Ziyang during a four-week visit to a number of African countries in early 1983. While reiterating several of the Eight Principles from two decades earlier, the Four Principles introduced notions of complementarity between China and the African economies and the importance of obtaining good economic returns. The Four Principles do not mention aid, and were seen as a move away from aid, towards a variety of other forms of economic cooperation (Brautigam, 2009, p.53). A further stage in China’s aid policy, described by Brautigam (2008, p.206) as the period of ‘gearing up for going global’, began in the mid-1990s. In 1994 China launched its Grand Plan of Trade and Economic Cooperation, which proposed that aid should be integrated with FDI, economic cooperation projects, and trade. Central to this strategy was the introduction of concessional loans by the newly created Exim Bank in 1995. The emphasis on win-win cooperation, and trade and investment became more central to Chinese policy. This combination of foreign aid, investment, and trade has become known as ‘trinity development cooperation’. Since the early 2000s, China has also played a more proactive role in multilateral institutions. This has involved efforts to increase its voice and alter the rules and balance of influence within existing institutions.9 Its rapid economic growth and increased foreign reserves have enabled China to increase its share of votes in key institutions such as the IMF and the World Bank.10 It also saw the incorporation of the Chinese Yuan into the basket of currencies included in the IMF’s Special Drawing Rights in 2015.11 A recent development, which could mark a new phase in the evolution of Chinese aid, is the creation of new multilateral institutions in which China

8 In 1989–90 Chinese aid was only a fifth of the level attained in 1975–6 in US$ terms (Kobayashi and Shimomura, 2013, p.55). 9 This has been described as the system-altering phase of China’s involvement in international institutions (Shambaugh, 2013, p.136). 10 The US Congress refused to ratify IMF reforms which increase China’s share of votes in the organization on several occasions. It eventually approved these changes in December 2015. 11 SDRs are a supplementary reserve asset created by the IMF in 1969, whose value depends on a basket of currencies and which acts as a unit of account.

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plays a leading role.12 In 2015 the AIIB was launched, with headquarters in Beijing, to provide an alternative source of funds to those of the existing multilateral institutions, for infrastructure investment in the region. Although the US and Japan, the leading countries within the World Bank and Asian Development Bank (ADB), respectively, have not joined the AIIB, a number of European countries including the UK have become founding members. In the same year, the member countries of the BRICS—Brazil, Russia, India, China, and South Africa—launched the NDB, also known as the BRICS Development Bank), with its headquarters in Shanghai, aiming to create a reserve currency pool of $100 billion and their own credit rating agency as an alternative to the three US agencies, Moody’s, Standard & Poor, and Fitch (Snell, 2015, p.61). Like the AIIB, the NDB focuses on financing infrastructure in developing countries, and is expected to be particularly involved in Africa. The creation of the AIIB and the NDB signals a significant shift in China’s strategy, from trying to influence existing multilateral institutions from within to developing new institutions and norms which are more in line with China’s own perspectives. It also led to a significant increase in total Chinese aid and in the share of multilateral aid in the total in 2015 and 2016 (Kitano, 2018). It remains to be seen whether these new banks turn out to complement existing institutions, or emerge as their rivals.

5.3.1 The Scale of Chinese Aid Many media reports and even some academic studies tend to exaggerate the level of aid given by China by including in their figures financial flows, which are not normally counted as aid. Until recently the Chinese government was reluctant to use the term ‘aid’, preferring to refer to ‘economic cooperation’. This has changed with the publication of the government’s White Paper, China’s Foreign Aid, in 2011. China defines aid differently from the OECD countries involved in the Development Assistance Committee (DAC), making comparisons between Chinese aid and that of other countries difficult.13 This is further complicated by the fact that Chinese figures on aid are provided by a number of different government ministries and agencies, rather than a single central source. Estimates of the scale of Chinese aid vary wildly. One study for the Rand Corporation claimed that in 2011, China pledged a total of $189 billion in aid to developing countries (Wolf et al., 2013), whereas the OECD reports that 12 Huang and Wei (2015, quoted in Xu and Carey 2015a, p.6) identify 2015 as the start of a new phase in Chinese aid policy in which it becomes a proactive institutional and conceptual innovator. 13 See Brautigam, 2011a and Grimm, et al., 2011, Table 1, for summaries of the differences between the Chinese and DAC definitions of aid.

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Chinese aid in that year came to less than $2.5 billion (OECD, 2013a, Table IV.1). These contrasting figures have been arrived at in two very different ways. The Rand figure is based on media reports of financial pledges made by China, and it includes not only aid but also government-backed investments, which the DAC defines as Other Official Finance (OOF) rather than ODA. It also refers to pledges rather than disbursements, so that this is finance which may (or may not) be forthcoming at some point. The OECD figure comes from the Fiscal Yearbook of China’s MOF, which reports ‘ODA-like flows’. This figure does not include concessional loans or multilateral aid and, therefore, underestimates the level of Chinese ODA (Kitano and Harada, 2014). Taking these additional elements into account, Kitano and Harada estimate that Chinese aid, calculated on a basis that is comparable to OECD data for DAC lenders, came to $4.7 billion in 2011.14 Their figure for gross disbursements of aid between 2010 and 2012, $14.48 billion, is very close to the total of $14.41 billion reported for the same period in the Chinese Government’s 2014 White Paper on foreign aid. All of the various estimates of Chinese aid agree that it has grown significantly since the early 2000s. China has risen from sixteenth or seventeenth place in terms of net foreign aid in the early 2000s to sixth, behind the US, the UK, Germany, France, and Japan, in 2012 and 2013 (Kitano and Harada, 2014, Table 2).15 It still has some way to go to catch up with the five largest donors in terms of the amount of foreign aid that it gives. It also provides less than 0.1 per cent of Gross National Income in aid, rather less than the 0.3 per cent average for DAC countries and the 0.7 per cent international target (Snell, 2015, p.21). Given China’s much lower level of per capita income compared to the OECD countries, this is not surprising. These figures also give a more realistic picture of the significance of Chinese aid compared to the other types of capital flows that have been discussed in this Chapter. Between 2001 and 2013, the cumulative amount of foreign aid (estimated on a basis similar to that used by the DAC) was about $35 billion. This compares to over $200 billion of overseas assets owned by CIC and $260 billion of foreign loans from the CDB at the end of 2013. It is less even than the $44.5 billion of trade credit provided in a single year by the Exim Bank in 2013.

14 Kitano (2016) provides revised estimates for Chinese aid which give a figure of $4.8 billion in 2011, but lower figures for 2012 and 2013 than Kitano and Harada (2014). 15 Kitano’s revised and extended estimates puts China lower down the ranking of donors in ninth place in 2013 and 2014, behind Sweden, the Netherlands, and Norway, as well as the five other donors mentioned (Kitano, 2016, Table 3). The latest estimates by Kitano (2018) show that the recent increase in Chinese aid has meant that it overtook the three European countries in 2016 but remained well behind the five major donors.

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5.3.2 The Chinese Aid Architecture The Ministry of Commerce (MOFCOM)’s Department of Foreign Assistance is in charge of overseeing foreign aid and ‘is responsible for the formulation of foreign aid policies, regulations, overall and annual plans, examination and approval of foreign aid projects and management of the project execution’ (PRC, 2011). The administration of foreign aid was merged with trade in 1982 during the early years of China’s economic reforms, and it has remained with MOFCOM and its predecessors ever since (Kobayashi, 2008, p.9). It is an indication of the link between Chinese aid, trade, and OFDI. Other ministries also have their own specialized aid programmes. The Ministry of Health provides medical teams to developing countries; the Ministry of Education is responsible for scholarships for African and Latin American students, whereas the Ministry of Agriculture provides technical assistance in rural areas. Each ministry submits its aid budget to the MOF for examination and then to the State Council for approval. MOF is the agency responsible for debt relief, and China’s contribution to international organizations such as the World Bank, the ADB, and various UN organizations. Chinese provincial governments have also established various kinds of partnerships abroad, which, it has been argued, also constitute foreign aid (Davies, 2008, p.8). Since China emphasizes national sovereignty, the formal mechanism through which aid is given consists of the borrowing government making a loan request, with a list of projects that is presented to MOFCOM and the Exim Bank (Kobayashi, 2008, pp.18–20).16 When the project has been evaluated, an intergovernmental framework agreement is signed, which sets out the terms of the loan, and the Exim Bank signs a loan agreement with a borrowing-country bank designated by its government. Although this approach is seen as a means of ensuring that loans are in line with the recipient’s priorities, it is not uncommon for Chinese SOEs to suggest projects to the government requesting the loan (Cheng et al., 2012, p.8; Zhang and Smith, 2017, pp.2339–40). The role of the Ministry of Foreign Affairs (MOFA) in relation to aid policy is to advise MOFCOM (Xue, 2014, p.31). The Chinese embassy in recipient countries may play a role in proposing projects and levels of aid to the country (Lancaster, 2007, p.4). However, although Chinese embassies come under the MOFA, the Offices of Economic and Commercial Affairs at the embassies are often in a separate location and report directly to MOFCOM, rather than to the ambassador or the MOFA (Corkin, 2011, p.67; Sun, Y., 2014, p.22). Some MOFA officials and scholars have argued that responsibility for China’s aid

16 As noted earlier, China’s concessional loans are channelled through the Exim Bank, which is responsible for the assessment of projects and the allocation and recovery of loans.

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programme should be transferred to MOFA because MOFCOM’s focus on economic gains can have a negative impact on China’s strategic and diplomatic interests, but so far the State Council has sided with MOFCOM on the issue (Zhang and Smith, 2017, p.2336). In total there are more than thirty agencies involved in aid in China, and this has led some commentators to conclude that Chinese aid spending is disorganized and fragmented, lacking effective coordination (Chaponnière, 2009, p.61; Lancaster, 2007, p.5; Watanabe, 2013, p.76). Over the last decade the government has taken steps to increase the level of coordination between different agencies. establishing an interagency liaison mechanism for foreign aid in 2008, upgraded to an interagency coordination mechanism in 2011 and then creating the China International Development Cooperation Agency in 2018.

5.4 Drivers of Chinese Financial Flows The debate over whether China’s economic expansion beyond its borders is primarily a result of state strategy or commercial interests, discussed in Chapter 4, also comes up in relation to financial flows. The fact that all of the key actors discussed in this chapter are either government ministries or centrally owned state enterprises, and that finance is a strategic sector, makes it even more likely that strategic considerations play the dominant role in finance than in any other sector. However, it would be an oversimplification to explain financial flows in terms of a single strategic objective of the Chinese state. The variety of actors involved, the different interests that they represent, and the pressures to which they are subject require a more nuanced analysis. In the case of SWFs, the primary driver for the creation of CIC and SIC and the decision to allow the NSSF to invest abroad in the mid-2000s was the need to find alternative uses for China’s growing foreign exchange reserves which would give better returns than holding US Treasury Bills. In this sense the SWFs clearly respond to a strategic economic objective of the Chinese government. The official Chinese position is that SWF investments are purely commercial. As Lou Jiwei, the then head of CIC, stated in 2009, ‘Our investment is to make money. I don’t care how many tons of oil we can ship home, what I do care about is the stock price’ (quoted in Murphy, 2012, p.37). This is reinforced by the first two basic principles, which, CIC claims, underlie its investment strategy: • CIC invests on a commercial basis. Its objective is to seek maximum returns for our shareholder with acceptable risk tolerance. • CIC is a financial investor and does not seek control of the companies in its portfolio. (CIC, Annual Report, 2015, p.23)

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It is sometimes claimed that broader government strategic objectives lie behind the investments of China’s SWFs and that they are heavily invested in the natural resources sector (Koch-Weser and Haacke, 2013, pp.26–9). It is certainly true that after the financial crisis there was a shift from investment in financial companies to the natural resources sector. However, this could also be explained in terms of the attractive returns to be earned on such investments at a time of booming commodity prices, and it was not necessarily linked to efforts to secure resources. The overall equity portfolio of CIC is diversified, with the energy sector accounting for only 5.0 per cent and materials for 4.1 per cent of the total (CIC, Annual Report, 2015, p.28). Indeed CIC has reduced its involvement in the energy and materials sectors since 2010, when they accounted for a quarter of the company’s equity portfolio (CIC, Annual Report, 2010, Fig. 5). Two factors limit the extent to which CIC can use its investments to further the strategic interests of the Chinese government. First, around two-thirds of its portfolio is managed outside the company by external fund managers, and this proportion has increased over time. Second, CIC and other SWFs own a relatively low proportion of the shares of the companies in which they invest so that they do not give the SWF effective control. This is consistent with the main objective of SWFs, which is to secure financial returns from a diversified portfolio. A much stronger case can be made for the strategic role played by the policy banks, since they are not constrained to generate financial returns to the same extent. The rationale for a policy bank is that it should play a strategic role. As far as their lending abroad is concerned, the CDB and Exim Bank have been involved in the acquisition of resources, promoting Chinese exports and supporting the Go Global policy. One frequently cited indication of the importance of strategic economic motives in bank lending is the resource-backed loans, which both CDB and Exim Bank have provided to a number of countries, including Angola, the Democratic Republic of the Congo, Ecuador, Russia, Turkmenistan, and Venezuela.17 These are loans to a foreign government or SOEs which are repaid through sales of a resource, mainly oil and gas. The oil and gas are sold to a Chinese SOE, with the payment by the SOE deposited in an account with the CDB or Exim Bank. The loans may be used for projects which are not related to the resource extraction, such as roads or power stations. Although such deals are seen as evidence that policy-bank lending responds to the strategic interests of the Chinese state, they can also be useful for the

17

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These are sometimes referred to as Resource for Infrastructure (R4I) swaps.

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banks themselves, for Chinese oil and mining companies, and for Chinese contractors.18 From the point of view of the government, they are seen as a way of securing supplies of key resources, particularly oil and gas. They also help to diversify the use of the country’s large foreign exchange reserves. For the policy banks, these loans are a source of profit and international expansion that helps them to diversify their assets. The tying of repayments to resource exports is also a means of reducing the risk of loan defaulting, particularly in economically or politically unstable countries. They also dovetail with the interests of Chinese oil and mining companies in obtaining access to foreign natural resources in order to expand internationally and increase their profits. Finally, since the loans are usually tied to the use of Chinese contractors to carry out the funded projects, they expand the market for Chinese engineering and construction companies. Downs (2011, p.58) describes the role of the CDB in energy-backed loans as ‘the bridge between the strategic objectives of the Chinese government and the commercial activities of Chinese firms’. The other point illustrated by resource-backed loans is the way in which the different aspects of the growing integration of China in the global economy, discussed separately in this book, are often linked. These deals are reflected in trade flows through Chinese imports of natural resources,19 and often through exports of machinery and equipment from China for local infrastructure projects.20 In some cases they are linked to OFDI by Chinese resource companies in the host country,21 and they invariably involve projects carried out by Chinese contractors. Thus the various aspects of China’s international projection discussed in Chapters 2 through 4 can all be linked to the lending activities of the policy banks. Despite being state owned, the commercial banks enjoy greater autonomy from the central government than the policy banks, and they are more subject to pressure to make profits. Their international expansion has, therefore, been driven more by commercial imperatives, arising in part from the growing international operations of their customers as more Chinese firms invest abroad. This has led them to set up branches abroad to support their clients. They have also acquired shares in foreign financial institutions. In addition investing abroad helps the banks to diversify and to reduce their dependence on the Chinese market, where competition is intensifying. 18

What follows is based on Downs (2011) analysis of CDB’s energy deals. Although it is not always the case that the resources are exported to China: they are sometimes sold on the international market. 20 In some instances they have been linked to Chinese exports of consumer goods. For example, part of a CDB loan to Venezuela was used to import domestic appliances from Haier. 21 Although there was no formal link between the Exim Bank’s loan to Angola in 2004 and the creation of a joint venture between Sinopec and the Angolan state oil company Sonangol, it has been suggested that the loan did help Sinopec to invest in the country (see Chapter 6, Box 1). 19

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All countries’ aid programmes reflect a variety of motives. Donors’ rhetoric, of course, invariably stresses economic development and poverty reduction as the major objectives of their aid programmes. However, governments are rarely, if ever, wholly altruistic in their aid giving. They also seek to obtain economic advantage, using aid to support trade and foreign investment by securing access to raw materials, export markets, and investment opportunities. Governments use aid strategically to support their allies in key regions, and as an instrument of soft power to enhance their international image and influence.22 As with other countries, Chinese aid has involved a complex mix of different objectives. Both changes over time and the interests of different actors play a role in determining the relative significance of the different drivers. While poverty reduction has been the main declared objective of aid from the OECD countries for a number of years now, it receives relatively little emphasis in Chinese statements on aid. China’s 2011 White Paper on aid does not specifically mention poverty reduction, referring rather to economic growth and progress (PRC, 2011, Preface). In the 2014 White Paper, there is a reference to reducing poverty and promoting the achievement of the Millennium Development Goals, which include poverty reduction. However, the emphasis in Chinese statements on aid continues to be on economic development rather than poverty reduction (Zhang et al., 2015). This is consistent with the Eight Principles view that aid should be not ‘a kind of unilateral alms but something mutual’. The stress on ‘mutual benefit’ in the Chinese discourse on aid means that the economic advantages that China derives from its aid programmes are clearly articulated. As two Chinese scholars point out, ‘by helping recipient countries build some economic development-related projects, China expects to reap trade, investment and contract opportunities overseas, especially for Chinese enterprises going abroad’ (Luo and Zhang, 2014). Aid projects carried out by Chinese construction companies, for example, have enabled these companies to gain a foothold in recipient markets, and they have subsequently stayed on and won commercial contracts (Brautigam, 2008, p.206). The fact that a significant proportion of aid is tied to the purchase of Chinese goods and services ensures that Chinese firms benefit from Chinese aid.23 22 The concept of soft power, developed by Joseph S. Nye, refers to the ‘ability to shape preferences of others ‘and ‘to get others to want the outcomes you want’ (Nye, 2004, quoted in Shambaugh, 2013, p.209). Soft power is contrasted with hard power, which involves coercion or the threat of force, and reflects the capacity to attract others. 23 There are no figures on the proportion of Chinese aid that is tied. It should be noted that despite the recommendations of the DAC on untying aid, several OECD countries continue to tie a significant proportion of their bilateral aid. In 2015 over 40 per cent of US aid and 25 per cent of Japanese aid was tied, although in the case of the UK, all aid was untied (OECD/DAC, 2017, Table 6).

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However, there is a tendency on the part of some authors to exaggerate the extent to which Chinese aid is driven by economic interests, particularly in relation to access to oil, gas, and minerals, and the role of loans for resource deals in developing countries. This arises from the confusion between Chinese aid and the other forms of official finance discussed earlier. Studies such as Lum et al. (2009) and Wolf et al. (2013), which show the bulk of flows going to natural resource extraction and infrastructure, include a wider array of projects than is normally included in the definition of aid. Most of the loans involved in these deals are examples of credit for investment or trade and are not aid according to OECD DAC criteria (Brautigam, 2010, p.18). Whereas strategic economic considerations have played an important role in bank loans and export credits, Chinese aid has been influenced more by strategic diplomatic factors. China has consistently used its aid programmes to obtain diplomatic support from the recipients. In the 1960s, obtaining admission to the United Nations, and securing the Chinese seat on the UN Security Council, which was occupied by the nationalist government in Taipei (Taiwan), was a major objective of Chinese diplomacy. China sought support from newly independent countries and offered to replace their Taiwanese aid programmes with its own support. In the vote in 1971, fifty-one of the seventy-six countries that supported the PRC had been recipients of Chinese aid (Li et al., 2014). China continued to use aid as a tool to obtain diplomatic recognition and isolate Taiwan until 2008, when the election of President Ma of the Kuomintang led to a drop in the tension and an informal truce in the competition between Beijing and Taipei for recognition.24 China also looks to aid recipients for international support within the United Nations to avoid pressure from the West over its human rights record. This became particularly important when it was faced with diplomatic isolation as a result of the killing of civilians in Tiananmen Square in 1989. In contrast to its insistence on recipients observing the One China Policy and breaking diplomatic links with Taiwan as a condition of aid, China prides itself on not imposing domestic conditionality on other countries. This was a major feature of both the Eight Principles (Principle 2) and the Four Principles (Principle 1). China’s refusal to impose political conditionality on recipients of Chinese aid has been much criticized in the West, where it has been argued that it undermines other donors’ efforts to improve governance, reduce corruption, and ensure respect for human rights in developing countries. Adherence to the principle of non-interference in internal affairs makes it difficult for China to explicitly use its aid to influence recipients’ domestic politics, even if it wished to do so. 24 This truce ended following the victory of the more nationalist Democratic Progressive Party in the 2016 presidential elections in Taiwan.

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Similarly, China rejects attempts to impose a particular model of economic development on other developing countries. The talk of a ‘Beijing Consensus’25 as opposed to the Washington Consensus, as promoted by the IMF, the World Bank, and most Western governments, has not been promoted by the Chinese government. Indeed it has explicitly rejected the notion of a model that can be transferred to other countries, arguing that each developing country should follow its own path, which is determined by its own particular conditions (Shambaugh, 2013, p.214; Zhang et al., 2015, p.23). Chinese aid can also be seen as a means of enhancing China’s soft power. A number of aspects of its aid, such as its growing contribution to UN peacekeeping missions, disaster relief, and the large number of medical teams sent to developing countries, serve to improve China’s international image and present it as a responsible power. Exchange programmes which bring foreign students to China and the establishment of Confucius Institutes to promote Chinese culture and language in many countries are also means of developing soft power. In summary then, a variety of factors has contributed to the growth of international financial flows from China in recent years. Some factors are clearly linked to the strategic concerns of the Chinese government, whereas others reflect the investors’ interests. However, it should also be clear that although the Chinese state cannot dictate the pattern of outward flows, it does have considerable influence over them, not least through its regulatory apparatus.

5.5 Conclusion Despite the rapid growth of China’s foreign exchange reserves and the growing international operations of its financial institutions, the significance of China in global financial markets should not be exaggerated. Although Chinese SWFs are amongst the largest in the world, their investments are dwarfed by those of other international investors. Even when investment from Hong Kong is included, China’s share of global portfolio investment remains quite limited. Despite the growth of its foreign aid, it is still only a medium-sized donor some way behind the US, the UK, and Japan. Where China does play a significant global role is in providing export credits, with the Exim Bank the world’s largest lender. It is also a significant provider of OOF to developing countries. This partly reflects the fact that because Chinese financial institutions are SOEs, most of their lending can be classified as 25 The term ‘Beijing Consensus’ was popularized by Joshua Cooper Ramo in his 2004 book of that name.

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official flows. However, China’s share of total financial flows (including private flows) is relatively low. The significance of China’s growing role in global finance is not due so much to the scale of its involvement as to the extent to which its financial flows are under the control of the state. Since the bulk of these flows come from the SWFs, the policy banks and the state-owned commercial banks, the state can exercise control over their direction and use. Different types of finance are used for different purposes. Portfolio investment by SWFs is a means of utilizing China’s foreign exchange reserves more effectively. Bank lending has been used to promote Chinese exports, acquire natural resources, and support its Go Global policy. Aid in the conventional sense has contributed to the growth of China’s soft power in the Global South, as well as creating business opportunities for Chinese companies. Although China is not, in overall terms, a dominant feature of the global financial landscape, its emergence has had some important implications. It does provide an alternative source of finance to traditional investors, lenders, and donors. This is particularly significant for countries in the Global South, which, for political or economic reasons, find it difficult to access more conventional sources. Chinese finance has also helped to increase the bargaining power with traditional donors of some developing countries and to create the ‘policy space’ to adopt more heterodox economic strategies (Prizzon et al., 2016, p.36). There are also signs that the growing significance of China (and other emerging economies) is having an impact on the global governance of development finance (Xu and Carey, 2015b). China’s emphasis on infrastructure for both its loans and its ODA has not only enabled countries to invest in infrastructure projects that they might not otherwise have been able to undertake but also contributed to a reappraisal of the significance of investment in infrastructure by international financial institutions and major donors (Cheng, 2015, pp.217–18). Further, the use of mixed credits and other innovative forms of finance by China and other emerging donors has contributed to traditional donors giving more emphasis to using official support to leverage market-based finance to meet development goals. This has led to discussion on new concepts of development finance, as illustrated by the OECD’s work on indicators of Total Official Support for Sustainable Development. Competition from China’s Exim Bank has also prompted expansion in the role of export credit agencies from developed countries which has led to greater access to credit and improved terms for developing countries (Xu and Carey, 2015b, p.870). The growth of new donors also led to greater flexibility in the application of the IMF’s debt limit policy and the World Bank’s Non-Concessional Borrowing Policy in 2009 and 2010 (Xu and Carey, 2015b, p.873). 109

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The growing importance of China in global finance is significant, not only for those countries that have received Chinese loans and aid but also indirectly because of the way in which it is driving broader changes in the international governance of development finance and shaking up the current system. These systemic effects are likely to become increasingly important in the future as China’s role in the global financial system expands.

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Part II China and Sub-Saharan Africa

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6 China’s Economic Expansion in Sub-Saharan Africa

6.1 Introduction Relations between the People’s Republic of China (PRC) and Sub-Saharan Africa (SSA) have changed significantly over time, from overtly political to a much greater emphasis on economic relationships. In the 1950s China supported liberation movements across Africa in their anti-colonial struggles. After independence the Chinese government courted the new African governments to obtain diplomatic recognition and support for Beijing’s claim to represent China at the United Nations in place of the Nationalist government in Taipei, which was still recognized by the Western powers. After the SinoSoviet split in 1960, Africa was also an area in which China competed with the Soviet Union for influence. In pursuit of these aims, the Chinese government provided aid to SSA, the highest-profile example being the Tanzam Railway, built in the 1970s to provide Zambia with a route to the sea as an alternative to the traditional route via Zimbabwe, then under white minority rule. Although for a relatively poor country China’s aid to Africa in this period was considerable, trade with the region was limited, and foreign investment non-existent. Aid was clearly driven by political rather than economic objectives, and the rhetoric of China’s engagement was one of international solidarity and anti-imperialism.1 After the death of Mao and the radical economic changes introduced in China from the late 1970s, Chinese overseas aid fell significantly, and its involvement in SSA declined. However, following Western criticism of the repression in Tiananmen Square in 1989, China re-emphasized its relations

1

See Strauss (2009) for a discussion of the rhetoric that surrounded the Tanzam Railway.

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with other developing countries, particularly in Africa (Tull, 2006). In the late 1990s, following Jiang Zemin’s tour of six African countries in 1996, the region once again began to become a focus of China’s attention. In 2000 the first Forum on China-Africa Cooperation (FOCAC) was held in Beijing, and it has been repeated every three years since then, the venue alternating between China and Africa. Although the political rhetoric surrounding these meetings remains largely unchanged from the Maoist era, the content has shifted to emphasize the expansion of economic relations, stressing the growth of bilateral trade, the encouragement of Chinese investment, and the setting up of Special Economic Zones. China’s growing economic presence in SSA over the past decade has attracted a great deal of attention, much of it critical.2 Two narratives dominate Western media accounts and the political debate over the drivers of China’s involvement in Africa. The first sees China’s growing role in SSA as part of a neo-colonial scramble for African resources, particularly oil and minerals. The second emphasizes China’s political ambitions in SSA and sees it challenging Western influence in the region.3 Acquiring resources, particularly oil and minerals, plays an important role in China’s economic involvement in SSA, but it is not the sole explanation of its relations with the region, which are far more varied than this might suggest. This chapter begins by describing the growth of different forms of economic relations between China and SSA, looking at trade, foreign direct investment (FDI), project contracts, loans, and aid. It then considers the main actors involved on both the Chinese and the African sides. Chinese involvement is then analyzed in terms of the strategic economic and political drivers, as well as the commercial factors which account for the close economic ties both from the Chinese and the African sides.

6.2 The Growth of Sino-SSA Relations China’s economic relations with SSA have taken a number of forms, which have grown substantially since the start of the Millennium. This section documents the growth of bilateral trade, foreign investment and projects undertaken by Chinese firms in the region, and loans and aid provided by China to SSA.

2 See Mawdsley (2008) for an analysis of the coverage of Chinese involvement in Africa in the British press. 3 These views have been criticized by a number of commentators, such as Brautigam (2009); Moyo (2012b)); Yan and Sautman, (2013); Sautman and Yan, (2014).

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6.2.1 Trade Trade is at the heart of the relationship between China and SSA. As China became more integrated with the global economy its trade with Africa grew rapidly. Until the 1990s trade relations between China and SSA were limited. Figure 6.1 shows the growth of bilateral trade between China and SSA since the mid-1990s (based on Chinese-reported data). In the late 1990s, total trade between China and SSA was less than US$5 billion a year. This changed dramatically in the new millennium so that by 2014, total trade with SSA had reached US$193 billion (UNCTADstat). Between 1999 and 2014, imports to China from SSA increased more than fifty-fold, while exports from China grew almost thirty-fold. As Figure 6.1 shows China ran a trade deficit with SSA throughout the period.4 The decline in prices as the commodity boom ended, and a slower rate of growth in China led to a sharp drop in the value of imports from SSA in 2015 and with exports continuing to grow, China’s trade with the region moved into surplus for the first time in 2015. One of the criticisms levelled at China’s trade with SSA is its ‘colonial’ structure. As Figure 6.2 shows, over 70 per cent of Chinese imports from SSA between 2013 and 2015 were primary products (PPs). However, this is not solely a feature of trade between China and SSA: PPs accounted for an even higher share of Japanese and European imports from SSA. When resource-based

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Figure 6.1. China’s Trade with SSA, 1995–2015 (US$ Billion) Source: UNCTADStat.

4 The overall trade deficit that China ran with SSA between 2000 and 2014 hides considerable differences between individual African countries. China had a trade surplus with two-thirds of the countries in the region, and its overall deficit with the region was mainly accounted for by Angola and South Africa.

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Figure 6.2. Shares of Different Products in Imports from SSA, 2013–15 Source: own elaboration from UNCTAD STAT data based on the classification developed by Lall (2000).

manufactures (RBMs) are included, over 95 per cent of China’s imports from SSA were either PPs or RBMs.5 Chinese imports from SSA are not only overwhelmingly resource based but also concentrated in a small number of products, of which the most significant are fuels and minerals. In recent years, oil, minerals, and metals have accounted for around 85 per cent of China’s imports from SSA.6 The top-five products that China imported in 2013–15 were petroleum, iron ore and concentrates, precious and semi-precious stones, copper, and ores and concentrates of base metals. Between them, these five products accounted for four-fifths of Chinese imports from the region. Over time it might be expected that the range of products exported from Africa would diversify as growing trade links lead to new products finding markets in China. Indeed China provides duty-free access to a growing range of products from the least-developed SSA countries, which by 2010 covered more than 4,700 tariff items. However, this seems to have had very little effect in terms of developing new exports with more than 90 per cent of the value of exports to China in 2012 made up of products that China was already importing from the region a decade earlier.7 It is hardly surprising that in contrast to its imports, over 90 per cent of China’s exports to SSA are of manufactured goods. The most important 5 This rises to 99 per cent if imports from South Africa are excluded, the same proportion as for Japan and slightly higher than for the US and EU. 6 Data in this and the next paragraph are all based on UNCTADstat. 7 Estimated from UN COMTRADE data at the 6-digit level of the Harmonized System classification.

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category of exports to SSA is low-technology products such as clothing, footwear, and toys, although over time, more sophisticated manufactured goods such as domestic appliances, TVs, and mobile phones have grown in significance. Capital goods have accounted for an increasing proportion of Chinese exports, doubling their share since the early 2000s to account for about a quarter of the total.8 Some of these exports are linked to the extractive sector, as Chinese oil and mining companies abroad import equipment and supplies from China. Chinese equipment is also proving attractive to African producers because it is relatively cheap compared to imports from the West and is often better adapted to small-scale production (Atta-Ankomah, 2014). How significant for China, then, is SSA as a trading partner? China’s main trading partners are the US, the EU, and its East Asian neighbours. Because of its low income, SSA is still of limited importance to China as a market for its exports, accounting for only 3.6 per cent of all of its exports in 2015. Its importance has increased since the global financial crisis but remains marginal in the wider picture. SSA is rather more important to China as a source of imports, supplying almost 6 per cent of its total imports in 2013 and 2014, although this fell to 4 per cent with the drop in exports in 2015. While trade with SSA is of relatively limited importance to China, this is certainly not the case from the point of view of the region. Trade with China has grown at a much faster rate than that with the rest of the world, making China the region’s most important export market and source of imports. In recent years a fifth of SSA imports have come from China, while almost 15 per cent of exports have gone to the Chinese market (Table A6.1).

6.2.2 Foreign Direct Investment The growing engagement of China in SSA is also reflected in the increased presence of Chinese firms in the region. While there is no doubt that Chinese FDI has grown spectacularly over the past decade, it is not easy to get a clear picture of the scale of Chinese investment in the region. As Kaplinsky and Morris (2009, p.554) note, ‘Official estimates of China’s FDI flows to SSA are contradictory, confusing and almost certainly understate their true significance.’ One of the reasons for this is that the Ministry of Commerce (MOFCOM) data only indicate the initial destination of Chinese FDI (see Box 4.1). Unfortunately, alternative sources of data on Chinese FDI are equally problematic. Data on inward investment collected by host governments are often patchy or nonexistent in Africa, so that although it is possible to build a picture for a few

8 Own calculation from UN Comtrade data on trade according to the Broad Economic Category (BEC) classification.

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Figure 6.3. Chinese Outward Foreign Direct Investment (OFDI) Stocks and Flows in SSA, 2003–15 (US$ million) Source: MOFCOM, 2016 Statistical Bulletin of China’s Outward Foreign Direct Investment; American Enterprise Institute/Heritage Foundation, China Global Investment Tracker (Accessed 18 Oct. 16).

countries, there is no way of obtaining estimates for the entire region.9 Data from the American Enterprise Institute/Heritage Foundation’s China Global Investment Tracker give a much higher estimate of Chinese FDI in SSA (see Figure 6.3) than the figures reported by MOFCOM.10 However, since their figures are based on media coverage, they may include planned investments, which are announced even if they never materialize and so overestimate the amount of Chinese investment that actually takes place. The true figure is probably somewhere between these two estimates. Despite the weaknesses of the data, they give some idea of the rapid growth of Chinese FDI in SSA. According to MOFCOM, the stock of foreign investment increased almost seventy-fold between 2003 and 2015. The American Enterprise Institute (AEI)/Heritage Foundation data also show a significant increase in Chinese FDI flows in recent years. How significant is SSA as a destination for Chinese FDI? According to the official MOFCOM figures, SSA has accounted for less than 4 per cent of the

9 A recent study of Chinese investment in Africa by the World Bank was able to obtain information from investment promotion agencies in only six countries (Shen, 2013). 10 The total amount of investment in SSA reported in the China Global Investment Tracker is more than three times the amount of Chinese OFDI reported by MOFCOM for the period 2005–2015 ($72 billion as compared to $23.8 billion).

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global stock of Chinese outward investment in recent years. If Hong Kong is excluded from the total, SSA’s share of Chinese Outward Foreign Direct Investment (OFDI) increases to over 7 per cent in 2015 (own calculation from MOFCOM data).11 How significant is China as a source of inward investment in Africa? UNCTAD (2013, Fig. 5) reports that China was the sixth-most important investor in Africa in 2011 in terms of the total stock of investment, and the fourth-most important in terms of the annual inflow in that year. In 2011 Chinese FDI flows to SSA were greater than those from the US (GAO, 2013, Fig. 12). By 2014 China was the fourth-largest investor in SSA (Sun et al., 2017, Exhibit 1), accounting for about 6 per cent of the total stock of FDI in the region (Table A6.1). Remembering that the official figures probably underestimate the true extent of Chinese investment in the region, it is very likely that in practice China has accounted for more than 10 per cent of all FDI in SSA in recent years. China has invested in forty-five out of the forty-seven SSA countries, but its presence is not evenly spread across the region. Not surprisingly, South Africa, the largest and most developed economy in the region, is by far the most important destination for Chinese FDI in SSA followed by Zambia, Nigeria, Sudan, and Zimbabwe. Although, overall, the Chinese share of the foreign investment stock in SSA remains relatively low, in some countries, including Zimbabwe, the Democratic Republic of the Congo (DRC), and Zambia, it now accounts for a significant share of total FDI (Table A6.1). There is general agreement that the extractive sector is the most important target for Chinese FDI in SSA, although the figures vary considerably between different sources. According to official Chinese data, mining (which includes oil and gas extraction) accounted 30.6 per cent of Chinese OFDI in Africa at the end of 2011, ahead of finance (19.5 per cent), construction (16.4 per cent), and manufacturing (15.3 per cent) (PRC, 2013). The China Global Investment Tracker data give a much higher share going to the extractive industries with oil, gas, and metals,12 accounting for more than two-thirds of Chinese investment in SSA between 2006 and June 2016.

6.2.3 Contracted Projects A significant part of the growing presence of China in SSA is not captured either by trade data or by the figures on FDI. Another form that Chinese 11 According to the China Global Investment Tracker database, which does not include investment in Hong Kong, SSA accounted for almost 10 per cent of accumulated Chinese OFDI between 2006 and 2016. 12 Although metals may include some downstream activity in manufacturing, the major part involves mining.

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engagement in SSA takes is through projects contracted overseas which do not involve direct investment. The Chinese have been extremely active building roads, railways, dams, and power stations, as well as public buildings throughout the region. The official Chinese figures for the value of projects completed increased more than twenty-fold between 2003 and 2015 (see Figure 6.4). Since 2010 SSA has accounted for about 30 per cent of the total value of Chinese-contracted projects around the world, and more than 130,000 Chinese workers were employed on projects in SSA at the end of 2015 (NBS Database). China is far and away the most important source of external finance for infrastructure in Africa (Sun et al., 2017, Exhibit 1), and Chinese firms account for almost half of the region’s international engineering, procurement, and construction market (Sun et.al., 2017, p.24). As with FDI, an alternative dataset on Chinese contracts in SSA is provided by the American Enterprise Institute and Heritage Foundation, which is based on media reports. Although the figures on large-scale contracts captured by the China Investment Tracker database are lower than the official figures, they show the same trend, with a seventeen-fold increase in the decade since 2005, the first year for which data are available. Over the period 2005–15, the most important markets in the region for Chinese contractors were Angola, Nigeria, Ethiopia, Sudan, and Equatorial Guinea, which, apart from Ethiopia, are all significant oil exporters. Between them they account for more than half the value of completed Chinese projects in SSA over the period.

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Figure 6.4. Chinese Contracts in SSA, 2003–15 (US$ Million) Source: National Bureau of Statistics of China; American Enterprise Institute/Heritage Foundation, China Global Investment Tracker.

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Gas 3%

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Construction 12%

Figure 6.5. Sectoral Distribution of the Value of Chinese Project Contracts in SSA, 2005–16 Source: American Enterprise Institute/Heritage Foundation, China Global Investment Tracker.

As with FDI there is a common perception that Chinese contracts in Africa are mainly related to resource extraction. Unfortunately, the official Chinese data on overseas contracts do not give a breakdown of the sectors involved so that it is necessary to rely on the China Global Investment Tracker. This shows relatively few Chinese projects in extractive industries. Gas accounts for less than 4 per cent of the total value of contracts, and none of the contracts are specifically identified as being in the oil industry.13 Metals, which make up such a significant share of FDI projects, account for a negligible share of the value of contracts. The most important sector in terms of Chinese contracts in the region is transport, which accounts for almost half of the value of contracts announced between 2005 and mid-2016 (Figure 6.5). Rail projects are the most important type, accounting for over half of the value of transport projects. Energy, which is the second sector overall, is mainly hydropower, which accounts for a half of all energy contracts and is significant because this supplies local energy needs rather than involving resource exports to China. Finally, construction projects account for 12 per cent of the total.

6.2.4 Chinese Loans and Aid The Chinese government has made high-profile commitments to providing finance for Africa at the last five FOCAC meetings. In Beijing, in 2006, it promised to provide US$5 billion in preferential loans and preferential export buyer’s 13 It is possible that some of the energy projects where the subsector is not named could be oil related.

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credits to Africa between 2007 and 2009. A further US$10 billion was promised in preferential loans between 2010 and 2012, and US$20 billion between 2013 and 2015. The FOCAC meeting in Johannesburg in 2015 promised US$60 billion over the next three years and the same sum was pledged at Beijing in 2018. However, beyond these broad-brush announcements it is difficult to get a clear picture of the amount of Chinese financial flows to Africa. The Chinese government does not publish data on official financial flows on either a country or a regional basis, and neither does the Exim Bank or the China Development Bank, which are the main providers of Chinese finance to SSA. As a result estimates of Chinese loans and aid to the region rely on the efforts of researchers to collate information from the bottom up on Chinese funded projects. The two most comprehensive sources of data on Chinese lending to Africa are those collected by AidData and by the China Africa Research Initiative (CARI). Such studies face a number of problems. They are often based on announcements which pledge future finance rather than actual financial flows. They may, therefore, overestimate actual flows, since some pledges are never fulfilled. Even where loans are made and projects carried out, the timing of the flows will clearly lag behind the announcements so that the annual figures will differ from the financial flows that take place in a particular year. Another problem is that it is not always possible to obtain figures on the amount of finance involved in a particular project, which means that some projects that are identified do not get included in the estimates of financial flows. In addition, relying on media reports may lead to a bias in favour of larger projects and the omission of smaller loans, which will also lead to an underestimation of actual financial flows. Despite these problems, in the absence of official data on Chinese financial flows to Africa these estimates at least provide some idea of the order of magnitude involved. AidData and CARI have been careful in putting together their databases to follow announcements to try to ensure that commitments have been implemented, and to eliminate double counting through the same project being announced several times (Strange et al., 2013; CARI, 2016). Despite this, there are quite substantial differences in their estimates,14 although, as Figure 6.6 shows, they agree that official financial flows from China to SSA have increased significantly since the early 2000s. Although their estimates of the scale of Chinese loans to individual countries differ considerably (see Brautigam and Hwang, 2016, Fig. 7), both CARI and AidData agree that Angola has been the main recipient of total Chinese lending to the region since 2000. The exact ranking of other countries varies between the two sources, but Sudan, DRC, Ethiopia, and Nigeria are listed amongst the largest recipients of Chinese loans in both. 14 See Brautigam and Hwang (2016, pp.11–14) for a discussion of some of the discrepancies between the CARI and the AidData estimates of Chinese lending to Africa.

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Figure 6.6. Chinese Official Financial Flows to SSA, 2000–14 (US$ Million) Sources: AidData – AidData’s Chinese Official Finance to Africa Dataset, 2000–2012, Version 1.1.1. Available from: http://aiddata.org/data/aiddatas-chinese-official-finance-to-africa-dataset-version1-1-1. SAIS-CARI – Johns Hopkins University, School of Advanced International Studies, China Africa Research Initiative Chinese Loans to africa. Available from: http://www.sais-cari.org/datachinese-loans-and-aid-to-africa/.

Chinese loans to SSA are concentrated in the same two sectors, transport and energy, in which Chinese contractors operate.15 This is consistent with the Chinese government’s view that ‘Backward infrastructure is the bottleneck that hinders the development of many African countries’ (PRC, 2012, Ch.III). Contrary to the popular view, a relatively small proportion of Chinese loans have gone directly to mining or oil and gas projects in SSA.16 One characteristic of Chinese finance in SSA has been the extensive use of commodity-backed loans also known as resources-for-infrastructure swaps, whose repayment is made through future commodity exports to China. The most comprehensive estimate of commodity-backed loans to Africa calculates that the total amount involved between 2000 and 2014 came to almost $30 billion, which accounted for a third of China’s total lending to Africa over the period (Brautigam and Hwang, 2016, p.16). Most of these involved oil, and some in DRC (copper) and Zimbabwe (diamonds) involved a share of the profits from mining. In a few cases (Ghana and Ethiopia) repayment was made through 15 The two sectors account for 48 per cent of total lending between 2000 and 2014, according to CARI (Brautigam and Hwang, 2016, Fig. 4), and 42 per cent for the slightly shorter period from 2000 to 2012, according to AidData. 16 Industry, mining, and construction accounted for 6 per cent of Chinese loans to SSA between 2000 and 2012, according to AidData, whereas CARI estimate that 10 per cent of Chinese lending between 2000 and 2014 went to mining (Brautigam and Hwang, 2016, Fig. 4).

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agricultural exports. Two of the most-discussed examples of such loans have been those made to Angola in return for oil and the Sicomines agreement in the DRC (see Boxes 6.1 and 6.2). The way in which these agreements combine aid and loans highlights the difficulty of distinguishing between them, which has contributed to the confusion over the scale of Chinese aid to SSA. How significant then are Chinese official financial flows to Africa? AidData estimates show that over the entire period from 2000 to 2011, flows from China were almost as great as official finance from the US to Africa and about a fifth of total OECD-DAC official development assistance (ODA) and other official finance to the region (Strange et al., 2013, p.29). The figures are lower according to the CARI estimates of Chinese lending, but both agree that over time China’s share has increased significantly.

Box 6.1 THE ANGOLAN MODEL The so-called Angolan Model of Chinese resource-for-infrastructure swaps has received a great deal of attention in both the media and the academic literature. The Angolan civil war that ended in 2002 left a large part of the country’s infrastructure destroyed or damaged. Having refused to agree terms with the IMF in 2001, President dos Santos approached China in 2002 and was able to obtain a series of loans in subsequent years. Between 2003 and 2011, Angola accounted for almost half of all China’s commoditybacked loans to Africa (Brautigam and Gallagher, 2014, Tables 1 and 2). Under the system, loans provided by the Exim Bank are serviced through oil sales to China by the Angolan state oil company, Sonangol. A fixed amount of oil is sold quarterly at current international prices and the proceeds deposited in an escrow account in the name of the Angolan government at the China Exim Bank. This account is then drawn on to pay the interest and repayments due on the loan. A joint commission between the Angolan government and the Exim Bank agrees on a list of infrastructure projects to put out for tender. MOFCOM pre-approves Chinese companies that are eligible to tender for projects and the Angolan government invites at least three companies to bid for each project. At least 50 per cent of project procurement must be sourced in China. When the projects are completed, the Chinese companies present their invoices to the Angolan Ministry of Finance and these are paid directly by the China Exim Bank, drawing down on the loan to the Angolan government. The terms of the loans by the Exim Bank involved an interest rate of 1.5 per cent above Libor. This was somewhat more favourable than commercial loans, but not as concessional as public loans from South Korea or India. The loans were to be repaid over periods of fifteen to eighteen years, with an initial grace period of three to five years, which was considerably better than commercial loans with a repayment period of four or five years. In 2004, the Chinese state-owned oil company Sinopec formed a joint venture with Angola’s state oil company Sonangol called Sinope Sonangol International (SSI), with Sinopec the majority (55 per cent) shareholder. At the time Shell had been negotiating to sell its 50 per cent stake in oil Block 18 to the Indian company ONGC Videsh; however, Sonangol blocked the deal and the concession was awarded to SSI instead. In 2004/5 SSI also acquired Block 3/80 when Songanol did not renew the concession previously held by Total. Although there was no explicit link between the Exim Bank loan and the entry of Sinopec into the Angolan oil sector, the timing suggests that this may have been a factor.

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China’s Economic Expansion in Sub-Saharan Africa Box 6.2 THE SICOMINES AGREEMENT IN DRC The Sicomines deal, originally signed in 2007, is one of the largest and most controversial Chinese commodity-backed loans in SSA. It followed the 2006 elections, which marked the end of the transition in the DRC following the civil wars of 1996–7 and 1998–2003. It involved a joint venture between the DRC state mining company Gécamines (32 per cent share) and a Chinese consortium (68 per cent) formed of two Chinese SOEs, China Railway Engineering Corporation (CREC) and Sinohydro. In return for the mining concessions for Mashamba West and Dikuluwe, the Chinese agreed to invest $3.2 billion in the mining operation and a further $6 billion in turnkey transport and social infrastructure projects, such as schools and hospitals, to be funded by China Exim Bank. These infrastructure projects were unrelated to the mining operations, but the loan would be repaid from the profits made by Sicomines. The agreement was initiated by CREC, a large construction SOE which was trying to diversify into resource extraction and had been investigating opportunities in Latin America and Zambia without success before the discussions with the DRC started. Originally, CREC had been interested in a standard mining project, but during the negotiations the Congolese, influenced by the experience of its Angolan neighbour, suggested that the agreement included an infrastructure component. In his election campaign, President Kabila had pledged to undertake a major programme of public works (les Cinq Chantiers) but was finding it difficult to obtain funding for large infrastructure projects from traditional donors. Although the Chinese government had not initiated the project, the Exim Bank was prepared to fund the infrastructure component, and the Chinese partners in the joint venture were designated the principal contractors for the various infrastructure projects. Only 12 per cent of the work had to be subcontracted to local Congolese companies. Sicomines was exempt from Congolese taxation while the profits were being used to pay off the Exim Bank loan and interest, but would then be subject to the normal terms of the DRC Mining Code. However, objections by the IMF to the size of the agreement because of the effect that it would have on the sustainability of the DRC’s debt and the prospects for receiving debt relief led to renegotiation, which reduced the infrastructure component to $3 billion and removed the government guarantee for the commercial investment in mining. In 2012 the Exim Bank pulled out of the funding arrangement, having provided $1 billion worth of loans to Sicomines, because of disagreement over certain key points. New negotiations began with CDB, the Bank of China, and the Exim Bank, but after a two-year hiatus, the Exim Bank agreed to renew its financial support. Infrastructure projects resumed, and mining production began in late 2015.

6.3 Key Actors in China–SSA Economic Relations Having looked at the different forms of China’s economic relations with SSA, it is now possible to identify the various actors involved. This helps to dispel the myth of a monolithic Chinese presence. At the governmental level on the Chinese side, the main ministries responsible for relations with SSA are the Ministry of Foreign Affairs (MOFA) and the MOFCOM. They jointly 125

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chair the Chinese Follow-up Committee of FOCAC. The MOFA guides diplomatic policies on African issues and the overall decisions of FOCAC, whereas MOFCOM is responsible for trade, investment, and the implementation of cooperation projects (Li et al., 2013, p.12). The two ministries do not always see eye to eye, and there has been conflict between them, for example over the control of foreign aid, which is currently in the hands of MOFCOM (Sun, 2014). MOFCOM views concessional loans principally as a market entry tool for Chinese companies, whereas the MOFA sees them as a way of improving China’s diplomatic relations with African countries (Corkin, 2011, p.73). The picture is further complicated by the role played by a number of Chinese provincial governments which have developed links with subnational governments in Africa and actively promote the activities of their own provincial state-owned enterprises (SOEs) there (Alden, 2007, pp.28–30; Chen and Jian, 2009). Trade between China and SSA involves a variety of firms. As far as SSA exports are concerned, these are mainly SOEs from both China and the African exporting countries. On the import side there is a much more diverse range of companies involved, including Chinese SOEs and private firms. Firms involved in construction and other infrastructure projects in Africa are significant importers of machinery and equipment to the region. Foreign companies with subsidiaries in China also import from there to supply their African markets. Consumer goods are imported by the growing number of Chinese traders who have set up in Africa. Although there are no reliable figures on the number of Chinese traders active across the region, it has been significant enough to generate hostility in a number of African countries (Cropley and Martina, 2012). Increasing numbers of African traders are also involved in trade as illustrated by the growing African business community in Guangzhou (Haugen, 2011; Yang, 2012). One estimate puts the numbers involved at around 80,000 (Lyons et al., 2013, p.86). There may be as many as 10,000 Chinese-owned firms operating in SSA.17 Kaplinsky and Morris (2009) identify four different categories of Chinese firm active in Africa: central SOEs, provincial and municipal SOEs, private Chinese companies with subsidiaries in Africa, and Chinese-owned small and medium enterprises (SMEs). Central SOEs come under the control of China’s central government, and their investments abroad have to be approved by MOFCOM. They include the oil companies China National Petroleum

17 This figure comes from Sun et al. (2017, p.27) and was arrived at by extrapolating from research carried out in eight SSA countries. The official MOFCOM database only includes around 2000 firms that have invested in Africa (Dollar, 2016, p.41), but this is likely to be an underestimate.

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Company (CNPC), CNOOC, and Sinopec, as well as China Power Investment and Sinosteel, which are amongst the largest Chinese investors in SSA.18 The state-owned commercial bank, Industrial and Commercial Bank of China (ICBC) is also a significant investor in the region as a result of its acquisition of a 20 per cent share of South Africa’s Standard Bank in 2007. Provincial and municipal SOEs (sometimes referred to as local firms) come under the subnational authorities. The most significant provincially owned SOEs active in SSA are Shangdong Iron and Steel, owned by the government of Shangdong Province, and the Jinchuan Group, controlled by the Gansu provincial authorities. Provincial SOEs have also been particularly active in the agribusiness sector in SSA (Gu et al., 2016). There are also some large private Chinese firms such as Sichuan Hongda (part of the Honglong Group) and Kingho Energy, which have significant investments in the region. Finally, the Chinese-owned SMEs are often firms set up by Chinese migrants, so there is a question as to whether they should be regarded as FDI according to standard definitions. Although the activities of SOEs in SSA has attracted most attention, the vast majority of Chinese firms, possibly as much as 90 per cent of the total, are private. A recent survey found that the share of private firms in the total number of Chinese companies ranged from 75 per cent in Angola to 95 per cent in Nigeria (Sun et al., 2017, Exhibit 6). While private firms are smaller than SOEs so that their share of investment does not match their numbers, they are becoming increasingly significant players in SSA (Gu, 2011; Shen, 2013). Unlike investment by SOEs, which tend to be concentrated in extractive industries and construction, Chinese private investment in the region is dominated by manufacturing and service industries (Shen, 2013, Fig. 2). Contracted projects involve a variety of construction and engineering companies. While the first Chinese construction companies in Africa were mainly large SOEs, more recently a variety of private contractors have emerged, including some set up by Chinese employees who stayed in Africa after working for such large SOEs (Wang, 2007, p.19). The leading Chinese contractors in SSA are still central SOEs such as China Railway Construction, China Communication Construction, Sinomach, and Sinohydro.19 Some provincially owned SOEs such as Shenzhen Energy have also won significant contracts in the region, as have the private telecommunications companies Huawei and ZTE. The most important source of finance from China to SSA has been the Exim Bank. While it does not provide a regional breakdown of its loans, estimates suggest that half of its global lending has gone to Africa (Corkin, 2011, p.69).

18

The information on the most important Chinese companies investing in Africa in this paragraph is based on the AEI/Heritage Foundation, China Global investment Tracker database. 19 Based on information from AEI/Heritage Foundation.

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A more recent estimate indicates that the bank lent $59 billion to Africa between 2000 and 2014, representing two-thirds of Chinese lending to the region over that period (Brautigam and Hwang, 2016, Table 1). The Exim Bank has provided funding for a number of major infrastructure projects, including the Ethio-Djibouti Railway, the Nairobi-Mombasa Railway in Kenya, Bagamayo port and industrial zone in Tanzania, and a terminal for the Jomo Kenyatta International Airport in Kenya (Lee et al., 2014). The second most important Chinese lender to Africa is China Development Bank (CDB), which does not provide concessional loans. In 2006 the ChinaAfrica Development Fund (CADF) was set up under the auspices of the CDB to promote economic cooperation between China and Africa by investing directly in Chinese firms that operate in Africa or plan to invest there. CDB lending to Africa between 2000 and 2014 came to $13.7 billion (Brautigam and Hwang, 2016, Table 1). Some of the Chinese state-owned commercial banks are also active in Africa, particularly the China Construction Bank, which has operated there since 2000 and provides support to Chinese construction companies, and the ICBC, which took a 20 per cent stake in South Africa’s Standard Bank in 2008 and since then has started to finance projects. Chinese aid to SSA comes in a variety of forms. Some takes the form of concessional loans and is channelled through the Exim Bank, but it is by no means the only source of ODA from China. Various government departments such as the Ministry of Health, which is responsible for medical teams; the Ministry of Education, which handles scholarships for African students; and the Ministry of Agriculture, which provides technical assistance in rural areas, are involved in providing aid to SSA (Brautigam, 2008).

6.4 Chinese Interests in Economic Engagement in SSA China’s presence in Africa is far from monolithic, despite frequent references in the media to the activities of ‘China Inc.’ in the region. It is true that the Chinese state plays a significant role in the region through the involvement of SOEs and the policy banks, as well as through aid from various ministries such as Health and Agriculture; however, these do not all necessarily conform to a coherent strategic plan. Major SOEs are not simply instruments of state policy; they also pursue their own objectives in terms of growth and profitability.20 20 This has been widely discussed in relation to the oil industry. Some authors regard the Chinese state-owned oil companies as instruments of the central government and their activities in Africa as, by definition, a reflection of the state’s strategic economic interests (Soares de Oliveira, 2008). Others emphasize the considerable autonomy enjoyed by SOEs, arguing that their activities are better explained by their own commercial interests (Downs, 2007). Between these extremes are those

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There are also a growing number of private firms investing in Africa, as well as an increased presence of Chinese traders in the region. In some cases their activities have even run counter to the Chinese state’s interests in Africa. This underlines the fact that there is not a single Chinese interest in Africa. It is useful to distinguish between three main sets of interests which have influenced Chinese engagement in the region. First, there are strategic diplomatic objectives of the Chinese government, which include the isolation of Taiwan, obtaining diplomatic support in international fora and increasing China’s soft power in the region, presenting it as an alternative to the West. These are the central concerns of the MOFA. Second, there are strategic economic objectives, which include the security of supplies of energy and mineral resources, reducing dependence on trade with the West, and supporting the international expansion of Chinese companies. These issues are of particular concern to MOFCOM, the Chinese policy banks, and some SOEs. Finally, there are the commercial objectives of firms and entrepreneurs seeking new sources of profit and opportunities which are the dominant concerns of private investors and traders but are also important for many Chinese SOEs. The relative importance of these objectives has varied over time and according to the type of economic involvement in the region.

6.4.1 Strategic Diplomatic Objectives In the second half of the twentieth century, Chinese interest in SSA was primarily political. While it is widely recognized that economic relations have become much more significant with the growth of trade, OFDI, Chinese projects, loans and aid in the twenty-first century, some commentators continue to regard geopolitical factors as the key to understanding China’s growing economic involvement in the region.21 This view regards China as a unitary actor pursuing a coherent strategy in Africa. It argues that China is using aid (broadly defined to include loans from Chinese banks and investment by SOEs) as a tool of Chinese foreign policy. This is part of a grand design to displace US and European influence in Africa as part of China’s rise to global hegemony (Alden, 2007, p.6). It has also been argued that China is trying to export its own development model (the Beijing Consensus) to SSA. This view is often associated with the who argue that there is considerable overlap between strategic economic and commercial interests, while recognizing that on occasions, the two can conflict (Taylor and Xiao, 2009; Jiang, 2009). 21 This section does not try to provide an overall analysis of Chinese foreign policy towards SSA, but rather it analyzes the role of political factors in understanding China’s economic involvement in the region. The distinction between economic and political drivers is not necessarily clear-cut. The economic objectives discussed later could be seen as serving political ends in terms of ensuring continued economic growth in China that is a source of legitimacy to the Communist Party. See Corkin (2011, pp.75–7) for a discussion of the difficulties of separating economics and politics when discussing China and Africa.

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claim that China has particularly strong relations with African countries with undemocratic regimes and low standards of governance.22 However, critics have pointed out that this interpretation of China’s involvement in Africa is flawed in a number of ways. Despite the publication of two government policy papers on Africa in 2006 and 2015, it is difficult to see China’s involvement in SSA as part of a coherent strategy. The many different interests involved contribute to this. Not only are there divergences between government ministries involved in African affairs, there are also differences between the interests of the various state bodies and those of the economic actors, and indeed between different types of economic actor. China’s growing economic relations with SSA should not be seen as part of a grand neo-colonial strategy for the region. The claim that China is trying to export its own model of development to SSA is contrary both to China’s declared policy of respecting national sovereignty and not imposing conditionality on other countries, and its view of development, which stresses the need for countries to find their own path rather than imitating or following other countries. Chinese leaders since Deng Xiaoping in the 1980s have emphasized the need for African countries to find their own development path rather than copying China.23 This does not mean that China lacks political objectives in SSA. Nor does it mean that it does not use its economic strength to achieve those objectives. One area where political factors have played a key role in determining economic engagement is in relation to Taiwan. Competition with Taiwan under its One China policy was a consistent feature of Chinese foreign policy before 2008. Both China and Taiwan used economic incentives to win over African governments. This led to an increasing number of countries in the region recognizing Beijing, so that when Malawi switched in 2007, receiving a US $6 billion financial package from China (Wu and Wei, 2014, pp.796–7), only four SSA countries still had relations with Taiwan. When competition for recognition started again after the end of President Ma’s term in office in Taiwan in 2016, The Gambia, São Tomé and Principe and Burkina Faso switched their recognition from Taipei to Beijing,24 leaving Taiwan still having diplomatic relations with only one SSA country, Swaziland. Not surprisingly, countries which recognized Taiwan got very little in terms of FDI, projects, loans, and aid from the People’s Republic. However, with only Swaziland still recognizing Taiwan, this has become a less important factor in the PRC’s relations with the region. 22

These claims are discussed in Chapter 8. See Deng Xiaoping’s comments to Robert Mugabe in 1985 and to President Chissano of Mozambique in 1988, quoted in Li, 2014, p.95). 24 The Gambia broke off diplomatic relations with Taiwan in 2013, but Beijing did not establish relations with it until 2016, after the defeat of the Kuomintang in Taiwan’s presidential elections. 23

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Africa remains important to China because of the number of votes that the region has within the United Nations.25 For example, it has sought the support of African countries in votes at the UN Human Rights Council, which are critical of its human rights record (leading African specialist He Wenping, quoted in Breslin, 2013, p.1276). China also looked to its relations with Africa in the aftermath of the repression of the protests in Tiananmen Square in 1989, when it feared isolation by the West. Again in the run-up to the Beijing Olympics in 2008, when the issue of Tibet came to the fore, China was able to look for support from some African governments. China has also sought support from African governments in other international fora. At the first FOCAC meeting in Beijing in 2000, the Chinese Minister of Foreign Trade and Economic Cooperation Shi Guangsheng thanked the African countries for their support for China’s accession to the WTO.26 China also seeks to use its economic involvement in Africa to promote its image internationally. This is a projection of its soft power presenting China as a different kind of global power from the US and Europe that is itself part of the Global South. It emphasizes its common experience with other developing countries and bases its relations with SSA on ‘sincerity, friendship, and equality’; recognizes the sovereignty of African states; and does not seek to impose political or economic conditionality (PRC, 2006). This involves elements of continuity in the rhetoric of official statements since the involvement of China in Africa in the Maoist period, which emphasized a common history of exploitation by imperialism and the struggle for development, appealing to domestic audiences (Strauss, 2009). Although China does not seek to impose its own model on SSA countries, admiration for the Chinese Model in Africa is seen as an important aspect of China’s soft power, and it provides legitimacy for the Chinese Communist Party at home (Sun, 2014, p.12).

6.4.2 Strategic Economic Objectives Economic interests have come to play a much more significant role in SinoAfrican relations in the twenty-first century than in earlier periods, and they are now more important than political factors. One indication of the relative significance of economic as opposed to diplomatic factors in relations with SSA is the roles played by MOFCOM and MOFA. MOFCOM deals with economic aspects, whereas MOFA is responsible for political affairs, and it has been argued that MOFCOM’s influence has increased relative to that of the MOFA in recent years (Corkin, 2011). Unlike many other countries, where aid In 2014 the fifty-four African states accounted for over a quarter of the members of the UN (Sun, 2014, p.4). 26 Speech to FOCAC on 11 October 2000, quoted in Cooke (2009, p.32). 25

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is seen as part of foreign policy and the foreign affairs ministry plays an important role, in China, it is MOFCOM that is the key ministry in relation to aid. Oil and minerals are at the heart of the economic relationship between China and SSA. This is reflected in the composition of its imports from SSA and the main sectors in which Chinese firms have invested. As discussed earlier, China’s imports from Africa are almost entirely of PPs and RBMs. Oil has accounted for almost half of all Chinese imports from the region, and minerals and metals for between a quarter and a third in recent years. Around a fifth of China’s oil imports come from Africa. The region is also a major source of some key minerals, accounting for more than half of China’s imports of diamonds and manganese, two-thirds of its platinum and chromium ores, and all of its cobalt imports.27 As shown earlier, Chinese oil and mining SOEs have made significant investments in SSA. Although different sources vary considerably in their estimates of the scale of investment by Chinese firms in oil and mining in Africa, they all agree that these are the most significant sectors in terms of Chinese investment in the region. Despite the fact that Chinese projects and loans are not concentrated in the extractive industries, they are indirectly linked to the sector through the extensive use of commodity-backed loans, which are often used to finance infrastructure projects in the region. China’s growing dependence on imported oil and minerals since the mid1990s made secure supplies an important government objective. As discussed in Chapter 3, China has adopted various strategies to increase resource security, including the diversification of sources of imports, acquisition of resources abroad by Chinese firms, and long-term contracts with foreign suppliers. To what extent can China’s involvement in oil and mining in SSA be attributed to the Chinese state’s strategic economic objective of ensuring the security of supplies of raw materials? In the case of oil, Africa was a particularly attractive area for expansion in the late 1990s and early 2000s, with proven reserves increasing by more than half in the decade from 1996.28 Increased imports from SSA in this period helped diversify sources of supply and avoid excessive dependence on the Middle East. The share of China’s oil imports from SSA went up from less than 5 per cent in the late 1990s to more than a fifth by the mid-2000s.29 Angola became the second-largest source of oil after Saudi Arabia in 2005. Other countries in the region exporting oil to China included Sudan, the Republic

27

Own calculations from International Trade Centre, Trade Map data. This compared to an increase of only 12 per cent in the rest of the world over the same period (Downs, 2007, p.45). 29 All the data in this and the next paragraph come from UNCTADstat. 28

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of Congo, Ghana, and Equatorial Guinea. In recent years, however, the region’s share of imports has declined slightly as China’s imports from Russia and Iraq have increased. SSA has not played such a significant role in diversifying the sources of the major minerals imported by China. In the case of copper, the share of China’s imports of ore and refined copper from SSA did increase from less than 1 per cent in the late 1990s to 8 or 9 per cent in recent years. In the case of iron ore, the imported mineral on which China is most heavily dependent, however, SSA has not contributed to a diversification of sources of supply and the region’s share of China’s imports is lower now than in the late 1990s. The second strategy that China has used to increase the security of its supply has been to encourage oil and mining SOEs to acquire natural resources abroad. This has been used extensively in the oil industry. SSA oil exporters were more open to foreign investment in exploration and production than other countries where resource nationalism has restricted investment opportunities for foreign firms. The region, therefore, became an important target of Chinese investment. In 2013 the International Energy Agency estimated that over a quarter of the oil produced abroad by Chinese companies came from Africa, more than from the Middle East (Jiang and Ding, 2014, Fig. 5). Chinese companies have invested even more in mining and metals in SSA than in the energy sector, and the government has provided support for such expansion. Unfortunately, there is no information on the production of various minerals by Chinese companies in the region or on the share of Chinese imports accounted for by such equity minerals. Although ownership by Chinese SOEs does not necessarily guarantee China’s resource security, as pointed out in Chapter 3, it seems likely that oil and mining investments in SSA have contributed to this end.30 It was certainly an important objective for the Chinese government when encouraging their expansion in the region. The third strategy for increasing resource security is long-term contracts with suppliers. Here the role played by commodity-backed loans is significant.31 These involve a commitment by the borrowing government or SOE to supply oil or another commodity over a number of years in order to repay the loan. As long as the borrower does not renege on the loan, this ensures a long-term secure supply.

30 Downs (2007) claims that a significant proportion of the oil produced by Chinese companies in Sudan was exported to China. It also seems likely that where mines in SSA were owned by Chinese manufacturers downstream (such as the steel companies that invested in iron ore mining), the bulk of their output would be exported to supply their plants in China. 31 Corkin (2013, pp.150–1) argues that in Angola, commodity-backed loans have been a more effective way of obtaining a secure supply of oil for the Chinese market than the acquisition of stakes in Angolan oil fields by Chinese oil companies.

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The lack of transparency in many of these commodity-backed loans means that it is difficult to know what contribution they make to the overall supply of oil or minerals. Estimates of the amount of oil that Angola supplies in return for its loans from China vary from 10,000 to 140,000 barrels a day (Corkin, 2013, pp.83–4). With China importing around 700,000 barrels a day from Angola in 2009, even the higher estimate implies that only a fifth of imports were the result of commodity-backed lending. Since Angola is the most important recipient of oil-backed loans in SSA, this suggests that the overall contribution made by such loans in SSA to Chinese energy security is limited. Loans linked to mineral extraction in SSA are far fewer in number and scale than those for oil and so are even less likely to be a major factor in resource security. It would in any case be a mistake to see these loans as driven solely by the interest of the Chinese state in securing supplies of energy and raw materials. A second strategic objective was to promote Chinese exports and the operations of Chinese construction companies abroad, so the loans involved a substantial level of tying to Chinese goods and companies.32 The structure of the loans to Angola and the DRC also reflected the interests of the Exim Bank, which provided them. Given the history of the countries concerned and their low credit ratings, Exim Bank wanted to reduce its risk exposure, and arranging for the loan to be repaid through commodity exports was an attractive way of doing so. Also, as discussed later, the interests of African elites played a significant role in the growth of resources-for-infrastructure swaps. Although promoting Chinese exports and investment globally is an important strategic objective for the state, this plays a relatively minor part in its relations with SSA compared to obtaining access to raw materials. As noted earlier, only US$1 in every $30 exported from China goes to the region. Chinese FDI to supply local markets has also attracted much less attention than the activities of large SOEs, which have been mainly directed towards extractive industries. Nevertheless the Chinese government does have some strategic economic interest in promoting exports to and investment in SSA. The global financial crisis has highlighted the dangers of excessive reliance on Western markets and increased the importance of developingcountry markets for Chinese exporters (Jacob, 2012). Chinese loans and aid to SSA provide an important market for Chinese firms. The bulk of the loans provided by China are tied to the purchase of Chinese goods. China’s Exim Bank requires that at least 50 per cent of the value of contracts supported with buyer’s credits should be spent on Chinese

32

In the Angolan case, Corkin (2013, p.150) argues that the Exim Bank was more successful in facilitating the market entry of Chinese construction companies than it was in obtaining an equity stake for Chinese oil companies in Angolan oilfields.

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products (quoted in Brautigam and Gallagher, 2014, p.351).33 The Chinese government also supports Chinese firms investing in SSA in other ways, for example providing equity through the CADF. Another initiative aimed at promoting Chinese trade and investment in SSA is the creation of Special Economic Zones. The Chinese government announced in 2006 that it would support the establishment of as many as fifty overseas ‘economic and trade cooperation zones’ (Brautigam et al., 2010; Brautigam and Tang, 2011). So far five such zones have been set up in SSA, two in Nigeria and one each in Ethiopia, Mauritius, and Zambia. Unlike the SEZs that were created in China as a means of promoting exports, the evidence so far suggests that those being set up in SSA are mainly intended to supply the domestic and possibly the regional market rather than being a platform for exports to the global market.34

6.4.3 Commercial Objectives Although strategic objectives partly explain some aspects of China’s growing economic relations with SSA, it would be wrong to see these relations as simply the result of a coherent strategy of a monolithic ‘China Inc.’ As Section 6.3 made clear, a variety of different actors is involved in Sino-African relations, and they pursue their own commercial interests in the region. In some cases these coincide with the strategic interests of the Chinese state, but they may also at times run counter to them. While oil and minerals are strategically important to China, the pattern of trade between SSA and China is not just a reflection of the strategic requirements of the Chinese state. As Figure 6.2 showed, SSA’s exports to the market economies of Japan, the US, and the European Union are similarly concentrated in PPs, suggesting that underlying factors of history (colonialism) and geography (resource endowments) play a key role in explaining trade patterns. In countries where the role of the state has been reduced through structuraladjustment policies which have led to increased openness and an expanded role for the private sector, trade patterns are determined by firms following current comparative advantage. It is not surprising, then, that SSA exports PPs to China. Commercial factors are key to explaining the growth of Chinese exports to SSA. The Chinese and African traders importing consumer goods to the region 33 In some cases the initiative for the loan has come from a Chinese company which approaches the foreign government with a suggestion that it requests funding from the Chinese government for a project. In these cases it is likely that commercial rather than strategic economic interests are the motivating factor. 34 The Eastern Industrial Zone in Ethiopia is an exception, with significant exports of shoes to the US and EU.

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are clearly commercially motivated and taking advantage of the highly competitive prices of manufactures in China. Although the China Exim Bank does facilitate exports by providing credit to suppliers and buyers, the main factor driving exports is demand in Africa. As would be expected, Chinese exports to SSA tend to be concentrated in the larger markets. While the Chinese government has encouraged oil and mining SOEs to invest in SSA, the companies have also had strong commercial reasons for doing so. In fact the earliest investments by Chinese extractive SOEs in SSA in the 1990s occurred before energy and resource security became a major concern in China and before the adoption of the Go Global policy. CNPC’s involvement in Sudan began in 1995 (Meidan, 2016), while the China NonFerrous Metals Mining Group (CNMC) acquired copper mines in Zambia in 1998. The importance of commercial factors is particularly evident in the case of mining, where the structure of ownership is much more diverse than in oil. Whereas the Chinese oil industry is controlled by the three SOEs that come under the central government, the mining industry is characterized by a more diverse structure with provincial and local SOEs and some private companies also playing a part (Shankleman, 2009, p.23). Chinese mining SOEs and companies from other sectors such as steel and construction have invested in mines overseas to increase their reserves, secure vital inputs, or diversify their activities.35 There is also a significant number of small-scale Chinese miners operating in SSA. In Ghana a first wave of gold miners from China arrived in the 1990s, and a large second influx occurred around 2010 when gold prices soared. By 2013 it was estimated that there were more than 10,000 Chinese miners in Ghana (Yang Jiao, 2013). A large number of small-scale Chinese firms were also involved in mining in Katanga province in the DRC in the late 2000s (Jansson et al., 2009, pp.36–8). While SOEs’ investment in SSA is the result of both the strategic objectives of the Chinese state and the commercial objectives of the SOEs themselves, the growing number of private Chinese companies operating in SSA is commercially driven. Many of these firms are highly profitable, with a third reporting profit margins of over 20 per cent in a recent survey (Sun et al., 2017, Exhibit 8). Several surveys have highlighted the importance of commercial considerations such as access to the local market, taking advantage of African trade agreements, low production costs, and the local availability of raw materials in private Chinese firms’ investment decisions. They also point to the intense competition and demand saturation in the Chinese market and the opportunity to transfer domestic excess capacity abroad as contributing 35 As mentioned above, CREC’s interest in investing in Sicomines in the DRC was part of a strategy of diversifying from construction into mining.

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factors (Gu, 2011; Shen, 2013). A very common pattern is for firms which begin by exporting to a particular market to move to local assembly to avoid import restrictions. This seems to be characteristic of many recent Chinese investments in countries such as Nigeria and Ethiopia.36 Although there is occasional support from the Chinese government for private firms investing in SSA, this is not on anything approaching the scale of the support given to SOEs. The incentives provided to the private sector are often symbolic rather than decisive in the decision to invest, and the managers of many firms interviewed in the region were found to know little or nothing about the policies and support available (Gu, 2011, pp.23–4).37 It is clear, therefore, that commercial factors, particularly market seeking, are driving private firms to invest in SSA. The growing activities of Chinese construction companies in Africa can also be seen as being driven by commercial considerations in many instances. It is often assumed that Chinese involvement in infrastructure is driven by China’s thirst for resources, but this is not necessarily the case. Many such projects are not in fact resource related, and they meet other priorities set by the host governments.38 Furthermore, Chinese construction companies are involved not only in projects financed by Chinese aid and loans but also compete with local and other foreign companies for international tenders.39 Competition in the Chinese construction market is intense, and as the domestic market became saturated, major firms looked to find new markets (Corkin, 2008). With its chronic need for investment in infrastructure, SSA became a major target for Chinese construction companies. Since both private firms and SOEs have commercial interests in SSA, it is quite possible that these will sometimes run counter to the strategic economic and political objectives of the Chinese state. The sale of equity oil40 by SOEs to the international market rather than to China is an example of companies prioritizing their own profitability ahead of the state’s aim of increased energy security (Chen, 2011, pp.607–8). Similarly, the use of Chinese workers may have made commercial sense for the firms involved in terms of cost and labour discipline, but it created resentment amongst the local population in some countries undermining efforts to portray the relationship between China and 36 Gu (2011) gives the example of the Yuemei Group, which set up a trading office in Nigeria in 2000, followed by a factory in 2004, in order to overcome import restrictions and take advantage of preferential access to the European market. 37 In the DRC only one of the small and medium Chinese firms interviewed had received any support from the Chinese government (Jansson et al., 2009, p.45). 38 These include schools and hospitals, as well as prestige projects, such as sports stadiums and government buildings. 39 The share of Chinese firms in World Bank-financed civil works contracts in Africa increased significantly from the mid-1990s to reach 42 per cent of the total value in 2013 (Zhang and Gutman, 2015, p.11). 40 This refers to oil produced by the SOEs themselves.

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SSA as a ‘win-win’ situation. The environmental impact of Chinese companies is another issue that has led to conflict with local populations and has tarnished the image of China in the region (see Chapter 8). In these cases the commercial interests of Chinese companies have harmed the government’s efforts to increase its soft power in the region.

6.5 African Interests in Expanding Economic Relations with China Focussing solely on Chinese actors and their strategic and commercial interests in SSA, as in Section 6.4, runs the risk of ignoring African agency in the development of Sino-African relations. Several authors have recently criticized such an approach and emphasized the role of African elites (Corkin, 2013; Mohan and Lampert, 2013). By identifying both political elites and the economic actors involved on the African side, it is possible to obtain a fuller picture of the factors that have contributed to the growing relationship. Despite the frequent media criticism of China’s ‘colonial’ role in Africa,41 there is obviously a key difference between China today and the British and French colonialism of the past, in that China does not have direct political control over African countries. As a result, local politics must play a part in the development of economic relations between China and SSA which cannot be seen solely in terms of Chinese interests. There is now growing recognition of the role of African political elites in the relationship, and some authors go further, arguing for a broader conception of African agency beyond the level of state elites (Mohan and Lampert, 2013). The same distinction between strategic political, strategic economic, and commercial aspects made in discussing Chinese interests can equally be applied to analyzing African interests. From a strategic political viewpoint, the Chinese policy of non-interference in the internal affairs of African countries and not imposing any political conditionality on borrowing countries makes engagement with China attractive. This has been a major Western criticism of China’s involvement in the region, on the grounds that it provides support for authoritarian regimes, but even for countries which are relatively democratic, China’s ‘no-strings-attached’ approach is attractive. The increased competition for Western powers that China’s entry into the region creates has also offered an opportunity for African governments to increase their bargaining power. The example of Angola provides an ‘China Is Africa’s New Colonial Overlord, Says Famed Primate Researcher Jane Goodall’ (Caulderwood, 2014) and ‘Is China the World’s New Colonial Power?’ (Larmer, 2017) are typical headlines. 41

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illustration of this. The Angolan government broke off negotiations with the International Monetary Fund (IMF) when it obtained a China Exim Bank loan in 2004. Subsequently Angola was able to obtain finance from other countries including Spain, Canada, Germany, Portugal, and Brazil, which feared that their companies would lose out to Chinese competitors in Angola (Corkin, 2013, p.144). Chinese loans and aid can also serve to legitimize and generate political support for ruling elites in SSA. Both infrastructure and prestige projects such as government buildings and sports stadiums serve a useful purpose. In Angola the majority of the stadiums built for the African basketball championships in 2007 and the African Cup of Nations in 2010 were built by Chinese companies (Corkin, 2013, p.154). As Brautigam (2009, p.373) notes, ‘What the Angolan government got was the political benefit of a very rapid, very visible improvements in infrastructure’ in the run-up to the country’s elections as a result of Chinese loans. In strategic economic terms, African economies face a chronic shortage of infrastructure in power, transport, and communications. The World Bank estimated in 2010 that the annual amount of external financial resources required to meet the infrastructure gap in Africa was $31 billion.42 African states have neither the government revenue nor the foreign exchange necessary to finance major infrastructure projects on this scale. Western lenders and investors have not been interested in funding such projects. The World Bank and other Western donors, who in an earlier era provided loans for infrastructure, have since the 1980s concentrated much more on programme (as opposed to project) lending and targeted social sectors such as health and education rather than infrastructure. The EU and its member countries only allocated $1 billion for infrastructure investment in SSA in 2009 (Konijn, 2014, p.15). In this context, African governments have been very keen to take advantage of China’s willingness to finance large infrastructure projects in the region. This suggests an alternative interpretation of the growth of commoditybacked loans to the view that they are a result solely of China’s efforts to secure supplies of energy and raw materials. African governments have been able to use their resources to obtain infrastructure and funding for other projects from China with repayments in commodities at a future date. The use of oil or minerals to repay these loans is a consequence of the need to provide a guarantee of repayments to foreign lenders.43

42

Quoted in Konijn (2014, p.15). Deborah Brautigam is quoted by the Economist Intelligence Unit (EIU)/Mayer Brown (2014, p.10), saying that commodity-backed loans are a result of African governments using commodities to secure finance rather than China using loans to secure resources. 43

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As the examples of Angola and the DRC illustrate (see Boxes 6.1 and 6.2), the governments of both countries, which had large parts of their infrastructure destroyed by civil war, were looking for international financial support for reconstruction and found it difficult to obtain funding elsewhere on terms that they deemed acceptable. The interests of the governing elites of both countries in obtaining political support through large-scale infrastructure projects were an important driver of the loans from the African side. The extensive use of commodity-backed loans in SSA can be seen, therefore, as a result of a convergence of different interests, including those of African elites in obtaining external funds, the strategic interests of the Chinese state in securing raw materials and new markets, the commercial interest of the Exim Bank in securing repayment of its loans, and the interests of Chinese SOEs in expanding their reserves and long-term growth and profitability. Apart from the specific case of commodity-backed loans, SSA governments welcome the additional foreign exchange and government revenues generated by increased exports of oil, gas, and minerals to China, which help relieve balance of payments and budget constraints. African commercial interests have also played a role in the growth of economic relations with China. Growing numbers of African traders have been involved in importing consumer goods from China. There is a thriving African business community in Guangzhou to which African traders have travelled to buy goods since the mid-1990s (Yang, 2012). These compete with Chinese traders in supplying African markets (Haugen, 2011). Indeed, in some African countries, it has been claimed that they are a more important source of imported Chinese consumer goods than the Chinese traders who operate in Africa.44 As pointed out earlier, in recent years, an increasing proportion of SSA’s imports from China have been capital goods. Local manufacturers have found that Chinese machinery and equipment is much cheaper than that supplied from the West, and although it may not be as durable, it is an attractive proposition for small, cash-strapped businesses.45 In some cases African businesses have recruited Chinese technicians to help operate the equipment and have even brought in skilled Chinese workers.46 Although this is on a minimal scale compared to the number of Chinese workers employed by Chinese companies in Africa, it illustrates the importance of commercial factors in the influx of Chinese workers.

44 Mohan and Lampert (2013, pp.100–1), quoting local manufacturers whom they interviewed in Ghana and Nigeria. 45 See, for example, Atta-Ankomah’s (2014) study of the use of Chinese machinery in the Kenyan furniture industry. 46 Mohan and Lampert (2013, p.101–2).

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For African governments, Chinese construction companies provide muchneeded infrastructure at a lower cost than their competitors and have a reputation for completing projects on time and within budget.47 They are also willing to respond to host government needs and to start projects with minimal delays and bureaucratic procedures. Although the tying of loans means that African governments have little choice but to use Chinese companies and goods when projects are funded by the Chinese government, the fact that Chinese firms win a significant number of construction projects financed from other sources shows that cost and performance are also important factors in the growing involvement of Chinese construction companies in the region.48 What this illustrates is that Chinese firms have certain competitive advantages, for example, low-cost technology and skilled labour, which African businesses and governments are keen to take advantage of for commercial reasons. More generally, it is a mistake to ignore the role of African agency in explaining Africa’s growing engagement with China. Although Chinese interests are the most significant factor in its growing economic presence in Africa, it is unlikely that this growth would have been so rapid had it not been for complementary interests on the African side. This is partly illustrated by cases where there has been resistance to China’s presence in the region: in Nigeria, for example, the expansion of Chinese oil companies in the Niger Delta has met with opposition (Obi, 2008). In many SSA countries local manufacturers have complained that they are being undermined by cheap Chinese imports, and, in South Africa, this led to the imposition of quotas on textile imports from China in 2007 in an attempt to protect the domestic industry (Morris and Einhorn, 2008). There are also cases where Chinese citizens have been expelled by African governments as occurred in Ghana in 2013, when a number of Chinese miners who were operating illegally in the country were deported. These examples show that China’s growing presence in SSA has required at least the acquiescence of African actors for it to have grown so rapidly. In many cases it has been actively promoted or encouraged by African actors to advance their own strategic and commercial interests. African agency and local conditions are also important in understanding the differential impact of China on host economies, which is discussed in Chapters 7 and 8.

47 It has been reported that Chinese construction project tenders in Africa are 40 per cent lower than alternative bids (Sun et al., 2017, p.30). 48 One estimate is that 49 per cent of all Chinese contracts in Africa are won through competitive international bidding, as opposed to the 40 per cent that involves closed bidding between Chinese companies (Konijn, 2014, p.13).

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6.6 Empirical Analysis of the Determinants of Sino-SSA Economic Relations The previous two sections have examined the motivations of Chinese and African actors that have led to the growing economic presence of China on the continent. How important have the different factors discussed there been in explaining the pattern of Chinese involvement through trade, FDI, loans, and contracts? Although there have been a number of econometric studies which have looked at individual aspects of Sino-African economic relations, there have been no comprehensive studies which look at the range of relations.49

6.6.1 The Model In order to explore the bilateral relations between China and SSA further, a panel of data was created covering forty-seven SSA countries between 2002 and 2015. The model was estimated for a number of dependent variables which measured the level of Chinese trade, FDI, engineering contracts, and loans with the 47 SSA countries. Based on the previous discussion, a number of independent variables were selected as indicators of commercial, strategic economic, and strategic political drivers of China’s economic involvement. The same explanatory variables were used as regressors for each of the dependent variables in order to compare their impact across the different types of relationships being analyzed. The commercial factors selected are those which are commonly used in gravity models of trade (and investment) flows. The key variables in these models are the relative size of the two economies involved and various other variables which are proxies for trade costs such as distance and whether or not a country is landlocked.50 The openness of the host economy can also affect the cost of doing business and is, therefore, included as a commercial factor. The key strategic economic factor identified above is access to resources, particularly oil and minerals. In SSA other strategic considerations such as promoting Chinese exports and investment are less significant; therefore, the two variables used to measure strategic economic considerations are the share of a country’s exports accounted for by fuels and by minerals, respectively.

49 Previous studies include on trade, Grauwe et al. (2012); Johnston et al. (2015); Hu and Marrewijk, (2013); on FDI, Biggeri and Sanfilippo (2009); Sanfilippo (2010); Cheung et al. (2012, 2013); Drogendijk and Blomkvist (2013); Kolstad and Wiig (2011); on Chinese economic cooperation projects, Biggeri and Sanfilippo (2009); Sanfilippo (2010); Berthelemy (2011); Cheung et al. (2014); and on Chinese loans and aid, Dreher et al. (2016). 50 Other variables used in such models, such as the existence of a common language, are irrelevant in the case of Sino-African economic relations.

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As was shown above, China’s strategic diplomatic objectives include the enforcement of the ‘One China’ policy and obtaining support for Chinese positions in international fora such as the United Nations (UN). Whether or not a country has diplomatic relations with Taiwan is included as a dummy variable to measure the former and the proportion of a country’s votes which coincide with China in major votes in the UN General Assembly is used to indicate the latter. In order to avoid problems of reverse causation, all the independent variables were lagged by one year. All variables in US$ are in constant dollar terms. The specification used to estimate the level of Sino-SSA relations for each relationship is of the form. logYit ¼ c þ alogChinaGDPt1 þ blogSSAGDPi;t1 þ dOPENi;t1 þ eDISTi þ fLANDLi þ gMINi;t1 þ hFUELi;t1 þ jTAIi;t1 þ kUNi;t1 þ έ Where: Y China GDP SSAGDP OPEN DIST LANDL MIN FUEL TAI UN

Indicator of economic relation with China in constant US$ China’s GDP in constant US$ Sub-Saharan African countries’ GDP in constant US$h Trade/GDP Ratio Distance to China in thousands of miles 1 for landlocked countries Share of ores and minerals in total exports Share of fuels in total exports 1 for countries which recognize Taiwan Share of country’s votes that coincide with China

Table 6.1. Determinants of Sino-SSA Economic Relations

Log China GDP Log SAA GDP Openness Landlocked Distance Minerals Fuels Recognition of Taiwan UN voting Random/fixed Effects Observations R-squared

FDI Stock (4)

Bilateral Trade (1)

Chinese Imports (2)

Chinese exports (3)

1.68*** 0.62*** .006*** ‒0.61 ‒0.23 0.94*** 0.73*** ‒0.14 0.11 RE 646 0.51

1.30*** 1.63*** 0.013*** 0.25 0.16 3.82*** 1.97*** ‒0.06 ‒0.85 RE 632 0.66

1.80*** 3.40*** 0.82*** 1.48*** ‒0.002 ‒0.002 ‒1.07*** Omitted 0.05 Omitted 0.30 0.31 0.41** 2.01*** ‒0.53*** ‒0.93** ‒0.04 ‒0.26 RE FE 646 604 0.71 0.47

Contracted Projects (5) 0.95*** 2.47*** ‒0.005 Omitted Omitted ‒0.06 3.39*** ‒1.56*** ‒0.93 FE 646 0.30

Loans (6)

0.95** 0.53*** 0.011* 0.12 ‒0.24 0.34 ‒0.15 ‒0.43 ‒0.60 RE 646 0.20

*, **, and *** significant at 10%, 5%, and 1% level

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6.6.2 Trade Flows Looking first at total bilateral trade flows, Table 6.1, Column 1, indicates that both China’s gross domestic product (GDP) and that of its SSA partner are significant factors explaining the level of trade. Economies that are more open also tend to trade more with China. Clearly commercial factors are an important determinant of trade between China and SSA. There is also evidence that strategic economic considerations influence the pattern of trade, with much higher levels of bilateral trade with countries specializing in fuels or minerals. This is hardly surprising since the bulk of Chinese imports from the region are either fuels or minerals. Countries which are specialized in agricultural products or manufactured goods have attracted much less attention from China. Strategic diplomatic factors (diplomatic recognition and UN voting behaviour) do not play a role in bilateral trade relations. Further evidence of the drivers of China’s trade relations with SSA can be derived from looking at imports and exports separately (see Table 6.1, Cols.2 and 3). Chinese imports from SSA are once more associated with GDP and openness, but other gravity variables (distance and landlocked status) do not reduce the level of imports. Not surprisingly specialization in ores and fuels are highly significant as would be expected. There is no evidence that diplomatic factors affect China’s imports from the region. Chinese exports to SSA are also affected by GDP as would be expected, but neither openness nor distance from China has a statistically significant impact. Landlocked economies do tend to import less as predicted by the gravity model.51 Fuel-exporting economies tend to import more from China, which probably reflects the extent of Chinese loans and construction contracts tied to purchases of Chinese goods in these countries. China exports less to countries which recognize Taiwan, but there is no relation with a country’s voting behaviour in the UN. Overall then China’s trade with SSA is driven primarily by commercial interests and its strategic interest in supplies of raw materials, particularly oil and minerals.

6.6.3 Foreign Direct Investment Given the significant role played by SOEs in Chinese OFDI, it might be expected that strategic economic and political considerations would play a more prominent role than in the case of trade. Since FDI flows fluctuate from year to year, the variable used was the stock of Chinese OFDI in each country. 51 This may reflect the fact that Chinese exports to landlocked African countries are recorded as exports to the countries through which they transit rather than their ultimate destination.

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As with trade, the size of GDP in both China and SSA are major determinants of FDI. In terms of strategic economic factors, fuel-exporting countries tend to have a larger stock of Chinese FDI. There is also evidence that countries which maintain diplomatic relations with Taiwan receive less Chinese investment. As with trade, there is no significant relationship with UN voting behaviour (Table 6.1, Col.4).

6.6.4 Contracted Projects The factors influencing the level of Chinese projects in SSA are very similar to those that determine FDI. Commercial factors play an important role with both Chinese and SSA GDP having a significant impact (Table 6.1, Col.5). What is also striking is the highly significant impact of specialization in fuels on the value of Chinese projects in SSA.52 There are several possible reasons for this. First, many projects may be linked directly or indirectly to the oil industry. Second, since a significant proportion of Chinese projects are funded by Chinese loans and China has made several R4I loans which involve repayment in oil, it is likely that a disproportionate share of contracts may be with oil-exporting countries. Third, oil-exporting countries may have more resources available for investment in infrastructure, and Chinese firms have been successful in obtaining a significant share of such contracts. While the data available do not allow these different factors to be disentangled, it suggests that the high proportion of contracts in fuel-exporting countries reflects a mixture of strategic and commercial factors. As was noted for OFDI, Chinese firms are less likely to be significantly involved in countries which recognize Taiwan. Once more, there is no tendency for China to concentrate on countries which support its position within the UN.

6.6.5 Chinese Loans Since loans to SSA are provided mainly through the policy banks, strategic factors are likely to be most significant in affecting Chinese involvement in SSA. As was pointed out earlier, there are no official statistics on the geographical distribution of Chinese loans and aid, so that estimates rely on unofficial figures collected from a variety of sources, which affects the reliability of the data.

52 An increase of 10 percentage points in the share of fuels in the total exports of a SSA country is associated with an increase of more than 30 per cent in the value of Chinese contracts.

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Table 6.1, Column 6, reports results based on a new database on Chinese loans to Africa developed by the CARI at Johns Hopkins University that covers the period from 2002 to 2015. The only factors that are significant are Chinese and SSA GDP and the openness of the SSA economy. Other factors which one might expect to have a significant impact, such as being an oil exporter or having diplomatic relations with Taiwan, are not statistically significant.53 Using the AidData figures on Chinese aid (ODA-like finance), none of the explanatory variables used in Table 6.1 was significant. Despite this there is some evidence from other studies that China does give less aid to African countries that recognize Taiwan (Dreher et al., 2016, Table 3). Dreher et al. conclude that Chinese ODA is driven primarily by foreign policy considerations, whereas less concessional flows are better explained by economic factors.

6.6.6 The Geography of Sino-African Economic Relations The econometric results discussed here are broadly consistent with the earlier findings on the drivers of economic relations between China and Africa. The most significant strategic diplomatic factor that affects Chinese involvement is whether the country has diplomatic relations with Taiwan. There is also strong evidence that China’s relations are particularly geared towards fuelexporting countries, which reflects its strategic economic interests. Finally, commercial factors, as measured by conventional gravity model variables also play an important role in determining the pattern of economic relations. Perhaps surprisingly, there was no evidence that countries which supported China at the UN had closer economic relations, although this could reflect the limited influence that the MOFA has on Sino-SSA relations. Even more surprising was the lack of evidence that the distribution of loans was influenced by strategic diplomatic or economic considerations.

6.7 Conclusion The most significant forms of Chinese involvement in SSA involve trade and construction and engineering projects, often financed by Chinese loans and export credits. Chinese FDI and aid (as defined by the Organization for Economic Co-operation and Development-Development Assistance Committee 53 Similar results were obtained using an alternative data set from AidData for non-ODA-like financial flows to SSA. Dreher et al. (2016, Table 3) also found that other official flows (OOF) from China to Africa were not affected by a country having diplomatic relations with Taiwan in a model with country fixed effects.

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(OECD-DAC)) have, contrary to the impression that is often given in the media, been less important. The factors that explain the spectacular growth of Sino-African economic relations vary across different types of activity. Bilateral trade is largely driven by commercial considerations on both the Chinese and the African sides. The existing pattern of specialization, in which SSA exports oil and minerals and imports manufactured goods from China, reflects comparative advantage. The openness of the African economies following the adoption of structural-adjustment policies in the 1980s and the lack of coherent industrial policies in the region mean that trade patterns are mainly determined by market forces. Chinese FDI flows can also be seen as primarily motivated by commercial considerations. This is certainly true of the growing number of private firms and provincial SOEs that have invested in Africa. Large centrally owned SOEs may be more subject to the state’s strategic economic concerns in securing access to raw materials, but they also pursue their own commercial objectives (Breslin, 2013, p.1277). One area where FDI reflects the government’s diplomatic objectives is in relation to the One China policy: Chinese investors avoid countries that recognize Taiwan. Strategic economic objectives are more significant in the case of loans, although this is not evident from their geographical distribution discussed in Section 6.6.5. Loans have been used to support Chinese companies in acquiring energy and mineral resources and, more generally, in promoting the Going Global strategy. However, both the CDB and the Exim Bank have commercial interests of their own which also play a role in their lending decisions. Again in terms of diplomatic objectives, their main contribution is that they do not lend to countries which do not have diplomatic relations with Beijing. On the African side, Chinese loans are particularly attractive to those countries that find it difficult to obtain credit elsewhere for economic or political reasons. Foreign aid, narrowly defined, is largely governed by diplomatic considerations both in terms of obtaining diplomatic support from African governments and of enhancing China’s soft power in the region. This broader political concern is reflected in the wide spread of Chinese aid in SSA, which goes far beyond the relatively few countries that are important sources of oil and minerals for China. All SSA countries which have diplomatic relations with Beijing receive aid from China (even though in the case of South Africa this is more symbolic), and grants and zero-interest loans are fairly evenly distributed around the continent (Brautigam, 2011). Aid often goes to support high-visibility prestige projects, such as government buildings and sports stadiums, to help garner political support.

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Appendix to Chapter 6 Table A6.1. Significance of Economic Relations with China by Country in SSA Chinese projects Chinese loans Share of China Share of China Chinese OFDI 2005–15 2005–15 stock (% total in exports in imports ($ p.c.) inward FDI) 2015 ($ p.c.) 2015 2015 Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde CAR Chad Comoros DRC Rep. of Congo Côte d’Ivoire Djibouti Equatorial Guinea Eritrea Ethiopia Gabon Gambia, The Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda São Tomé Senegal Seychelles Sierra Leone South Africa Sudan Swaziland Tanzania Togo Uganda Zambia Zimbabwe

22.1% 39.3% 6.6% 6.6% 10.3% 20.8% 7.6% 6.0% 11.0% 13.8% 15.2% 14.8% 9.7% 27.8% 15.5% 17.0% 28.5% 12.0% 25.1% 25.9% 16.6% 3.7% 17.5% 13.7% 27.7% 22.4% 12.4% 13.4% 16.3% 16.1% 12.6% 8.8% 23.0% 24.8% 10.6% 2.5% 10.1% 2.6% 4.3% 17.5% 24.6% 7.6% 21.7% 37.9% 13.2% 10.7% 10.6%

51.3% 21.5% 3.6% 17.2% 7.0% 11.2% 0.0% 26.5% 9.1% 0.5% 61.3% 44.7% 1.4% 2.1% 9.1% 4.5% 16.0% 19.7% 39.7% 6.2% 2.7% 0.4% 1.7% 1.1% 10.2% 9.6% 4.3% 21.1% 64.5% 0.9% 8.2% 7.9% 3.5% 1.6% 22.4% 0.1% 2.1% 1.0% 41.8% 27.6% 58.6% 4.2% 17.4% 8.3% 2.7% 34.9% 18.3%

9.8% 7.9% 9.7% 0.0% 203.5% 2.0% 0.9% 13.4% 5.4% 12.9% 30.0% 2.4% 0.6% 2.4% 2.9% 9.7% 15.8% 6.2% 0.2% 4.9% 11.1% 139.7% 17.1% 1.9% 3.3% 0.5% 4.6% 9.1% 4.0% 25.7% 4.1% 2.1% 25.0% 3.9% 15.3% 0.2% 5.0% 3.2% 14.4% 4.4% 6.6% 0.0% 7.0% 12.8% 3.1% 19.8% 36.4%

1940 75 2948 2 49 224 325 72 487 310 79 2705 69 1950 16576 188 254 2171 36 333 197 187 259 428 293 48 45 184 493 1527 159 867 218 169 102 40 152 4797 108 64 435 104 184 145 116 598 202

744 82 379 0 8 159 263 20 43 0 3477 33 545 83 1892 102 131 582 0 114 50 0 148 4 0 2 14 55 106 326 67 294 35 17 19 0 100 675 9 8 91 0 60 33 182 151 102

Total SSA

20.9%

13.6%

6.0%

274

90

Sources: Cols. 1 and 2: UNCTADStat Col. 3: UNCTADStat for total inward FDI and MOFCOM (2016) for Chinese OFDI Col. 4: NBS database for value of Chinese projects and UNCTADStat for population Col. 5: CARI database for loans and UNCTADStat for population

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7 China’s Economic Impacts on Sub-Saharan Africa

7.1 Introduction The effects of China’s increasing role in Sub-Saharan Africa (SSA) have been a topic of intense debate. This chapter considers the economic impacts, whereas in Chapter 8, the controversy over its social, political and environmental effects are discussed. Official Chinese statements consistently refer to the relationship as ‘win-win’, emphasizing the mutual benefits for Africa and China. Public opinion polls in a number of SSA countries have shown that a majority of those surveyed has a positive view of the economic impact of China, particularly in terms of the infrastructure that has been built and the availability of cheap Chinese products (Lekorwe et al., 2016, Fig. 15). On the other hand, some Western and African critics see the relationship as a neocolonial one, in which China exploits African resources and dumps its products with no regard for African interests. Such broad generalizations pay little regard to the different forms of Chinese economic involvement in SSA and the variety of actors involved (described in Chapter 6). They also fail to take into account the variety of impacts that China has on SSA. There are direct impacts involving the bilateral relations between China and SSA, and indirect ones arising from China’s effects on global markets and prices. A further important distinction that has been made in the literature is between complementary (positive) and competitive (negative) economic impacts (Introduction, Table 0.1).1 These effects can differ between countries, between sectors and groups within countries, and over time.

1 The distinctions between direct and indirect impacts and complementary and competitive effects has been extensively used in the ‘Asian Drivers’ literature on the impact of China on SSA. See Jenkins and Edwards (2006); Schmitz (2006); Kaplinsky, McCormick, and Morris (2007); Kaplinsky and Messner (2008).

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The chapter focusses on three key issues that are at the centre of the debate over China’s economic impact on SSA. The first is the impact of China on the region’s exports and the way in which export expansion has contributed to or impeded growth. The second concerns the contribution that China is making to reducing SSA’s massive deficit in terms of transport, power, and communications infrastructure, which is widely regarded as having held back economic growth. Finally, after a period when the emphasis on industrialization diminished with the dominance of neoliberal ideologies and the Washington Consensus, the importance of the manufacturing sector in economic development is now being recognized once more. SSA’s industrial sector is relatively small and underdeveloped, so China’s impact on the sector may prove critical.

7.2 Exports to China and the Commodity Boom The clearest example of a complementary relationship between China and SSA is provided by the region’s exports of commodities to China. As shown in Chapter 3, from the late 1990s, China’s resource-intensive industrialization created an enormous demand for energy and minerals, much of which had to be met by imports. SSA is a region with abundant supplies of raw materials that had been relatively underexploited in the past. There was, therefore, a good match between China’s needs and what Africa was able to supply.

7.2.1 Direct Effects In practice, only a handful of SSA economies have been directly affected by this rush for resources. Although China’s imports from SSA grew rapidly during the first decade of the twenty-first century, they were concentrated in a few countries with South Africa, Angola, Sudan, and Republic of Congo accounting for around four-fifths of the total. At the peak of the commodity boom in 2011, only eight SSA countries sold more than 20 per cent of their total exports to China. These consisted of three oil exporters (Sudan, Angola, and Congo), four mineral exporters (Democratic Republic of Congo (DRC), Mauritania, Zambia, and South Africa), and one timber exporter (Gambia). The direct effect of China on the exports of the remaining countries in the region was relatively small. It is not even necessarily the case that China’s demand had much impact on those countries that did have a large share of exports to China. South Africa and Zambia have well-established mining industries, and they would be able to find alternative markets for their minerals in the absence of exports to China. Nor has China played a major role in expanding supply in the two countries. In South Africa, Chinese foreign direct investment (FDI) in mining 150

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has been limited and mainly involved participation in joint ventures in existing mines. Chinese investors have played more of a role in Zambia, where Non-Ferrous Company Africa (NFCA), a subsidiary of China NonFerrous Metal Mining Company acquired the Chambishi copper mine in 1998, when it was privatized by the Zambian government.2 NFCA invested US$150 million in rehabilitating the mine and bringing it back into production, but it remains a relatively small player, producing between 5 and 10 per cent of total Zambian copper output (Bastholm and Kragelund, 2009, p.128). China has played a much more central role in the development of the mining industry in the DRC and Mauritania. The early development of mineral exports from the DRC to China was the result of Chinese traders who entered the country during the late 1990s and early 2000s to buy ores from artisan miners. After 2006 many larger private Chinese companies became involved in the industry, and some degree of local processing developed following a ban on exports of raw ore imposed by the local government in 2007 (Shelton and Kabemba, 2012, pp.65–70). The Sicomines agreement (see Box 6.2) has given further impetus to the mining industry. Given the conflicts and political instability in the country during the period, which limited Western involvement, China played an important role in the growth of DRC exports. China also made an important contribution to the growth of exports from Mauritania through the construction of a deep-water port at Nouakchott in the 1980s, and a further loan for the expansion of its capacity in 2006 (Mauritanian Embassy, n.d.). More recently China has also been involved in building a new iron ore terminal at the port of Nouadhibou.3 The most obvious example of a country where China has played a key role in the growth of exports is Sudan, which has been subject to US sanctions since 1997, and came to depend heavily on the Chinese market and investment by Chinese companies (Large, 2008). China played a more limited role in the development of the Angolan oil industry, and the fact that Angola has been a member of the Organization of the Petroleum Exporting Countries (OPEC) since 2007 and, thus, in theory, subject to production quotas may have limited the extent to which its exports to China represent a net increase in the quantity of oil exported.4

2 See Bastholm and Kragelund (2009); Haglund (2009); and Li (2010) for accounts of Chinese investment in Zambian mining. 3 China is also directly involved in mining through Minmetals, which has a minority shareholding in the Tazadit iron ore mine, which is majority owned by the Mauritanian stateowned company SNIM (USGS, 2013). 4 There is relatively little information on China’s role in the development of the oil industry in the Republic of Congo, but the operations of Sinopec there were the result of its acquisition of Addax Petroleum in 2009, which suggests that it was not a major factor in the growth of local production.

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7.2.2 Indirect Effects The indirect effects of China on SSA exports through its impact on commodity prices are more widespread, but even so have only benefitted a minority of SSA countries. Although the terms of trade of the majority of SSA countries improved during the commodity boom,5 this was not solely due to China. Chapter 3 showed that there are substantial differences in the impact of Chinese demand on different commodities, with the strongest effect on the prices of minerals and metals. In contrast, the surge in energy prices owed much more to supply-side factors than to the growth of demand from China. Other products where China had a moderate impact on prices were feedstuffs (particularly soybeans) and sawn wood. Chapter 3 also noted that there was little impact on the prices of tropical agricultural products, cotton, or skins and hides. In addition to the countries mentioned earlier, the main beneficiaries of increased commodity prices induced by the growth of China have been exporters of iron ore (Liberia and Sierra Leone) and aluminium (Guinea and Mozambique). Exporters of precious metals such as Botswana and Namibia (diamonds), and Burkina Faso, Guinea, and Mali (gold), where China accounts for a small share of global consumption, have not benefitted much. Although oil exporters experienced the greatest improvement in their terms of trade, China’s contribution to this was more limited than in the case of minerals and metals (see Chapter 3). Nevertheless, additional demand from China did help boost prices to some degree, so China had a positive impact on all the region’s oil exporters.6 The only other product of interest to some SSA countries, and where Chinese demand has contributed to higher prices, is wood, of which West African countries, including the Gambia, Gabon, Cameroon, and the Republic of Congo, are important exporters. Most of the remaining countries in the region export agricultural products and have not benefitted from a significant Chinese impact on prices. As seen in Chapter 3, China’s demand for tropical foodstuffs is relatively limited (Table 3.1). The main agricultural product for which it does have a significant import demand, soybeans, is not grown on a substantial scale in SSA. Although China has a large share of the world market for cotton, an important export for several African countries, its impact on prices has been relatively small. There are a few SSA countries where manufactures constitute an important share of total exports. In contrast to the situation with commodities, the growth of China has tended to depress the prices of manufactured goods, as 5 The terms of trade of thirty-six out of the forty-seven SSA countries improved between 2002 and 2011. 6 In addition to the three countries already mentioned, the other major oil-exporting countries in SSA are Cameroon, Chad, Equatorial Guinea, Gabon, and Nigeria.

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seen in Chapter 2. This impact was felt particularly strongly in the case of garment prices after China entered the World Trade Organization (WTO), and the subsequent ending of the Agreement on Textiles and Clothing. Because Mauritius, Lesotho, and Madagascar specialized in clothing, it is not surprising that they were among those African economies whose terms of trade deteriorated between 2002 and 2011. In summary, the direct and indirect effects of China on SSA exports have brought significant economic benefits to a minority of countries whose economies are complementary to China’s because they specialize in commodities that are in high demand in China: minerals, oil, and timber. Despite the general claims made about the impact of China, the majority of SSA countries remain relatively little affected by Chinese demand, particularly those that export mainly agricultural commodities. Finally, SSA economies that export manufactured goods have been negatively affected (see Section 7.4.1 for further discussion).7

7.2.3 The Downside of Commodity Exports Although an increase in exports and improvement in the terms of trade can have a positive effect on a country’s growth in the short and medium term, critics question the long-term impacts of specialization in primary products. The so-called resource-curse literature points to the poor economic performance of many resource-rich countries.8 Both the economic and political effects of natural resource wealth have been used to explain this.9 One of the main economic concerns is that a commodity boom can give rise to the so-called Dutch Disease. This term refers to the impact of the discovery of gas in the Netherlands on the domestic manufacturing sector (Corden and Neary, 1982; Corden, 1984). This impact was generalized to situations where the discovery of new resources or a windfall because of a major increase in the price of a commodity leads to a number of negative side effects. These include the appreciation of a country’s real exchange rate and an increase in government spending, which raise the price of non-traded goods (such as housing and services) relative to traded goods. As a result, resources shift out of nonbooming tradable sectors, such as agriculture and particularly manufacturing, to non-traded goods and services and the export sector (Frankel, 2012, p.12). 7 Zafar (2007) reaches broadly similar conclusions regarding the likely impact of China on the terms of trade of different SSA countries. 8 Since the negative relationship between natural resource dependence and growth was pointed out by Sachs and Warner (1995), there has been extensive debate over the empirical evidence with results varying according to the time period covered, the measure of natural resources, and the econometric methods used (van der Ploeg, 2011; Saad-Filho and Weeks, 2013). 9 The ‘political-resource curse’ is discussed in Chapter 8.

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Critics of China’s involvement in resource extraction in SSA have argued that it has given rise to Dutch Disease (Zafar, 2007; Sindzingre, 2011). This could have occurred in one of two situations: where China makes a significant contribution to the development of new sources of raw materials or where Chinese demand has a major impact on global commodity prices. The first of these involves direct trade and an investment/lending relationship between China and the country concerned. The second, indirect effect, applies to all countries which export minerals and metals, and possibly oil and timber. Not surprisingly, these are the same countries where China had positive shortterm and medium-term effects on exports. One indicator of the potential existence of Dutch Disease is the appreciation of a country’s real effective exchange rate (REER). Of the SSA countries which export minerals and metals, only Zambia and South Africa had a significant appreciation of their REER between 2001 and 2011.10 All of the oil exporters in the region saw their currencies appreciate over the period, but China’s contribution to the global oil price rise was less significant than in the case of minerals. As indicated previously, China did make a major contribution to the development of the oil industry in Sudan and so could have had Dutch Disease effects there, but elsewhere the appreciation of the exchange rate was mainly a result of global conditions. The likelihood that trade with China leads to Dutch Disease effects is also reduced by the extensive use of resources-for-infrastructure (R4I) deals in SSA. Because increased foreign exchange earnings are used to repay loans made by the Chinese policy banks to finance infrastructure built by Chinese companies, the impact on expenditure within the host economy is relatively limited. This is, therefore, a useful mechanism for avoiding currency appreciation in the short term, and replacing the exported natural capital with new forms of created capital that will increase productivity in other sectors of the economy. Export instability is another disadvantage of specialization in primary commodities. Primary commodities tend to be much more subject to price fluctuation than manufactured goods.11 While countries may benefit from increased export revenues during a boom, they suffer the consequences of the bust which inevitably follows. Over the entire cycle, economic fluctuations

10 Of the others, Mozambique had a slight appreciation; Liberia and Mauritania slight depreciations; and DRC and Guinea significant depreciations of their REER. Based on data extracted from http://bruegel.org/publications/datasets/real-effective-exchange-rates-for-178-countries-a-newdatabase/ (Accessed 30 May 2018). 11 This reflects differences in supply and demand conditions for primary products and manufactures in the short run. Primary commodities tend to have lower price elasticities of supply and demand. In other words, because many primary products have few close substitutes and are often essential, large price changes are required to bring about a reduction in demand. At the same time, it is difficult to increase production in the short term because of the long gestation periods and high investment costs involved in bringing additional output on stream.

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make investment more risky, and this tends to depress economic growth (van der Ploeg, 2011, pp.386–388). There are two ways in which China’s growth could have contributed to greater instability in SSA economies. First, if China had been a major cause of the downturn in commodity prices after 2011, this might have contributed to the decline in growth rates in Africa, but, as seen in Chapter 3, Chinese imports of primary products continued to increase after 2011, and other factors explain the end of the commodity boom. Second, if the growth of China had caused SSA economies to become more specialized in commodity exports, this could have led to them becoming more vulnerable to price fluctuations. However, SSA’s dependence on commodity exports pre-dates the development of trade relations with China and characterizes trade with the EU and US (Figure 6.2). Thus although many African economies were negatively affected by the drop in commodity prices, and major exporters to China including Angola, Sudan, and DRC saw the value of exports to China fall after 2011 or 2012, this was primarily due to the fall in oil and metal prices on world markets rather than a decline in demand from China.

7.3 China’s Contribution to Infrastructure Development A second area of substantial complementarity between China and SSA is infrastructure. SSA suffers from a serious infrastructure deficit, both in comparison to other developing countries and in relation to what is required to meet economic growth targets. China, on the other hand, has always emphasized the importance of infrastructure in economic development and invested heavily in its domestic infrastructure. As a result Chinese construction and engineering companies have acquired considerable experience in infrastructure at home, and have been encouraged by the government to make use of their expertise abroad. In the 1950s and 1960s, infrastructure, such as roads, railways, and power plants was seen as critical to development, and much of the West’s aid was used to support infrastructure projects.12 As late as the mid-1970s, projects accounted for over half of Organization for Economic Co-operation and Development (OECD) aid, and two-thirds of this was spent on infrastructure (Mosley and Eeckhout, 2000, p.103). From the 1970s onwards, there was a shift away from such activities to give more emphasis to programme as

12 Between 1946 and 1961, 75 per cent of World Bank loans was used for transport and electricity projects (Brautigam, 2009, p.133).

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opposed to project lending, and to sectors such as health and education, rather than hard infrastructure (Mosley and Eeckhout, 2000). This trend was given a further push by structural adjustment policies in the 1980s and the emphasis of the Washington Consensus on economic liberalization and macroeconomic stability.13 The infrastructure deficit in SSA has led to inadequate supplies of electricity, causing power outages, high transport costs, and logistical and health problems (Arewa, 2016). These in turn tend to reduce productivity and slow economic growth.14 It has been estimated that SSA needs to spend almost $75 billion a year on infrastructure development including over $40 billion on improving power supplies (NEPAD, 2015, Table 4). How can SSA countries finance these infrastructure investments? Government investment in SSA has been cut back and it has proved difficult to attract adequate levels of private investment, apart from in telecommunications. Western donors continue to prioritize other types of aid expenditure. In contrast, in its 2013 report on China-Africa Economic and Trade Cooperation, the State Council of the People’s Republic of China (PRC) highlights the importance of infrastructure: ‘Infrastructure construction is a starting point for improving the investment environment and people’s livelihoods in Africa, and is of great importance for poverty reduction and development on the continent’ (PRC, State Council, 2013, Ch. IV). China has the financial capacity to fund significant infrastructure investment in the region, and Chinese companies have accumulated considerable experience in building roads, railways, dams, and power plants. Thus China is well placed to make a contribution to reducing the infrastructure gap in SSA. It also has a reputation for agreeing and carrying out infrastructure projects quickly, in contrast to other lenders which take much longer. As the Senegalese President Albert Wade pointed out in an article in the Financial Times, ‘China has helped African nations build infrastructure in record time’ (cited in Brautigam, 2009, p.133).15 The development of infrastructure is, therefore, an area in which China has a potentially significant role. Chinese involvement in infrastructure has taken a number of forms. There is some Chinese FDI in telecommunications through companies such as Huawei and ZTE; however, it is more common for firms to be involved in

13 Recently there is renewed recognition of the importance of investment in infrastructure, reflected in statements by the International Monetary Fund (IMF), the World Bank, and the G-20 (Gutman et al., 2015, p.9). 14 The World Bank estimated that increasing the power supply in Africa could increase GDP by 2 per cent and business productivity by 40 per cent (cited in Schiere and Rugamba, 2011, p.13. 15 While this is a widely shared perception, there can be long delays in Chinese projects. It took a decade from the first discussions about the Bui Dam with Sinohydro until construction began (Hwang et al., 2015, p.4).

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the provision of infrastructure through engineering contracts. China Railway Construction, China Communications Construction, Sinomach, and Sinohydro are among the leading Chinese companies involved in infrastructure projects in SSA.16 China also provides significant amounts of finance for infrastructure projects, mainly through the Exim Bank and the China Development Bank. There are various estimates of the level of China’s involvement in infrastructure in SSA. The World Bank calculated that its financing commitment to infrastructure projects increased from less than US$500 million in 2001 to US $4.5 billion in 2007 (Foster et al., 2008, Table 2). More recently it has been estimated, based on AidData figures, that between 2007 and 2012, the average flow of Chinese infrastructure funding was around $5 billion a year.17 The Infrastructure Consortium for Africa gives the much higher figure of US$13.4 billion for both 2012 and 2013 (cited in Gutman et al., 2015, p.28). In 2013 China accounted for around a quarter of all external finance for infrastructure projects in Africa, making it the most significant source of finance in the region by some distance.18 As noted earlier, the sectors with the greatest infrastructure requirements in SSA are power and transport. Almost half of China’s loans to Africa between 2000 and 2014 went to these two sectors (see Chapter 6, Section 6.2.4). Not surprisingly, Chinese projects also concentrated in these sectors. Between 2005 and 2016, almost half of the value of such contracts was transport related, and a sixth involved hydroelectric projects (see Fig. 6.5). OECD donors, on the other hand, have devoted significant resources to neither hydropower nor rail development in recent years. Several concerns have been raised in relation to Chinese infrastructure projects. First, much of Chinese finance is tied to Chinese firms and products. This would be a problem if Chinese suppliers tended to be high-cost, or if there was limited competition among them. In fact Chinese companies tend to be highly cost competitive, as indicated by their success in international tendering when they face competition from non-Chinese contractors.19 There has also been intense competition in the Chinese construction industry, which is

16

Data from AEI/Heritage Foundation. American Enterprise Institute (AEI)/Heritage Foundation data for the period 2005–15 gives the total value of Chinese contracts in hydroelectric, rail and shipping projects as $68 billion, or just over $6 billion a year. The State Council’s report, ‘China-Africa Economic and Trade Cooperation 2013’, states that China approved concessional loans worth US$11.3 billion for 92 African projects from 2010 to May 2012. 18 According to Infrastructure Consortium for Africa (ICA) figures, the total funding for African infrastructure from development financial institutions (both bilateral and multilateral) came to $44 billion in 2013, with a further $9 billion provided by the private sector (Economist Corporate Network, 2015, p.14). 19 The share of Chinese firms in World Bank–funded civil works in Africa has increased from around 10 per cent in the late 1990s to 42 per cent in 2013 (Zhang and Gutman, 2015, Fig. 7). 17

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one of the factors that has led firms to expand overseas (Corkin and Burke, 2006, p.77). A second concern relates to the terms on which China provides finance for infrastructure projects. As seen in Chapter 6, many of China’s infrastructure loans involve swapping resources for infrastructure. This makes calculating the financial costs involved complicated. Brautigam and Gallagher (2014), who have studied these loans, conclude that their cost is generally not out of line with the interest rates at which countries can obtain loans on international capital markets.20 Apart from cost, another concern raised in relation to Chinese-provided infrastructure relates to quality. One much-publicized case of poor-quality Chinese construction was the Luanda General Hospital, which had to be evacuated in 2010 because of fears that the building would collapse (Corkin, 2013, p.121). Despite reports of substandard work in some Chinese projects, there are also examples of Chinese companies achieving high-quality work. A study of Chinese construction and infrastructure projects in Angola, Sierra Leone, Tanzania, and Zambia gives several examples of high standards and concludes that despite widespread perceptions of inferior quality, in some cases, very little distinguishes the quality of Chinese construction companies from that of other local and foreign companies (Corkin and Burke, 2006, p.78–9). This was confirmed by a recent study comparing World Bank–financed transport projects undertaken by Chinese contractors with those of OECD companies, which found that on average, Chinese and OECD projects were of similar quality, although the range was greater for Chinese projects, with some of high standard and others with very poor performance (Farrell, 2016). Where they do arise, problems of poor quality are often attributable to a lack of government oversight and corruption in the country concerned. In the Angolan case, some critics have suggested that lack of project durability serves the interests of the local elite, by ensuring a stream of new contracts from which they can benefit (Corkin, 2013, p.122). Another criticism of Chinese infrastructure projects in SSA is that they are not focussed on meeting the needs of African development but rather are designed to promote China’s strategic political and economic interests by increasing its soft power and ensuring access to oil and mineral resources. Broadly speaking, China is involved in three different types of infrastructure projects in SSA. Some are intended to fill gaps in terms of power generation or remove transport bottlenecks, and can contribute to the overall economic development of the host country. Others may be specifically tied to the extraction of natural resources, e.g. building oil pipelines or rail links from a 20 There is often a lack of transparency concerning the terms of these deals, which makes comparison difficult.

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mine to a port, and are primarily intended to support exports to China. These too can have economic benefits that are more general in some circumstances. Finally, there are prestige projects, such as government buildings or sports stadiums, which are undertaken primarily for political reasons, and do not contribute to increased productivity or improved economic performance. If Chinese projects fell predominantly in the second and third categories, a degree of scepticism regarding their contribution to development would be justified. Although there are numbers of Chinese prestige construction projects, such as the African Union building in Addis Ababa, the Foreign Ministry building in Mozambique, and several sports stadiums, such as those built for the African Cup of Nations in Angola, Gabon, and Equatorial Guinea, these are not considered infrastructure in the sense used here, and do not account for a major share of Chinese loans. A more serious criticism is that roads, railways, and ports built by the Chinese in SSA are primarily built for the purpose of extracting resources from the continent, and replicate the kind of infrastructure that was built during the colonial period (Kerby, Moradi, and Jedwab, 2014). It may be hard to distinguish between projects primarily intended to facilitate resource exports to China and those which contribute to economic development more generally. In some cases projects such as port development, which are primarily motivated by resource extraction, can also have wider development impacts. It is also not always clear in the case of electricity projects whether they provide energy to specific mines or to the host country’s national grid. A recent study of 141 Chinese infrastructure projects in Africa concluded that only 7 were wholly linked to resource extraction, and a further 4 were partially linked. More than 90 per cent of the projects on which information was available did not involve resource extraction (NEPAD, 2015, Table 28). Some major Chinese infrastructure projects are clearly related to mining development, such as the rail link between the phosphate-rich Bofal and Nouakchott in Mauritania. However, generally in SSA, ‘the bulk of Chinese infrastructure finance is targeted towards projects that meet the country’s broader development needs’ (Foster et al., 2008, p.37).21 Studies of the impact of infrastructure investment on GDP have estimated that a 10 per cent increase in infrastructure increases gross domestic product (GDP) by 1.5–2.0 per cent (Estache and Garsous, 2012). However, the impact varies depending on the type of infrastructure. It is not possible to quantify the contribution of Chinese-built infrastructure to growth in SSA given the data available and the uncertainties concerning the nature of the infrastructure being

21

Scholvin and Struver (2013, p.189), in a study of China’s role in transport infrastructure projects in the South African Development Community (SADC), also conclude that although some projects are linked to resource exports, they tie in well with the SADC countries’ priorities.

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built. China has, however, undoubtedly had a positive long-term economic effect through its involvement in infrastructure in the region. It is not surprising, therefore, that public opinion surveys in Africa have found that Chinese involvement in infrastructure is the most frequently cited factor contributing to a positive image of China in the region (Lekorwe et al., 2016, Fig. 15).

7.4 China’s Impact on SSA Manufacturing China’s competitive impact on SSA is most often discussed in relation to manufacturing. One of the most visible signs of China’s presence in SSA is the ubiquity of Chinese goods in the region’s shops and markets, and it is often claimed that Chinese competition is having a negative effect on local industry. Typical headlines assert that ‘Chinese imports threaten Kenya’s textile industry’(Yusuf, 2013), and ‘Ghana’s textile trade unravels due to cheap Chinese imports’ (Mathews, 2015). How valid are these claims? Are local manufacturers being displaced by Chinese imports, or has China made it more difficult for African countries to get on the first step of the industrialization ladder (Kaplinsky and Morris, 2008)? There are also potentially positive impacts on SSA manufacturing. Imports of inputs and machinery from China and inward investment by Chinese firms can bring much-needed technology and help increase productivity. Chinese outward foreign direct investment (OFDI) may also create opportunities for local suppliers through backward linkages. Recently some commentators have even suggested that rising wages in China present a major opportunity for SSA countries to industrialize, because China will start to relocate abroad its most labour-intensive industries, which will no longer be competitive at home. (Lin, 2012; Chandra et al., 2013; Lin and Wang, 2014).

7.4.1 Competition from Chinese Manufacturing As shown in Chapter 6, imports of Chinese manufactures have grown rapidly throughout SSA since the start of the millennium. Despite claims that these products are displacing African manufacturers, much of the evidence is anecdotal. Detailed studies of the impact of increased Chinese imports in particular markets are surprisingly few and far between. Scoping studies by the African Economic Research Consortium claim that Chinese competition has led to local producers being displaced in Cameroon, Kenya, Ghana, and South Africa (Ademola et al., 2009, p.498), but the evidence base for this claim is sketchy. Part of the problem is the absence of reliable statistics for most SSA countries that would make it possible to estimate the level of Chinese import penetration in the domestic market. Relatively few African countries have up-to-date 160

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Ethiopia South Africa

Kenya Tanzania

Senegal

Figure 7.1. Share of Chinese Imports in Apparent Consumption of Manufactured Goods in Selected Countries, 2000–10 Notes: Senegal 2003 author’s estimate Source: UNIDO

information on domestic industrial production or consumption of manufactured goods. Where they do exist, figures on local production only include the formal sector and, therefore, underestimate the actual level. At the same time, where Chinese goods enter the country through informal or illegal channels, the level of imports is also underestimated. There is no way of knowing for certain whether the overall effect of these omissions is to reduce or increase the true level of Chinese manufactures’ import penetration. Figure 7.1 shows the share of Chinese imports in the apparent consumption of manufactured goods in five SSA countries during the first decade of the millennium.22 In all five cases, China’s share of the domestic market increased significantly from less than 5 per cent to over 10 per cent in Kenya, Senegal, South Africa, and Tanzania, and from less than 10 per cent to over 20 per cent in Ethiopia. This does not necessarily mean that domestic manufacturers have been negatively affected. Imports from China may be replacing imports from other countries. Indeed, as shown in Chapter 2, Chinese exports have partly grown as a result of firms relocating their export production from more advanced economies, particularly those in Asia, to China. Because the major share of manufactured products sold in Ethiopia, Kenya, Senegal, and 22 Apparent consumption is calculated as domestic output and imports minus exports of manufactured goods.

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Tanzania are imported, it is likely that the increase in China’s share of the market is mainly at the expense of that of other exporters. The situation is rather different in South Africa, whose much stronger manufacturing sector has been affected by Chinese competition. Chinese competition in third markets can also have a negative impact on a country’s exports. For SSA countries (apart from South Africa) which had only recently started to export labour-intensive manufactures at the time China joined the WTO, the main question is whether Chinese competition is stopping them from getting a foothold on the ladder of industrialization (Kaplinsky and Morris, 2008). Attention has focussed particularly on the textile and garment industry because it is usually one of the industries associated with the earliest stages of any country’s industrialization process (see Box 7.1). Box 7.1 CHINA’S IMPACT ON SSA EXPORTS OF TEXTILES AND GARMENTS The African Growth Opportunities Act (AGOA), introduced by the US government in 2000, gave preferential access to the US market for exports from most SSA countries. This led to a boom in garment exports to the US from some African countries, most notably Kenya, Lesotho, Madagascar, and Swaziland, between 2000 and 2004. By 2004 the clothing industry employed 54,000 people in Lesotho, 34,000 in Kenya, and 28,000 in Swaziland (Kaplinsky and Morris, 2008, Table 12). The combination of AGOA preferences, the absence of any rules of origin for least-developed African countries, and US quotas on imports from China created an incentive for firms to use these countries as a conduit for the transhipment of Chinese garments to the US market. In many cases this involved minimal processing in the African country concerned and was merely a way of avoiding US quota restrictions (Rotunno et al., 2013). The ending of the Agreement on Textiles and Clothing (ATC) meant that such quota hopping was no longer necessary or advantageous. In Lesotho in the first half of 2005, eight of the forty-seven garment-exporting factories closed, and employment fell by a quarter, while in Swaziland, employment fell by more than 40 per cent (Kaplinsky and Morris, 2008, p.264). Although the ending of quotas removed one incentive for exporting from SSA, products imported from AGOA countries continued to enter the US dutyfree, and with normal duty on garments of as much as 30 per cent in some cases, there was still an advantage to retailers in sourcing apparel from Africa. China’s impact on African exports of garments was contradictory. The success of SSA countries in penetrating the US market depended to a significant extent on imports from China of both garments and textile inputs. If the exports had been required to use more expensive imported fabric from the region or the US, it is unlikely that they would have grown so significantly. There is also some evidence of Chinese investors setting up factories in SSA, although many of these may have been from Taiwan rather than the PRC. On the other hand, SSA exports clearly competed with production in China for a share of the US market. The way in which these trends played out depended largely on the measures adopted globally through the ATC and by the US. It is clear that a level playing field, in terms of access to developed-country markets, would have made it extremely difficult if not impossible for SSA to develop an export-oriented garment industry in competition with China.

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Apart from the specific case of textiles and garments, there is also some evidence of Chinese competition having a negative impact on exports of manufactures from South Africa, which is the country with the strongest industrial economy in the region (Edwards and Jenkins, 2014; Jenkins and Edwards, 2015). There is also evidence that Chinese competition is having a negative effect on intraregional trade in SSA (Giovannetti and Sanfilippo, 2009; Pigato and Gourdon, 2014).

7.4.2 Technology Transfer and Local Linkages One potential channel through which China contributes to technological development in SSA is imports of its machinery. As shown in Chapter 6, capital goods have accounted for a growing proportion of Chinese exports to SSA. Machinery imported from China is considerably cheaper than alternatives that can be bought in the West.23 The lower cost of such equipment makes it available to a wider range of producers who are unable to afford the more sophisticated imported machinery. Despite the fact that Chinese machines are of lower quality and have a shorter life than Western ones, they can give higher returns, particularly to small and medium enterprises with limited access to finance. As one Nigerian manufacturer commented, referring to his firm’s Chinese machinery, ‘Although these products don’t last as long as European machines would, it just helps us get by, in that we could break even before the machine deteriorates. That’s the advantage’ (Chen et al., 2016, p.14). It has also been argued that Chinese capital goods are more appropriate to local conditions in SSA because they produce less sophisticated products for low-income markets and are more labour-intensive so that they create more jobs than machinery and equipment imported from the OECD countries. The scale of output may also be lower so that capacity can be more fully utilized. This has the added advantage of reducing the barriers to entry faced by local small and medium enterprises starting production. To date the evidence supporting these claims remains limited, but there are examples that point in that direction (Hanlin and Kaplinsky, 2016). A case in point is the furniture industry in Kenya, where Atta-Ankomah (2014, Ch. 6) found that imported Chinese planers, saw benches and lathes cost a fraction of the price of imports from Europe. Although the Chinese machines were less durable, more subject to breakdowns, and produced at 23 In Nigeria there are examples of machines costing anywhere between a quarter and a twentieth of the price of European machines (Chen et al., 2016, p.13). In Kenya, Chinese woodworking machines used in the furniture industry cost around a tenth of the price of a machine imported from England (Atta-Ankomah, 2014, p.153).

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lower capacity than other imported equipment, they provided an opportunity for small-scale and informal producers, who could not afford the large-scale European machinery, to obtain equipment that could produce better-quality products than would be possible with locally produced alternatives. A second potential channel for technology transfer is Chinese investment which gives rise to spillovers. Vertical spillovers from FDI occur mainly through backward linkages to local suppliers, but most studies of Chinese OFDI in SSA have found that these are quite limited. A survey of 1,000 Chinese firms in SSA found that on average they sourced less than half of their supply from local firms (Sun et al., 2017, p.47). Chinese manufacturers in Nigeria create few backward linkages, preferring to import their inputs (Chen et al., 2016, pp.17–19). In Ghana it was also reported that apart from the plastic recycling firms and steel mills which use local waste as a raw material, Chinese firms import almost all their inputs (Tang, 2016a, pp.16–17). Several factors contribute to the limited development of linkages by Chinese firms. Where activities are supported by the China Exim Bank, the tying of loans to purchases of Chinese goods discourages the development of local linkages.24 Chinese manufacturers in SSA are usually market seeking, preferring to source their parts and components from their established suppliers in China and tending not to be well-embedded in the local context (Gu, 2011, pp.33–4). The lack of local linkages is not solely the result of Chinese firms’ preference for Chinese suppliers; it also reflects the absence of local networks of suppliers able to provide products that are competitive in terms of price and quality (Sun et al., 2017, p.47). There is some evidence from SSA that Chinese firms tend to create fewer backward linkages to local suppliers than Western investors (Amendolagine et al., 2013). As Morris et al. (2012, p.132) note, it is an open question whether the low level of linkage creation by Chinese firms is the result of their relatively recent entry into SSA or if it reflects more fundamental differences between Chinese and Western companies. There are also questions over the extent to which exports to China create forward linkages through downstream processing of raw materials. Although resource-based manufactures account for a higher share of SSA exports to China than to developed-country markets, the bulk of commodity exports to China are exported in unprocessed form (see Figure 6.2).25 China has recognized this as a problem and this may lead to more local processing in future.

24 The Exim Bank’s financing conditions require at least 50 per cent of project procurement to be sourced in China, with Chinese companies used to implement the projects (Corkin, 2013, p.101). 25 A case study of timber in Gabon found that when the destination market shifted from Europe to China, the level of processing fell (Kaplinsky et al., 2011).

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Another potential spillover from FDI occurs via the training of locals employed by foreign companies. The evidence suggests that this channel of technology transfer is also relatively limited despite some examples which have been widely publicized, such as Huawei’s training initiatives (Li, 2016; Tsui, 2016). Generally, since local workers are mainly employed in unskilled posts, they receive little training, and what they do receive is at the low-skilled operational level (Shen, 2013, p.38).26 There are cases in the textile and garment industry in South Africa and Botswana where local ex-employees of Chinese companies have tried to set up their own businesses, but with limited success. One problem has been that former workers are only familiar with a specific part of the production process, which again illustrates the limited extent to which technology is being transferred to the host country (Tang, 2014, p.23). Also because Chinese firms have few connections with the local business sector, opportunities for technology transfer to local firms are limited apart from instances where Chinese firms are involved in joint ventures with local firms. These are relatively rare in SSA, where the bulk of investment is in 100 per cent Chinese-owned projects (Shen, 2013, Fig. 8). It is perhaps not surprising, then, that host governments in SSA have a negative view of the impact of Chinese FDI in terms of technology transfer (ibid, Table 1).27

7.4.3 ‘Flying Geese’ in Africa: Will China Relocate Labour-Intensive Manufacturing to SSA? While in the past China has often been seen as an obstacle to industrialization in SSA, recently, it has been argued that it is becoming a major catalyst for African manufacturing. Leading Chinese development economist and former World Bank chief economist Justin Lin argues that China is on the verge of graduating from low-skilled manufacturing to become a ‘leading dragon’. This will release nearly 100 million manufacturing jobs, opening up a great opportunity for industrialization in SSA and other low-income countries (Lin, 2012). He draws an analogy with the ‘flying geese’ pattern which has been used to explain the spread of industrialization in East Asia from Japan, first to South Korea, Taiwan, Hong Kong, and Singapore, then to Indonesia, Malaysia, the Philippines, and Thailand, and ultimately, to China itself and Vietnam (Chandra, Lin, and Wang, 2013). Lin and his colleagues claim that 26 Recent studies of Chinese firms in Ghana and Nigeria confirm that local employees are mainly unskilled and that formal training provided is limited (Chen at. al., 2016, p.14; Tang, 2016a, pp.18–19). In contrast almost two-thirds of the firms surveyed by Sun et al. (2017, p.40) reported that they provided some training to their workers but the study provides no details on the extent or nature of the training offered. 27 In a survey of government opinion in five countries (Liberia, Ethiopia, Rwanda, Nigeria, and Zambia) all had a negative opinion of China’s contribution in terms of technology transfer, which contrasted with a positive view of its job creation (Shen, 2013, Table 1).

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‘the leading dragon phenomenon alone can create sufficient labour-intensive manufacturing jobs for developing sub-Saharan African countries to bring them to par with most industrial countries . . . The number could almost double employment in manufacturing in African countries in a few years, jumpstarting its process of industrialization’ (Chandra et al., 2013, p.77). There are several problems with this optimistic view.28 First, wages in the manufacturing sector in SSA are not necessarily that low. Wages in South Africa, which has the region’s strongest manufacturing base, are considerably higher than in China, as are those in Mauritius, one of the region’s most successful exporters of manufactures. Zambian wages are also on a par with Chinese wages in light manufacturing. Nevertheless, within SSA, some countries, most notably Ethiopia and Tanzania, have wages well below those of China (Ceglowski et al., 2015, Table 2; Dinh et al., 2012, Table 1.1). Second, average manufacturing productivity levels tend to be considerably lower in most SSA countries than in China. As a result only countries with significantly lower wages than China (Ethiopia and Tanzania) are able to compete with China in terms of unit labour cost (Ceglowski et al., 2015, Table 6).29 Although the most efficient firms in some African countries may be able to match the average productivity in China in some industries, giving them a potential advantage in terms of labour costs as a result of lower wages, this depends on the quality of management in the firm (Dinh et. al, 2012, p.30). A third problem is that other costs are higher in SSA than in China, most notably the cost of inputs and logistics (trade costs). As the World Bank study by Dinh et al. (2012, p.55) recognizes, these wipe out any advantage of low wages in most light manufacturing sectors. In the garments industry, for example, most inputs have to be imported from Asia, which involves significant additional transport costs, while the well-known deficiencies of infrastructure in SSA, including power outages and poor transport and port facilities, also add to the cost. Finally, even if wages continue to rise in China, there is no guarantee that SSA will become a preferred location for production by Chinese or other firms. Manufacturers are already relocating within China, away from the coastal areas to the inland regions, and in other Asian countries where wages are considerably lower (The Economist, 2015). If they do relocate outside China, other Asian countries have wage levels comparable to those in SSA and similar or higher levels of productivity.30 Other Asian countries also have lower input and logistics costs than SSA (Iarossi, 2009). 28 For a critical view emphasizing China-side factors that limit the likely shift of labour-intensive manufacturing to SSA, see Ozawa and Bellak (2011). 29 Unit labour costs take into account both relative wages and productivity levels. 30 Wages in Vietnam, for example, are lower than in Zambia and similar to those in Tanzania (Dinh et al., 2012, Tables 1.1 and 1.2). According to Ceglowski et al. (2015, Table 6), unit labour

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7.5 China’s Economic Impact on Angola, Ethiopia, and South Africa The three countries discussed in this section are all significant partners for China in SSA, but each represents a quite different case. Angola is China’s major supplier of oil in SSA and has been a pioneer of Chinese resources-forinfrastructure loans. Ethiopia does not have major oil or mineral resources but has been a significant recipient of Chinese loans and infrastructure projects. This has led some commentators to conclude that China’s interests in Ethiopia have been political rather than economic, leading one commentator to describe it as a case of infrastructure for diplomatic support (Adem, 2012). Finally, South Africa is SSA’s most industrialized economy and China’s most important trade partner in the region. It also engages with China as a fellow member of the BRICS (Brazil, Russia, India, China, and South Africa) and the G20.

7.5.1 Angola As shown in Chapter 6, Angola is one of China’s most important economic partners in the region. It ranks second after South Africa as a source of Chinese imports, and is the largest recipient of Chinese loans, as well as the most important market for Chinese contractors in SSA. Its economic relations with China are largely complementary, since it is an oil exporter which faced a massive task of reconstruction when the prolonged civil war ended in 2002, with much of the country’s infrastructure destroyed or in poor condition. In 2001 the Angolan government requested financial support from the International Monetary Fund (IMF), but refused to agree to the Fund’s demand for increased transparency and macroeconomic stabilization through cuts in public expenditure and reduced borrowing. In 2002 President dos Santos approached China, and after an initially cautious approach with a loan of $145 million from the China Exim Bank and China Construction Bank for projects to be carried out by Chinese construction companies in 2002, a $2 billion loan agreement was signed between the China Exim Bank and the Angolan Ministry of Finance in 2004. Further loans from the Exim Bank were agreed in 2007 and 2009, so that by 2011, China had provided $14.5 billion in loans to Angola (Corkin, 2013, p.145). As seen in Box 6.1, the loans were to be repaid through oil sales by the state oil company Sonangol. Oil exports and

costs in India and Indonesia are similar to those of Ethiopia and Tanzania, and much lower than those of other SSA countries.

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Chinese loans for infrastructure projects are thus at the heart of relations between Angola and China. OIL EXPORTS

Angola is China’s most important supplier of oil in SSA and one of its topthree sources globally. China is by far the most important market for Angolan oil, overtaking the US in 2007, and it now accounts for over 40 per cent of the country’s oil exports. This does not, however, imply that China was a major driver of Angolan oil production, which more than doubled between 2002 and 2008 and was due to earlier exploration, mainly by Western oil companies. Sinopec was the first Chinese oil company to enter Angola when it set up a joint venture with Sonangol in 2004 and acquired a 50 per cent stake in an oil block previously owned by Shell. Despite further acquisitions in subsequent years, the share of Chinese firms in Angolan oil production and exports remains limited (Corkin, 2013, pp.145–151). Furthermore, in 2007, Angola joined OPEC, which set a quota of 1.9 million barrels a day (Hammond, 2011, p.355). This meant that further expansion of exports to China could only come about if exports to other markets were reduced, although rising oil prices meant that the value of exports continued to rise even after production stabilized. The state oil company, Sonangol, plays a central role in the Angolan oil industry, in a regulatory capacity, organizing auctions and signing production-sharing agreements, and itself directly involved in oil exploration and production. All companies entering the industry must establish a relationship with Sonangol through a joint venture or a consortium or by signing a production-sharing agreement. Sonangol has first refusal when any company wants to sell its share of an oil block (Alves, 2013). Sonangol is central not only to the oil industry but also to political power in Angola because it is the main source of government revenue. It has been described as the centrepiece of a parallel state system which is firmly under the control of the presidency, where political power is highly concentrated (Soares de Oliveira, 2015, Ch.1).31 This has given the government considerable control over the use of oil revenues. In Angola, there is a lack of transparency in accounting for oil revenues and evidence of corruption leading to the disappearance of significant sums of money.32 These revenues were used to consolidate the political power of the ruling party, The Popular Movement for

31

In 2016 President dos Santos’s daughter became the head of Sonangol. The relationship between Sonangol, the Ministry of Finance, and the Central Bank is known locally as the Bermuda Triangle because of the lack of transparency and the tendency for large sums to disappear (Corkin, 2013, p.43) 32

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the Liberation of Angola (MPLA), and to enrich the local elite (Soares de Oliveira, 2015, Ch. 3 and 4). CHINESE LOANS AND INFRASTRUCTURE

After the end of the civil war in 2002, Angola embarked on a major effort to rehabilitate and expand its infrastructure. Chinese loans and Chinese engineering and construction companies have played a major part in this effort. Questions have been raised about the quality of some of the work carried out by Chinese firms. Speaking to a UK delegation in 2013, the Angolan Minister of Urbanism and Housing, Jose Antonio M.C. Silva, commented that the low prices of Chinese companies had been attractive at first but that he felt that the quality of construction was not as high as might have been expected (British Expertise, 2013, p.13). Problems with quality also reflect the lack of oversight of projects by the Angolan government and the prioritization of rapid results over a durable infrastructure. As was mentioned earlier, it has even been suggested by some that local elites benefit from the need to put out new contracts for tender which create new opportunities for rent extraction (Corkin, 2013, p.122). To what extent have these infrastructure projects contributed to economic development in Angola? The World Bank estimated that total investment in infrastructure raised Angola’s per capita growth rate by as much as 1 per cent a year (Pushak and Foster, 2011). Although some Chinese projects have been prestige projects, such as basketball and football stadiums, most have been in sectors such as transport, energy, water, health, and education.33 Nor is it the case that infrastructure investment has been primarily directed at resource extraction. Because Angolan oil is located offshore, investment in building and rehabilitating roads and railways is not directly linked to the export sector.34 Loans have been used by the Angolan political elite to promote state building and consolidate the position of the ruling party, MPLA. It is also widely believed that the elite has benefitted economically from the relationship. Loans have even given rise to disputes between members of the elite over access to and coordination of the disbursement of funds (Ferreira, 2008, p312). In 2004 a scandal broke out as a result of attempts by members of the Angolan elite to siphon off Chinese funds, and the Angolan Finance Minister had to go to Beijing to reassure the Chinese authorities (Ferreira, 2008, p.297). Nevertheless, the sheer scale of infrastructure construction has 33 See Corkin (2013, Appendix 3) for a list of projects financed under various Chinese loans to Angola. Corkin claims that ‘the number of prestige projects built with Chinese financing seems to outweigh the poverty reduction projects’ (p.121). She does not provide any evidence to back this claim. 34 The indirect link is through repayment of loans by sales of oil, but as argued previously, this is more a means of reducing the risk to the Exim Bank than a mechanism for extracting resources.

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undoubtedly contributed to the country’s rapid economic growth since the end of the civil war. Chinese loans are of course not cost-free and will require servicing in the future, mainly through oil exports. This raises two questions: the terms on which loans are granted and the sustainability of the debt incurred. China granted loans to Angola on terms that compared favourably to alternative sources because of the grace period before repayments started and the length of time over which the loans were to be repaid (Corkin, 2013, pp.79–80; GAO, 2013, Appendix II). The level of indebtedness incurred was not excessive in relation to the oil prices that prevailed at the time. Recent estimates put Angola’s total debt to China at $25 billion (George, 2016), less than the annual value of exports to China in recent years. LONG-TERM ECONOMIC IMPACTS

What then has been the impact of China’s involvement in Angola on the country’s economic performance? During the commodity boom between 2002 and 2011, Angola was the fastest-growing economy in SSA. There is, however, strong evidence that it suffered from Dutch Disease. It experienced the greatest appreciation of the real exchange rate of any SSA country during the period, making Luanda the most expensive capital in the world. This was partly down to the government’s policy of maintaining the value of the domestic currency, the Kwanza, for a number of years, which helped keep down the cost of imports (Corkin, 2013, p.115). The decade of high oil prices represents a missed opportunity. The additional resources from increased oil revenues and Chinese loans were used to consolidate the political position of the MPLA and for the personal enrichment of the Angolan elite, rather than to transform the economy, which continued to be highly dependent on oil exports. Angolan manufacturing at the beginning of the twenty-first century was extremely limited, and this has changed little since then.35 There was very little investment in local manufacturing, and the bulk of manufactured goods sold locally were imported. There has been no attempt by the Angolan government to develop a coherent industrial policy. Industrial policy in Angola is the responsibility of the Ministry of Industry, but there is no coordination between industrial promotion and oil-sector policies, which come under the Ministry of Petroleum (Morris et al., 2012, p.169). Oil exports have generated very few backward linkages to local suppliers, partly because of the specific nature of the offshore oil industry and partly because of the lack of local capabilities. There is a wide gap between the 35 The share of manufacturing in GDP increased from 4 per cent in 2000 to just over 4.6 per cent in 2015 (UNCTADStat).

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complex and capital-intensive nature of the sector and the very low level of domestic capabilities (Morris et al., 2012, Table 6.1). An attempt by Sonangol and Sinopec to develop forward linkages by building a refinery in Luanda collapsed in 2007 as a result of disagreement between the partners (Alves, 2013). Another plan to build a new refinery was shelved in 2016 as a result of the drop in oil revenues. Similarly, there has been limited use of local contractors and inputs in infrastructure projects.36 In projects financed by Exim Bank loans, at least 50 per cent of procurement must be sourced from China. Although the Angolan government does have local content requirements, there is not the political will to enforce them (Corkin, 2013, p.117). It is also doubtful whether local suppliers are capable of supplying the quality or quantity of inputs required. There has been some growth in the local supply of materials for the construction industry including bricks, cement, and wooden door frames and windows in recent years, but these have mainly been provided by Chinese rather than Angolan companies (ibid, p.104). The fact that the government has prioritized rapid results has militated against longer-term goals promoting local content.37 Not only has there been little effort to promote industry in Angola; the agricultural sector has also been largely neglected. The government has focussed mainly on building up support in urban areas, with most of its construction activities concentrated there. This reflects the development vision of the Angolan elite, which views modernity as intrinsically urban (Soares de Oliveira, 2015, p.82). The continued dependence on oil meant that when oil prices fell sharply in 2015, the Angolan economy went into recession. The fall in oil prices meant that an increased proportion of Angolan exports had to be used to service the country’s debt, which also put pressure on government finances (George, 2016). While Chinese involvement in Angola clearly boosted the economy in the short term, Angola failed to take advantage of the commodity boom to transform the economy. This was primarily down to the Angolan regime itself, but it was facilitated by China’s willingness to fund projects prioritized by the regime in return for future oil supplies.

7.5.2 Ethiopia Ethiopia is Africa’s second-most-populous country, with over 100 million inhabitants. Despite still being a low-income country, it has grown rapidly 36 There are also complaints concerning the lack of employment opportunities for Angolans because of the extensive use of Chinese workers in the construction industry. Employment issues are discussed in more detail in Chapter 8. 37 In 2009 import duties on construction materials were removed to ease supply bottlenecks, making it even harder for a local supplier industry to develop (Corkin, 2013, p.115).

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since the mid-2000s, with GDP increasing at an average of more than 10 per cent a year, almost double the regional average (World Bank, http://www.worldbank. org/en/country/ethiopia/overview, Accessed 5 Mar. 18). China and Ethiopia have had close relations for more than two decades. Under the Dergue (1974–91), Ethiopia was closely allied with the Soviet Union, and, as a result, relations with China were strained. Much closer relations with China developed after the Dergue was overthrown by the Ethiopian People’s Revolutionary Democratic Front (EPRDF) in 1991. The new government, which was strongly supported by the West initially, wanted to diversify its relations and sent senior members of the EPRDF to Beijing to initiate a new relationship. Ethiopian Prime Minister Meles Zenawi visited China himself in 1995, and this was followed by Chinese president Jiang Zemin’s visit to Ethiopia in the following year. Diplomatic relations between the two countries continued to grow, and, in 2003, the first meeting of the Forum for China Africa Cooperation (FOCAC) to be held in Africa took place in Addis Ababa. The 2005 elections in which the opposition did well, triggering a government crackdown, led to strained relations with the West, prompting even closer relations with China (Adem, 2012, p.146). In contrast to the two other cases discussed in this section, Ethiopia is not currently an oil- or mineral-exporting country, so that access to resources has not been a major factor in China’s involvement, although some Chinese companies have been involved in oil and gas exploration. This has led some commentators to conclude that China’s interest in developing stronger relations with Ethiopia is driven primarily by diplomatic strategic considerations (Adem, 2012, p.155; Cabestan, 2012, p.62). Its position as a relatively stable country in the horn of Africa makes it an influential power. It is also a hub for many regional organizations, most notably the African Union, whose new building in Addis Ababa was built and financed by China. It has been claimed that Ethiopia has been following the ‘Chinese model’, and it has been described as ‘the China of Africa’ (FT, 2018). Although the EPDRF expressed interest in learning from China’s market-led socialism and agricultural development (Adem, 2012, p.145), it also drew on the experiences of other East Asian developmental states, particularly South Korea, Taiwan, and Japan. The lessons from China were incorporated selectively by the government, as, for example, in the emphasis on selective state intervention in the economy and on infrastructure as a key to development (Fourie, 2015). There was no attempt at the wholesale application of the ‘Chinese model’ in Ethiopia, and China has not tried to export its own model to Ethiopia. Nevertheless, Ethiopia’s economic success and the perceived influence of the Chinese model reinforce China’s soft power in SSA (Cabestan, 2012, p.53). Despite the emphasis often put on political and diplomatic factors in analysis of Sino-Ethiopian relations, strategic economic and commercial 172

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considerations are not entirely absent. Although at present it is not a major market for Chinese exports, because of its relatively low per capita income, its large population does mean that it could become a significant market in the future. It is already a significant market in SSA for Chinese contractors. Chinese firms have also been active in oil and gas exploration, which could lead to Ethiopia becoming a more important source of resources in the future. SINO-ETHIOPIAN TRADE RELATIONS

Ethiopia is not currently an important source of imports for China. Ethiopian exports to China are dominated by sesame seeds, which accounted for around 85 per cent of the total between 2006 and 2015 (Zewde, 2017, Table 2). Ethiopia went from being a minor producer of sesame seed to being the largest in Africa, to meet the growing demand from China. The only other product of any significance exported from Ethiopia to China is leather. Although coffee is Ethiopia’s main export to the world market, Chinese demand for coffee remains limited, and Ethiopian exports there are negligible. Despite this, China became Ethiopia’s largest export market in 2012 and now accounts for more than 10 per cent of the country’s total exports. China’s role in Ethiopian imports is much more significant, and it currently accounts for about a third of total Ethiopian imports. These imports include both consumer goods and capital goods. In some cases, most notably footwear, there is evidence that competition from China led to downsizing or bankruptcy of local firms, particularly at the bottom end of the market, although some firms were able to survive by improving quality and design (Gebre-Egziabher, 2009). In the main, imports from China compete with imports from other countries rather than locally produced goods because of the limited development of local manufacturing. Cheap Chinese products provide welfare gains to poorer consumers who would not otherwise be able to afford them. Capital goods are imported to supply Chinese-financed infrastructure projects, and although this is a requirement of tied loans, Chinese machinery and equipment usually are competitively priced. Unlike Angola, Ethiopia has a large and growing trade deficit with China, reflecting the low level of exports to China. Despite the granting of tariff-free access to the Chinese market for a wide range of goods, exports to China have not kept up with the growth of imports. CHINESE LOANS AND INFRASTRUCTURE

China has played a significant role in the development of Ethiopia’s infrastructure, through the involvement of Chinese companies in building dams, roads, and railway lines and through the provision of loans to finance such projects. Major projects include the Tekeze Dam, built by the China Gezhouba Group Company (CGGC) and Sinohydro, and the Fenchi-Amerti-Neshe 173

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Dam and Genale Dewa III hydroelectric power project carried out by the CGGC. In transport, the China Railway Engineering Corporation built the Addis Ababa Light Railway; the China Railway Group and China Civil Engineering Construction Corporation were responsible for the Addis-Djibouti railway and China Communications Construction Company built the Addis Ababa-Adama expressway and the Bole international airport expansion (Nicolas, 2017, Table 4). All of these projects involved loans from the China Exim Bank. As a result Ethiopia was the largest market in SSA for Chinese construction and engineering firms in 2014 and 2015 (NBS database). Chinese contractors have also been successful in winning bids for projects funded by non-Chinese donors in Ethiopia, including the World Bank, the EU, and the African Development Bank. Ethiopia has also been a major recipient of Chinese loans, which totalled around $13–15 billion between 2000 and 2015.38 Although there is no systematic information on the extent of China’s contribution to infrastructure development in Ethiopia, there is no doubt that it has played a major role. China has been the largest provider of external finance for railways and the energy sector as well as a major financier for road construction (d’Orey and Prizzon, 2017, pp.14–15). Overall China is ‘one of the largest, if not the largest, development partners in the infrastructure sector in Ethiopia’ (ibid, p.13). In transport, Chinese companies have carried out some of the major railway projects in Ethiopia, and it has been estimated that 70–80 per cent of tenders for road projects have been won by Chinese firms (Cabestan, 2012, p.58). They have also been heavily involved in the energy sector, adding 1.5GW of generation capacity and almost 2600 kilometres in transmission and distribution lines and dominating the construction of transmission lines above 132 kV (IEA, 2016, p.38). Chinese involvement in power generation is all in renewables, including hydropower, a biomass plant, and a wind farm (ibid, p.39–40). There have been criticisms of the quality of some of the infrastructure that has been built by the Chinese, particularly the deterioration of the condition of the Addis Ababa ring road (Nicolas, 2017, p.28) and the poor quality of the telecommunications network installed by ZTE (Cabestan, 2012, p.59), but there is no evidence that Chinese contractors are generally worse than those from other countries.

38 CARI reports a total of $13 billion between 2000 and 2015. AidData’s latest estimates for 2000–14 give a total figure of almost $15 billion, of which $3.7 billion was classified as official development assistance (ODA)-like, which is not included in the China Africa Research Initiative (CARI) figure.

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The Ethiopian government has ambitions for the country to become a major industrial centre in SSA. The Growth and Transformation Plan II (GTPII 2015–20) aims to increase the share of manufacturing in GDP to 15 per cent. However, up to now, the manufacturing sector has remained small, accounting for a mere 4 per cent of GDP in 2010–14, the same level as twenty years previously (Shiferaw, 2017, Table 1). One of the factors holding back the growth of Ethiopian manufacturing has been the low level of investment by domestic firms. As a result the government has gone to great lengths to attract FDI through tax exemptions, the provision of land at low rents, and the creation of industrial zones. China has been an important source of FDI in Ethiopia. Its share of total FDI increased from 11.5 per cent in 2000–5 to over a quarter since 2006, making it the leading investor in the country (Shen, 2013, p.13) The Ethiopian Investment Commission reports that 70 per cent of Chinese investment was in manufacturing and that a total of over 100,000 permanent and temporary jobs have been created (Nicolas, 2017, Table 2). China has also been responsible for the development of the Eastern Industrial Zone (EIZ) in Dukem, 30 kilometres southeast of Addis Ababa. The EIZ is one of five official special economic zones (SEZs) that China proposed to develop in SSA. It was initially planned in 2007 and launched in 2009. Unlike the other official Chinese SEZs in SSA which have been built and operated by SOEs, the EIZ is run by a private company, Jiangsu Qiyuan Group Co. Ltd (Wang et al., 2017, Table 6).39 Progress was relatively slow, but by 2016, there were over thirty companies operating in the EIZ, all, apart from one, Chineseowned. Total employment in the zone was around 15,000 (Nicolas, 2017, pp.20–1).40 They cover a range of industries including cement, steel pipes, machinery, vehicles, tractors, textiles, clothing, and footwear (Nicolas, 2017, Table 3). One criticism that has been levelled at the EIZ is the lack of focus, which makes it difficult to exploit the potential from developing industrial clusters (Giannecchini and Taylor, 2018). ECONOMIC IMPACTS OF RELATIONS WITH CHINA

On balance China’s overall economic impact on Ethiopia has been positive, primarily as a result of the contribution that it has made to the development of infrastructure. There is a consensus that the rapid growth of the Ethiopian 39 Chinese companies are also involved in developing at least nine other industrial parks in Ethiopia that are operated or owned by the Ethiopian Industrial Parks Development Corporation (IPDC) (Wang et al., 2017, Table 5). 40 The initial plan was to attract eighty companies, creating 20,000 jobs.

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economy in recent years has been largely driven by investment in infrastructure (Shiferaw, 2017, p.3). The share of public investment in GDP increased significantly and this has been well spent on basic infrastructure projects such as roads and hydropower, which have raised the overall level of productivity (Rodrik, 2016, p.13). The projects which China funds in Ethiopia are in line with the Ethiopian government’s development priorities. Despite the complaints about the quality of some Chinese construction, there has not been a general problem with the infrastructure that has been built. China’s impact on Ethiopian exports, on the other hand, has been relatively limited. The direct impacts have been confined to sesame seeds, the growth of which has certainly been a result of increased demand from China,41 but this remains a relatively small proportion of total exports. Moreover, since Ethiopia does not export the commodities where Chinese demand had a significant impact on world prices, the indirect impacts on the country’s exports have not been significant either. There is little sign so far that Chinese FDI and the development of the EIZ have led to any significant structural transformation in Ethiopia.42 In both the EIZ and elsewhere, Chinese firms rely heavily on imported inputs, which limits the extent of backward linkages. A World Bank survey of Chinese companies in 2011 found that 61 per cent of their inputs were sourced from abroad (World Bank, 2012, p.13). Although, up to now, Chinese manufacturing investment in Ethiopia has been mainly to supply the domestic market, there are signs of increased exports of footwear and clothing, taking advantage of low wages, cheap power, and preferential access to developed-country markets. The Huajian Shoe Company is the example that is often mentioned. It began producing shoes in the EIZ in 2011 and is now establishing its own industrial zone in Lebu on the outskirts of Addis Ababa. There are also signs of growing interest by Chinese clothing and textile firms in investing to export from Ethiopia (Newsome, 2017). Perhaps as important as the contribution made by China to infrastructure, development has been the greater policy space that relations with China provided, enabling Ethiopia to become less reliant on the West. The Ethiopian minister of foreign affairs pointed out on a visit to China in 2010 that China ‘had made available to Africa, and the developing world, possibilities for consolidating sovereign choices and independently chosen paths of development’ (quoted in Kragelund, 2015, p.252). This allowed Ethiopia to avoid the negative impacts of neoliberal policies and pursue a more statist development path.

41 Chinese production of sesame seed declined after 2002, and imports increased rapidly, with Ethiopia accounting for around half of China’s imports (Chakrabarty, 2016, Fig. 2). 42 For a more positive view of the contribution of Chinese firms to Ethiopian industry, see Li, Z. (2014).

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7.5.3 South Africa South Africa is the largest economy in SSA, and it accounts for more than a quarter of the region’s GDP.43 It is also China’s most important trading partner in the region, accounting for over a third of its imports from SSA and almost a quarter of exports to the region between 2006 and 2015 (UNCTADStat). It is also the only SSA country with significant FDI in China. Considering the size of the South African economy and the scale of their bilateral trade, Chinese OFDI in the country is relatively low, and South Africa has a negligible share of Chinese construction and engineering contracts in SSA.44 Nor has South Africa been a significant recipient of Chinese loans. Trade is, therefore, at the heart of economic relations between China and South Africa. In contrast to Angola, whose economic relationship with China is largely complementary, relations with South Africa involve a mix of complementary and competitive aspects. South Africa is also a key country for China politically. It enjoys a unique relationship with China as the only African country that is a member of the BRICS grouping and of the G20, and is, therefore, involved in regular summit meetings with China. Its diplomatic relationship with the PRC is relatively recent, since South Africa had close relations with Taiwan during the apartheid regime, seeing it as a like-minded anti-communist state and establishing military links, as well as encouraging Taiwanese investment in the ‘Bantustans’45 (Alden and Wu, 2014, p.6) The African National Congress did not immediately establish diplomatic relations with Beijing after taking power in 1994, attempting at first to secure the dual recognition of both Beijing and Taipei. When this proved impossible, the government broke with Taiwan and established relations with the PRC in 1998. SOUTH AFRICAN EXPORTS TO CHINA

South African exports to China grew rapidly from less than US$0.5 billion in 2001 to a peak of US$12.5 billion in 2011, which made it South Africa’s main foreign market. Since 2013 the drop in commodity prices has significantly reduced the value of its exports, but China remains the country’s most important market. Ores and metals have accounted for between two-thirds and three-quarters of all of South Africa’s exports to China in recent years. The main minerals 43 For a general overview of the relationship between South Africa and China, see Alden and Wu (2014). 44 According to official Chinese statistics, only 15 per cent of the total stock of Chinese OFDI in SSA was in South Africa (MOFCOM, 2016). A significant part of this was accounted for by ICBC’s acquisition of a 20 per cent share of South Africa’s Standard Bank in 2007. 45 The Bantustans were the black homelands created by the apartheid regime in South Africa.

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and metals exported have been iron ore, ferro-alloys, manganese ore, and chromium ores.46 Although there have been efforts to promote greater value added in exports through investment in the local processing of raw materials, these have had little impact on the structure of exports to China so far.47 How significant has China been in the growth of South African mineral exports? In recent years between a quarter and a third of South African ore and metal exports have gone to China. However, the South African mining industry is long established and technologically developed, and it exports to a wide range of countries. It would not be difficult for the industry to find alternative markets to China. Although there has been some Chinese investment in South African mining by companies such as Minmetals, the Zijin Mining Group, Jiquan Iron and Steel ( JISCO), and Sinosteel, the scale of investment is limited and has mainly involved joint ventures with existing firms rather than opening new mines (Shelton and Kabemba, 2012, pp.74–82). China’s involvement has not, therefore, been a major factor in boosting mineral supplies from South Africa. China’s demand for minerals and metals did, however, have a major impact on global prices, particularly of iron ore, one of the main minerals exported by South Africa. This indirect effect of China’s growth helped boost the value of South Africa’s global exports between 2002 and 2011, and it contributed to improving the country’s terms of trade. IMPORTS FROM CHINA

Imports from China rose from around US$1 billion in 2001 to a peak of US$16 billion in 2013, while China’s share of South African imports increased from 5 per cent to 16 per cent over the same period, making it the country’s major source of imports. As elsewhere, imports from China are almost entirely made up of manufactured goods. This has led to concerns about deindustrialization, and has been a source of tension in South Africa’s engagement with China. At FOCAC in Beijing in July 2012, President Zuma commented that an unequal trade relationship based on the supply of raw materials and imports of manufactures was unsustainable (Mail and Guardian, 2012). How justified are these concerns? Unlike Angola, South Africa has a significant industrial sector, and the growth of imports from China has had a substantial impact on local production and employment. China’s share of manufactured goods consumed in South Africa increased substantially during 46 South Africa also exports gold and diamonds to China, but because these exports are often made through third countries, they do not necessarily appear in the figures reported by South Africa (Alden and Wu, 2014, p.14). 47 The Comprehensive Strategic Partnership Agreement between China and South Africa, signed in 2010, committed the countries to work together to include more value-added products in South Africa’s exports to China.

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the first decade of the twenty-first century (Edwards and Jenkins, 2015, Table 2), particularly in textiles, clothing and footwear, and electrical and electronic products. The availability of cheap Chinese products put downward pressure on prices, particularly of clothing, leather products, and footwear. This benefitted consumers and also helped keep down the cost of wage goods (Morris and Einhorn, 2008; Rangasamy and Swanepoel, 2011). On the other hand, growing imports also posed a threat to domestic manufacturers and their employees. Increased market penetration by Chinese products does not necessarily displace domestic production: it may equally come at the expense of exports from other countries as importers switch to Chinese suppliers. Estimates by Edwards and Jenkins (2015, Table 4) show that about a quarter of the total increase in Chinese import penetration could be attributed to the displacement of other importers, but the greater part of the increase affected domestic production. As a result it was estimated that South African manufacturing production was 5 per cent lower in 2010 than it would otherwise have been. Because the main industries affected by Chinese competition tend to be labour-intensive, the impact on manufacturing employment is even greater than the impact on production. Increased import competition has both a direct effect on employment as a result of a reduction in domestic production, and an indirect effect where firms increase productivity and shed labour in order to compete with imports. Taking both of these effects together, it was estimated that by 2010 the increased competition from China had reduced employment in South African manufacturing by 145,000 people.48 The South African government did attempt to stem the rising tide of Chinese imports of textiles and garments by negotiating import quotas with China for the period 2007–8 to give the domestic industry breathing space to restructure. However, the main impact was to divert imports to other low-cost suppliers, particularly Bangladesh, Mauritius, Malaysia, and Vietnam (van Eeden, 2009). China refused to extend the quota arrangement when it expired at the end of 2008. COMPETITION IN THIRD MARKETS

South African manufacturers have not only faced competition from China in their domestic market but have also lost out in their export markets.49 Although South Africa is generally thought of as an exporter of minerals and agricultural products, almost half of its exports are manufactured goods. Manufactures play 48 Since these estimates were made, it has been reported that 11,000 jobs were lost in the South African steel and engineering industries in 2015, as a result of competition from Chinese imports (Sun et al., 2017, p.47). 49 This section is based on Edwards and Jenkins (2014) and Jenkins and Edwards (2015).

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a particularly significant role in exports to other SSA countries. These exports have been particularly vulnerable to Chinese competition. South Africa has lost market share to China in the US, the EU, and the main SSA countries. The largest losses were in SSA and, particularly, in Angola and Tanzania, where exports were more than a fifth lower in 2010 than they would have been if South Africa had been able to maintain its share of the market ( Jenkins and Edwards, 2015, Table 4). It has lost market share to China in a range of industries including iron and steel, non-electrical equipment, and vehicles and parts, both in developed-country markets and in SSA. OVERALL ECONOMIC IMPACTS

The impact of the growing relations with China on the South African economy has been decidedly mixed, creating both winners and losers. The mining sector, particularly iron ore, benefitted from rising prices after 2002 that were stimulated to a significant extent by the growing demand in China. The main beneficiaries of this increase in prices have been privately owned mining companies, which have seen their profits rise significantly. Although the commodity boom led to a significant improvement in South Africa’s terms of trade and an appreciation of the exchange rate, it is not clear that China contributed to any Dutch Disease effects in South Africa. However, it is the case that Chinese competition negatively affected the manufacturing sector, so that the main losers have been manufacturers and their employees. One of the main problems facing the South African economy has been the very high levels of unemployment. Although there are deep-seated structural causes behind unemployment, and it has not been caused by the impact of China, it is also the case that the growing relations with China have tended to add to the problem rather than helping to resolve it. In contrast to Angola, China has made no significant contribution to growth through loans and the provision of infrastructure to offset the negative impacts on manufacturing. Because the main positive contribution was through the impact on commodity prices and the terms of trade, the drop in mineral prices from 2012 has led to a slowdown in the rate of GDP growth (IMF, 2016).

7.6 Conclusion The picture that is often presented of China’s economic impact on Africa is often either highly critical or overly optimistic. This chapter has presented a more nuanced picture. Some aspects of China’s involvement in SSA have had positive economic effects, whereas others have been negative. Outcomes have 180

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depended on a range of factors, including the structure of the host economy, the nature of the host state and regime, and the level of local capabilities. As far as exports are concerned, there has been a tendency to exaggerate the extent of China’s impact on the region as a whole. Relatively few countries have been affected in a major way by the growth of Chinese demand for commodities. The countries which potentially benefit most from China’s growth have been those which specialize in oil and base metals such as iron ore and copper. Exporters of agricultural products have not benefitted to anything like the same extent, and may even have been negatively affected where the increased costs of oil imports exceeded the gains from cheaper imports of manufactures from China. Those that were negatively affected tend to be exporters of manufactures, and those with a significant industrial sector facing competition from Chinese imports, such as South Africa. Second, there is no clear evidence that exports to China have had a positive impact on growth.50 Nor is there convincing evidence that China has had a negative impact on SSA’s growth through the resource curse. There is now widespread recognition that the economic resource curse is not inevitable, and that the outcomes of commodity booms and dependence on primary product exports depend to a large degree on the responses of governments (Di John, 2011; Saad-Filho and Weeks, 2013). There is a range of policies which governments can use to mitigate the negative effects of the resource curse (Frankel, 2012). Thus even in those cases where China has contributed to dependence on commodity exports, the effects on economic growth have more to do with the policies of those countries themselves than with the growth of China. Indeed countries that have been involved in R4I deals with China may have avoided some of the pitfalls associated with the resource curse. The evidence suggests that China is making an important contribution to infrastructure development in SSA. Given the limited funding available from other sources, China’s willingness to finance infrastructure, particularly power and transport projects, has been very welcome. Despite concerns about quality in some quarters, the competitiveness of Chinese companies has meant that major projects are generally completed rapidly and within budget. Apart from South Africa, which has a relatively large and developed manufacturing sector, and a few smaller economies with an important garment export sector, China’s impact on manufacturing has had a limited overall effect on SSA economies (despite vociferous complaints from local manufacturers) because of the small size of the industrial sector. Chinese competition has

50

Two econometric studies of the impact of China on economic growth in Africa found no positive empirical evidence that exports to China enhanced growth unconditionally. See Baliamoune-Lutz (2011) and Busse et al. (2016).

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merely served to highlight the lack of competitiveness of SSA manufacturing, which was keeping the continent from industrializing well before China became a major source of manufactured goods. Whether the potential benefits of increased commodity prices and loans from China have been realized or not depends to a large degree on the ability of the host government to capture a share of the rents generated, to avoid the pitfalls of the Dutch Disease, and to utilize export revenues and Chinese finance productively. Where the state is weak or the regime corrupt or parasitic, it is unlikely that the increased availability of resources will be translated into strong economic performance. Finally, the level of local capabilities is a critical factor in determining the extent to which a country benefits from its relations with China. If the technological capabilities of local firms are very low, it is unlikely that they will be able to benefit from backward or forward linkages, and they are more likely to be swept aside by Chinese competitors. Where the level of skills in the local labour force is low, there is likely to be greater reliance on foreign workers, so that employment is not generated locally, and training is not provided. The economic impact of China on SSA is not a predetermined outcome of the interests and strategies of the Chinese state and non-state actors involved: it also depends to a significant extent on the agency of African actors.

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8 Social, Political, and Environmental Impacts in Sub-Saharan Africa

8.1 Introduction The previous chapter focussed on the economic impacts of China on Sub-Saharan Africa (SSA), but the implications of China’s economic growth go well beyond this. Indeed some of the most vocal criticisms of China’s involvement in the region concern the social, political, and environmental impacts. These negative aspects of China’s impact have received much more attention in the Western media than the economic effects have (Mawdsley, 2008, pp.518–19). They have also been prominent in statements by Western politicians. China’s growing presence in Africa is often seen as a threat to Western hegemony in the region, and its behaviour is contrasted with a very benign picture of the West’s involvement, which emphasizes poverty reduction, ‘good governance’, and environmental responsibility. These criticisms have tended to frame much of the academic and nongovernmental organization (NGO)-produced literature on China’s role in Africa. The critical literature includes allegations that Chinese firms prefer to use Chinese workers rather than create local employment, and that they are involved in violations of labour rights. It is also often claimed that China supports corrupt and authoritarian regimes and undermines Western efforts to promote democracy and transparency in Africa. Finally, critics point to the devastating environmental impacts of China’s involvement in extractive industries and major infrastructure projects such as dams and roads. This has generated an opposing body of literature on China’s role in Africa which has been characterized as ‘myth-busting’ (Hirono and Suzuki, 2014) and that challenges the claims made about the negative impacts of China. In some cases it is argued that China’s behaviour is no different from that of other external powers in the region, and that claims about China’s negative impact are based on an overly rosy picture of the role of the West. Others

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question the empirical validity of claims made about China’s involvement in Africa. This has even affected the Chinese literature on Sino-African relations, much of which focusses on refuting Western criticism (ibid, p.450). While these are important issues which deserve serious analysis, there is a danger that the focus on criticism of China’s impact on Africa has tended to exclude consideration of other aspects of China’s social, political, and environmental impacts, particularly those which present China in a more favourable light. These include the jobs created by Chinese firms, the increased policy space afforded to governments by China’s policy of non-interference in their internal affairs, and the contribution that China has made to the development of renewable energy in SSA. The claims made by the Chinese government regarding its relations with Africa should not be dismissed as mere rhetoric.

8.2 Social Impacts There are several different social impacts associated with China’s economic activities in SSA. Much of the criticism revolves around the employment practices of Chinese firms involved in infrastructure projects or foreign direct investment (FDI) in the region. Although there are also broader social impacts on local communities affected by Chinese projects, such as the displacement of communities as a result of dam construction, these are not discussed here.1 The focus of this section is on workers directly employed by Chinese firms. This raises questions regarding the extent to which Chinese companies have preferred to use Chinese rather than African workers, the low wages paid, and various aspects of labour rights and working conditions. Given that Chinese practices are often implicitly compared to the behaviour of other external actors, the section also considers whether claims that Chinese firms are worse employers can be substantiated. Finally, some of the positive impacts on labour are discussed.

8.2.1 Employment One of the most controversial aspects of China’s impact in SSA is the claim that Chinese firms do not employ Africans, preferring to rely largely on Chinese workers, particularly in major construction projects. Given the lack of employment opportunities in most SSA countries, this is a particularly sensitive issue. 1 The issue of the impacts on local communities is discussed in the Latin American context in Chapter 11 because the issue has attracted more attention there than in SSA.

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According to official Chinese figures, there were over 130,000 Chinese workers employed on economic cooperation contracts in SSA at the end of 2015 (see Chapter 6.2.3). These figures underestimate the total number of Chinese working in the region.2 Nevertheless, the perception that Chinese companies do not offer jobs to Africans is false (Sautman and Yan, 2015). A survey of 1,000 Chinese firms in eight SSA countries in 2016–17 found that locals made up 89 per cent of employees. Even in construction projects, where reports of extensive use of Chinese workers are most common, 85 per cent of the labour force was local. In manufacturing 95 per cent of those employed in Chinese companies are local (Sun et al., 2017, Exhibit 12).3 There is also evidence that over time Chinese firms have increasingly localized their workforces as they become more familiar with conditions in the host country.4 Rising wages in China have increased the cost of expatriate workers, making it more attractive to use local workers for unskilled jobs. However, the African workforce is mainly employed at the lower levels, and it remains the case that managerial and technical posts are often largely filled by Chinese employees (Shen, 2013, p.38).5 In the manufacturing sector, the employment issue is not so much one of Chinese firms employing Chinese workers as the impact of Chinese competition on local production and jobs. Competition from imports from China had a significant impact on the manufacturing sector in South Africa, and this led to a substantial reduction in employment (see Chapter 7.5.3). Elsewhere in the region, although imports of manufactures from China have grown and there have been complaints about local job losses, the limited size of the manufacturing sector has meant that these negative impacts have been relatively small in terms of the employment situation overall.

8.2.2 Wages While foreign firms usually pay higher wages than locally owned companies in developing countries (Lipsey, 2004), it is often claimed that Chinese-owned companies tend to pay lower wages to local employees than other foreign

2 Tang (2016b, p.110) quotes an estimate by Xinhua, the official Chinese news agency, that there were 750,000 Chinese living or working in Africa on a long-term basis in 2007, and other sources that estimate that there may be as many as two million Chinese in Africa today. 3 Shen (2013, p.38) reports a ratio of at least fifteen local employees to each Chinese worker amongst firms interviewed, and no evidence of excessive import of Chinese workers in manufacturing. 4 See Kernen and Lam (2014) on Ghana, Tang (2010) on Angola and the DRC, and Corkin and Burke (2006) on Chinese construction companies in Angola, Sierra Leone, Tanzania, and Zambia 5 Sun et al. (2017, Exhibit 14) found that less than half (44 per cent) of the managers in the Chinese firms that they surveyed were Africans.

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companies operating in the same sector.6 In the DRC, for example, FEZA, a Chinese mining company, paid lower wages than Western companies such as TFM operating in the same area (Shelton and Kabemba, 2012, p.153). In Zambia, NFC Africa Mining plc is reported to pay the lowest wages in the copper mining industry (Lee, 2009, p.101; HRW, 2011, Annex IV). Yan and Sautman (2013) criticize the Human Rights Watch (HRW) report, arguing that it fails to take into account the lower proportion of low-paid contract workers in Chinese firms compared to other foreign companies, so that comparing the salary scales of permanent workers tends to exaggerate the pay differential. There were also large increases in wages in Chinese companies as a result of the 2012 collective bargaining negotiations after the HRW report was published (HRW, 2011). Nevertheless, despite this, wages at NFC Africa remain below those at other mines and smelters in Zambia.7 While these cases illustrate the differences in wages paid by Chinese and other foreign companies, what is required is a more systematic comparison of wage levels. A United Nations Industrial Development Organization (UNIDO) survey of foreign investment in SSA carried out in 2005 found that the average wage paid by Chinese firms was only just over half that of Indian firms, and less than a fifth of that paid by Northern firms (Henley et al., 2008, Fig. 15). A study based on a 2010 UNIDO survey confirmed this, showing that Chinese investors paid significantly lower wages than either Northern or Indian firms (Coniglio et. al, 201, Table 6). The study also found that wages in Chinese companies were lower than those in domestically owned firms in SSA.8 The lower wages paid by Chinese firms are most marked in the case of skilled labour. Skilled workers in Chinese firms are paid over 20 per cent less than those working for domestic firms and 40 per cent less than those in US or EU firms, while the wage for unskilled workers is 10 per cent less than that paid by domestic firms and 14 per cent less than that of US and EU firms (Coniglio et al., 2014, p.19). This may reflect the fact that Chinese investors are able to bring in skilled Chinese workers, who are much cheaper than local or expatriate skilled workers employed by other foreign firms or domestically owned firms in SSA. 6 In some SSA countries, it has also been reported that wages in Chinese companies were even lower than those paid by local companies and were below sectoral or national minimum wages (Baah and Jauch, 2009, p.66). On the other hand, a World Bank survey of Chinese firms in Ethiopia found that the average wage of US$85 a month was above earnings in domestic companies, although this does not take into account the sectors in which the firms operated (World Bank, 2012, p.12). 7 Although wages were lower at NFC Africa, it has also been pointed out that when copper prices dropped as a result of the global financial crisis in 2008–9, the Chinese company maintained production and avoided laying off workers, whereas the profit maximizing strategies of the global mining companies led to 19,000 miners losing their jobs (Lee, 2014, pp.37–9). 8 The study controls for factors other than ownership that may affect the level of wages, such as the size of the firm, the proportion of skilled workers, and the sector of activity.

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Other common complaints are that workers are often required to work long hours and that overtime is not paid at a higher rate, despite local legislation requiring this. In some cases it has even been noted that workers are unaware that they are entitled to overtime pay. Construction workers in Chinese companies in Ghana, Namibia, Zimbabwe, and Angola were reported to be working long hours without overtime rates (Baah et al., 2009; Chakanya and Muchichwa, 2009; Emmanuel, 2009; Jauch and Sakaria, 2009).

8.2.3 Working Conditions and Labour Rights Going beyond job creation and the level of wages, serious concerns have been raised regarding working conditions and labour rights in Chinese-owned firms in SSA.9 Four out of five SSA governments responding to a World Bank survey on Chinese investment cited ‘poor labour standards’ as a concern (Shen, 2013, Table 2). Critics accuse Chinese companies of transferring their repressive labour practices from China to host countries (IHLO, 2014). Issues of concern include poor health and safety standards, excessive use of casual labour, hostility towards trade unions, and the employment of child labour. HEALTH AND SAFETY

Two of the sectors in which Chinese companies have been particularly active, mining and construction, are industries which raise concerns over health and safety. Historically, mining has been one of the deadliest occupations, owing to fatal explosions and mine collapses. There are also many health hazards associated with working in mines, including silicosis and other lung diseases, exposure to toxic metals, and hearing loss as a result of loud noise. Despite increasing mechanization, these problems continue. The oil industry also has its fair share of accidents and health problems. Health and safety standards are often compromised even in the developed world, and this is even more prevalent in developing countries. China is regarded by many as the most dangerous place in the world for miners.10 There are also numerous reports of health and safety standards being disregarded by Chinese companies in SSA. In 2006 the Zambian government closed down the Chinese mining company Collum Coal Mining Industries Ltd for forcing miners to work underground without safety clothing 9 There is also a question of whether the increasing significance of China as an export destination for SSA countries has led to a reduction in labour standards in the exporting countries. There is only one study that has systematically examined this question and it found evidence of a moderate negative effect in countries where a significant proportion of exports go to China displacing exports to markets with higher labour standards (Adolph et al., 2017). 10 The death rate in coal mining in China is thirty times that in South Africa and one hundred times that in the US (Bennett, 2006).

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and boots (IHLO, 2014). The HRW (2011) study of Zambian copper criticizes working conditions in the Chinese mines, where health and safety considerations are often ignored and workers are not adequately provided with personal protective equipment. Poor standards in health and safety, including lack of protective gear, have also been reported among Chinese construction companies in Ghana, Namibia, Zimbabwe, and Malawi (Baah et al., 2009; Chakanya and Muchichwa, 2009; Chinguwo, 2009; Emmanuel, 2009). Health and safety standards are also often very low in Chinese manufacturing companies, and, in some cases, factory fires have resulted in the death of workers. In Nigeria twenty workers were killed in a fire while locked in a Chinese rubber and plastics factory, and, in Kenya, twenty-nine workers died under similar circumstances in 2007 (Baah and Jauch, 2009, p.69). There are also complaints of verbal and even physical abuse and sexual harassment in some Chinese companies in Namibia, Malawi, and Kenya (Chinguwo, 2009; Jauch and Sakaria, 2009; Masta, 2009). In 2006 two Chinese companies in Mozambique, Monte de Ouro and Irmãoes Comércio Kodak, were closed down for physical and psychological abuse of Mozambican workers (Shelton and Kabemba, 2012, p.154). CASUALIZATION

Another criticism is that workers are often employed on casual contracts with no job security or benefits. In Zambia in 2007, for example, only 56 of over 2,000 employees at NFC Africa were on permanent contracts, with the remainder either casuals or on fixed-term contracts (Lee, 2009, p.101). However, irrespective of their ownership, mining companies often make extensive use of subcontracting to reduce costs. Other foreign-owned mines in Zambia, such as the UK-Indian-owned Konkala Copper Mines and the Swiss-owned Mopani Copper Mines, employed only half of their workforce as permanent employees and the rest through contractors (Yan and Sautman, 2013, Table 1). Casualization is not confined to the extractive industries. In Tanzania the workforce was substantially reduced and permanent employees replaced by casual workers at the Tanzania-China Friendship Mill in Dar es Salaam between 2003–6 (Lee, 2009,). A similar process of casualization occurred in the Mulungushi Textile factory in Kabwe, Zambia, after it was taken over by the Qingdao Textile Corporation in 1997 (Brooks, 2010). Workers were employed on casual terms for as long as ten years, even though, legally, they should have been made permanent after six months. Wages for casual workers were about a third of those received by permanent employees (Brooks, 2010, p.121). Casualization in Chinese companies is often associated with an absence of employment contracts and the arbitrary determination of wages and benefits by management. In Malawi, 89 per cent of the workers at Chinese companies 188

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surveyed did not have a formal contract (Chinguwo, 2009, p.285). Workers, and particularly casual workers, do not receive benefits, or at best receive only those that are legally required. Forced overtime is common, and workers have to work long hours or face dismissal. RELATIONS WITH TRADE UNIONS

Chinese companies are seen as hostile to independent trade unions and reluctant to engage in collective bargaining. A study of Chinese FDI in ten African countries which focussed particularly on labour issues concludes that ‘Chinese businesses tend to see trade unions as ‘trouble-makers’’ (Baah and Jauch, 2009, p.68). In Ghana, Namibia, Malawi, South Africa, Nigeria, Angola, and Kenya, most of the Chinese companies studied did not have trade unions and in many cases actively discouraged workers from joining one, so that workers feared they would lose their jobs if they did. In the Katanga region of the DRC, workers in Chinese mining companies were not unionized, although the right to form free and independent trade unions is recognized in the country’s constitution (RAID, 2009, p.11). Although there are trade unions at China Nonferrous Metal Mining Corporation (CNMC) in Zambia, workers have not been free to choose the union that they wish to join, and there has been intimidation of union representatives (HRW, 2011). HRW recognizes that these problems are not confined to Chinese companies, but argues that they are worse there than in other foreignowned companies, although the situation has improved over time. CHILD LABOUR

Another claim is that Chinese companies exploit child labour. This issue has received a great deal of attention in the mining sector in Katanga, DRC, where there is considerable Chinese investment (Amnesty International, 2013; RAID, 2009). Although Chinese firms do not employ children directly, large numbers of children work in artisan mining in the region, which forms part of the supply chain for Chinese investors.11 There have been reports of child labour being employed by CCCM in Zambia, a company with a particularly bad reputation, that has been closed down on several occasions (Shelton and Kabemba, 2012, p.150). In general, however, Chinese firms have not been found to directly employ underage workers in SSA.12

11 Chinese companies are not the only ones buying ores produced using child labour in Katanga. A BBC Panorama report claimed that a subsidiary of the Anglo-Swiss company Glencore Xstrata in Zambia had purchased ore from the Tilwezemba mine in DRC, although Glencore has denied this (Amnesty International, 2013, p.16). 12 None of the country case studies of Chinese investment in Baah and Jauch (2009) identify child labour as a problem.

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8.2.4 Are Chinese Firms the Worst Employers? The impact of Chinese companies on their employees in Africa has given rise to intense debate (see Box 8.1). On the one side, there are those who point to the low wages paid by Chinese companies and numerous examples of poor working conditions and violations of labour rights. Against this are those who argue that such criticisms unfairly single out the Chinese and are an example of ‘China-bashing’, motivated by the West’s strategic rivalry with China in Africa (Yan and Sautman, 2013). This raises two questions: first, do Chinese firms behave worse towards their employees than other companies, particularly Western transnational corporations (TNCs), in SSA? Second, if they do, can this be attributed to inherent Chinese characteristics of such firms or are

Box 8.1 DEBATE ON LABOUR CONDITIONS IN CHINESE COPPER MINING IN ZAMBIA In 2011 HRW published a highly critical report on labour abuses in Zambia’s Chinese state-owned copper mines (HRW, 2011, 2012). The report is based on interviews with 143 workers at Chinese and non-Chinese companies. It identifies a number of problems at the Chinese companies, including low wages, unsafe working conditions, excessive working hours, and anti-union activities, and it concludes that ‘The Chinese-run companies . . . remain in routine violation of Zambian and international law on these same issues, and perform considerably worse from a labour standpoint than their competitors from other multinationals in Zambia’s copper industry’ (p.97). The report was subjected to withering criticism by Yan and Sautman. They describe the report as ‘bad social science [which] has not told us anything about Chinese investment in Africa’ (Yan and Sautman, 2013, p.152) and accuse HRW of building ‘a binary view of a Chinese SOE versus Western-based privately owned firms and [making] China Nonferrous Metal Mining Corporation (CNMC) a strikingly negative example of investment in Africa’ (ibid, p.151). This debate highlights many of the problems involved in evaluating the impact of Chinese investment on workers in Africa. One of the main criticisms of the HRW report is that by singling out a particular Chinese company for investigation it contributes to a Western discourse that seeks to demonize China and Chinese firms. It essentializes the practices of Chinese companies without locating them in their specific context. The point here is that it is necessary to compare Chinese firms with other transnational corporations, rather than simply enumerating the violations which occur. The HRW report claims to do this, arguing that ‘Chinese-run companies are generally the worst on issues involving health and safety, hours of work, and rights to organize’ (HRW, 2011, p.97). However, there is a problem where the focus is so heavily on one company or one group of companies despite the recognition of poor practices by Western companies. Another criticism of the report’s methodology highlights its reliance on interviews with workers in a context of strong anti-Chinese feeling. This suggests that the use of quantitative data is more appropriate than qualitative methodologies, but even where these exist, as in the case of wages and industrial fatalities, the report and its critics interpret them very differently.

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Social, Political, and Environmental Impacts in Sub-Saharan Africa In the case of wages, Yan and Sautman (2013) argue that the Chinese mines have relatively lower copper content in the ore and lower productivity, and when these are taken into account, wages are not particularly low. ‘When the factors noted above are accounted for, CNMC/non-CNMC wage comparisons can be explained in terms of the specific structure, history, and profitability of CNMC’s production. Yet, HRW report readers will only take away from it that cruel Chinese super-exploit African workers, a point consonant with the mainstream China-in-Africa discourse’ (p.145). While this is a gross distortion of the thrust of the HRW report, which does point to poor conditions in non-Chinese firms, it illustrates the problem with the type of approach which is not explicitly comparative. It is reinforced by HRW’s claims that ‘by investigating the specific practices of particular Chinese employers . . . it is possible to begin to paint a picture of China’s broader role in Africa’ (HRW, 2011, p.1), although HRW specifically denies that it has undertaken this work to assess ‘Chinese investment’ or ‘China in Africa’ (p.13).

they the result of other factors which tend to be associated with poor employment practices? One problem is that with the partial exception of wages, where there is some evidence that Chinese firms tend to pay lower wages, there are virtually no studies that systematically compare working conditions and labour rights in Chinese and other companies in SSA.13 A second issue is that despite the wide range of different types of Chinese firms operating in SSA (see Chapter 6.3), there is a tendency in the critical literature to lump all Chinese-owned firms together, irrespective of whether they are central of local state-owned enterprises (SOEs), large private firms, or small or medium enterprise (SMEs). As the evidence in the previous section indicates, there are clearly examples of poor working conditions and violations of workers’ rights among Chinese firms in the region, but there are also examples of good practice. In Nigeria, United Nigeria Textile plc is reported to have high health and safety standards and good relations with its workforce. Some Chinese firms in South Africa are also reported to perform well in this regard (Shelton and Kabemba, 2012, p.160). There are also numerous examples of poor working conditions and low standards in non-Chinese companies. The question, then, is whether working conditions are significantly worse in Chinese-owned companies than they are in ones under different ownership.14 The studies that exist are based on a small number of firms, from which it is difficult to draw general conclusions. In Ghana it was found that Sinhydro and Shanghai Construction performed worse than other foreign and local

13 An ongoing project at the School of Oriental and African Studies (SOAS) is comparing Chinese, other foreign firm, and local firm employment practices in the construction and manufacturing sectors in Angola and Ethiopia, but so far has only produced preliminary findings (Oya, 2017). 14 The failure of HRW to carry out such a systematic comparison with other mining companies in Zambia is an important element in Yan and Sautman’s (2013) critique of the report.

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companies (Baah et al., 2009). In Angola, too, it was found that other foreign firms in the construction industry performed better than the Chinese companies (Emmanuel, 2009). On the other hand, a study of eleven Chinese and nine US-owned companies in Kenya highlighted similarities between the two groups of firms (Rounds and Huang, 2017). However, this study was based on interviews with managers, and it did not provide any evidence on working conditions. A second line of argument against the criticism of Chinese firms in SSA is that low wages, poor working conditions, and low labour standards are the result of other contextual factors, rather than inherent characteristics of Chinese firms. There is some truth in this argument. For example, Chinese firms in Africa have tended to concentrate in the extractive industries and construction, where there are major health and safety problems and the use of casual labour is common. An explanation of the impact on workers of Chinese companies needs to locate their activities in a broader context. In the extractive industries, growth in the global demand for resources leads firms to expand into new, frontier areas and bring more marginal mines back into production. It is in such circumstances that the pressure to reduce wages and depress standards is most intense, and, at the same time, the rule of law and the ability of states to regulate are least effective. As latecomers, firms from China and other emerging economies are likely to be particularly prominent in such areas, since the most productive and accessible resources are already under the control of incumbents. It is not surprising, therefore, that critics are able to find numerous examples of exploitative practices in Chinese companies.15 In the manufacturing sector, Chinese firms are often in industries such as clothing and textiles, footwear, and furniture, where production is highly mobile and international competition is intense. In such industries cost minimization is crucial and working conditions are often highly exploitative. Faced with interstate competition to attract investment, governments are often prepared to support companies’ efforts to reduce costs and avoid enforcing regulation.16 The trends, such as the increasing casualization and the violation of labour rights, observed in Chinese firms can then be seen as illustrating a broader tendency in the global economy.

15 This is not meant to imply that managers in these firms are not responsible for the poor working conditions and low labour standards faced by their workers, but to put them in context rather than falling into the trap of ‘China-bashing’, which sees Chinese firms as particularly culpable. 16 A government official in Namibia stated in relation to complaints about Chinese firms exploiting workers and paying low wages: ‘If we want to develop our country, we need to sacrifice labour costs now to benefit later. The objective is to create jobs for Namibians and any FDI should be able to do that’ (quoted in Baah and Jauch, 2009, p.218).

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Another contextual factor that influences the behaviour of Chinese firms is the nature of the local state and its capabilities. Many of the worst examples of exploitative working conditions come from countries such as the DRC that were characterized by their low standards well before Chinese firms made their presence felt. The emphasis on contextual factors does not rule out Chinese ownership having some effect on firm behaviour, particularly in the early phases of a firm’s expansion overseas, when the types of capitalism and labour relations that characterize the home country do influence the way in which firms operate abroad. The low priority given by Chinese companies in SSA to health and safety standards and their reluctance to engage with independent trade unions and expectations in terms of hours of work and intensity of effort is partly a reflection of conditions in China. Tang (2016b, p.115) cites the example of NFC Africa’s acquisition of the Luanshya mine in Zambia, where managers thought that an accident rate of three per week was acceptable because it was much better than in China, but local employees were dissatisfied because under the previous ownership of a Swiss company there had only been one accident a month. There is some evidence that the performance of Chinese companies in Africa is improving. In Zambia, government officials report that NFC Africa has improved its compliance with health and safety and labour standards (Haglund, 2009, p.92). Again this depends on the local context. Where trade unions have been able to organize, they have obtained better conditions for workers. In Zambia in the mining industry, for example, industrial action led to a new collective agreement between the trade unions and NFC Africa, which made jobs that had previously been on short-term contracts permanent, and gave fixed-term contracts to those who had been casual workers (Lee, 2009, p.111). However, in the textile industry in both Zambia and Tanzania, where Chinese firms were more mobile and workers had less bargaining power, attempts to resist casualization and improve conditions were unsuccessful (Lee, 2009; Brooks, 2010).

8.2.5 Positive Social Impacts Despite the criticism directed at Chinese firms for using imported labour, even in countries such as Angola, where a relatively high proportion of Chinese workers are employed, it is still the case that the majority of the labour force is African. Because Chinese firms are heavily involved in labour-intensive activities such as construction, clothing, and footwear, they do create a substantial number of jobs for locals. There are no overall figures available on the numbers employed by Chinese firms in Africa. The most comprehensive survey covering 1,000 Chinese firms 193

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in eight SSA countries found that that they had around 300,000 employees (Sun et al., 2017, p.11). Another more limited study, based on 156 greenfield Chinese investment projects in the region, identified almost 64,000 jobs created between 2003 and 2014 (Pigato and Tang, 2015, Table 2). These studies only represent a small proportion of Chinese FDI, and the total number of jobs created in the region must be considerably higher. Sun et al. (2017, p.40) estimate that the total number employed in Chinese-owned firms in Africa is in the millions. Estimates for individual countries include more than 100,000 jobs created by Chinese FDI in Ethiopia (Nicolas, 2017, Table 2); 69,000 employed by 600 Chinese firms in Nigeria, (Shen, 2013, p.17); between 80,000 and 150,000 in Chinese companies in Tanzania, (Lu and Kweka, 2013, p.8);17 and 76,000 jobs generated by Chinese FDI commitments in Zambia between 2000 and 201218 (Sinkala and Zhou, 2014, Table 1). Although the claims that there are millions employed by Chinese firms in SSA are probably exaggerated, particularly bearing in mind that total employment in manufacturing in SSA in 2010 was only 9 million (Bhorat et al., 2017, Table 2) and many of the jobs in Chinese firms are in manufacturing, they are certainly in the hundreds of thousands. In addition to providing employment opportunities for unskilled workers, Kaplinsky (2013) points to other ways in which China’s economic presence in SSA may be promoting more inclusive growth. As mentioned in Chapter 7, Chinese competition has led to lower prices for basic consumer goods, helping to raise the living standards of poor consumers. Many of the Chinese SMEs which have entered SSA tend to produce products for poorer consumers, and to be more regionally dispersed. There is also some evidence of small-scale African businesses benefitting from access to cheap Chinese machinery and equipment, which could contribute to growing local entrepreneurship.

8.2.6 Conclusion Some of the critical claims concerning the social impacts of China’s presence in SSA are exaggerated, but there is an element of truth to a number of them. The current state of knowledge concerning many of these aspects is such that claims and counter-claims are often based on anecdotal evidence and individual case studies, and there is a need for much more systematic research with more comparative analysis of Chinese firms compared to other foreign investors in SSA, as well as greater awareness of the ways in which behaviour is 17 The lower figure was provided by the Chinese Business Chamber of Tanzania, and the higher one by the Chinese Embassy. Both may be overestimates. 18 This refers to pledged investment, and it is unclear how much of this has actually been carried out.

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changing over time. A more balanced approach is also necessary to reveal some of the positive social impacts of Chinese activities.

8.3 Political Impacts The political implications of China’s growing economic relations with SSA have created even more controversy than the social impacts. As The Economist pointed out in 2008: Diplomats and pundits, for their part, fear that the west is ‘losing’ Africa and other resource-rich regions . . . China will befriend ostracised regimes and encourage them to defy international norms. Corruption, economic mismanagement, repression and instability will proliferate. (p.4)

Western politicians have warned Africans of the dangers of ever-closer relations with China. In 2007 the UK Secretary of State for International Development pointed to the risks of growing Chinese financial support for African countries, claiming that China’s failure to match the type of conditions required by other donors in relation to good governance and human rights could set progress in the region back (McGreal, 2007). Similar warnings were subsequently issued by US Secretary of State Hillary Clinton and President Obama when they visited Africa, without explicitly mentioning China, although their remarks were clearly targeted at China (McGreal, 2014; Smith, 2012). This view has set the terms for much of the academic debate on the political implications of China’s growing involvement in SSA (Hirono and Suzuki, 2014). On the one hand, there are those who emphasize the negative effects, claiming that China’s presence threatens progress towards democracy, the rule of law, and political stability in the region (Rotberg, 2008; Tull, 2006). Other authors have sought to counter these claims, arguing that there is little if any evidence to support them (Brautigam, 2009, Ch.11). Much less attention has been given to some of the potential positive political impacts of Chinese support and China’s policy of non-interference in the internal affairs of other countries. This section focuses first on the three negative claims regarding the political impact of China on SSA. First, it looks at the relation between China’s economic involvement and the existence of authoritarian regimes in the region. Second, it considers whether China’s actions have encouraged corruption. Third, it examines the links between China’s presence and conflict and political instability in SSA. In each of these cases, a number of different arguments about the negative effects of China’s presence are examined.19 19

The appendix to this chapter provides an econometric analysis of the relationship between the various dimensions of Chinese economic involvement in SSA and authoritarianism, corruption, and political instability.

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The section then turns to other aspects of China’s political impact which are not highlighted in the debate.

8.3.1 Authoritarian Regimes A common complaint voiced by Western politicians and the media is that China tends to support authoritarian rulers in Africa, thus undermining the West’s agenda of promoting democracy. Frequently cited examples include the regimes of Robert Mugabe in Zimbabwe and Omar al-Bashir in Sudan. In contrast, the Chinese government claims that it respects national sovereignty and does not interfere in the internal affairs of other countries, and is prepared to do business with different types of political regimes. Supporters of this view can point to the fact that China’s most significant economic partner in the region is democratic South Africa. While there are individual examples of both authoritarian and democratic regimes with which China has strong economic relations, is there a systematic tendency for China to favour countries that are less democratic, as the critics argue? As seen in Chapter 6, China does tend to have particularly strong economic links with oil- and mineral-exporting economies and, as the literature on the so-called ‘political resource curse’ argues, such economies tend to have polities that are less democratic (Ross, 2001; Rosser, 2006). However, the criticisms of China’s involvement in SSA imply that, quite apart from this association, it tends to favour relations with authoritarian regimes. In order to test this claim, we added the World Governance indicator (WGI) ‘Voice and Accountability’ as an explanatory variable to each of the equations estimated to explain Sino-SSA relations in Chapter 6 (see Table A8.1). The only case where China appears to have closer relations with less-democratic countries is in terms of its imports from SSA. In contrast, Chinese exports tend to go to the more democratic countries in the region. The total level of trade (imports + exports) between China and SSA also tends to be higher with the more democratic countries.20 There is no evidence that Chinese FDI or Chinese projects in Africa tend to be systematically biased towards undemocratic countries.21 Indeed when we add the voice and accountability variable to the regression for Chinese projects, these tend to be concentrated in more democratic countries.22 Nor is there evidence that 20 An earlier study by Grauwe et al. (2012) also found that Chinese imports from SSA tended to be negatively correlated with the level of democracy while Chinese exports tended to go to more democratic countries. 21 Earlier studies of Chinese FDI in SSA by Cheung et al. (2013) and Kolstad and Wiig (2011) also found that autocracy or lack of political rights did not affect the level of investment. 22 Cheung et al. (2014) and Berthelemy (2011) found no significant relation between their indicators of democracy and the level of Chinese projects in Africa.

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undemocratic regimes in SSA receive preferential treatment in terms of the allocation of Chinese aid or loans.23 Despite the West’s attention to China’s relations with authoritarian regimes in SSA, the only real evidence that China has strong economic relations with such regimes, beyond what can be explained by oil and minerals, comes from China’s pattern of imports. As discussed in Chapter 6, the pattern of trade is less subject than other economic relations are to control by the Chinese government. The tendency for China to import more from countries that are less democratic is likely to reflect the fact that these countries’ resources are not already tied up by Western companies, rather than a deliberate strategy of supporting dictatorial regimes. If the latter were the case, one would expect to find a much clearer pattern of Chinese FDI, projects, loans, and aid being directed towards such countries. The evidence is more consistent with the view that by adopting a policy that emphasizes respect for national sovereignty and non-interference in the internal affairs of other countries, China has been willing to do business with all kinds of governments. Some critics argue that even if China does not specifically seek out authoritarian regimes in developing its economic relations with SSA, its policy of noninterference is undermining the West’s efforts to promote democracy in SSA by providing such regimes with economic options which enable them to resist pressure from the West. However, both the West’s commitment to promoting democratization and its ability to do so effectively are open to question. In the past the West has been more than willing to support authoritarian regimes when it was in its political or economic interest to do so. It is also unclear how far closer economic relations with China are a key factor in resistance to Western pressure to democratize. Angola and Ethiopia are two examples of countries with strong economic links with China and relatively authoritarian regimes. However, their reluctance to engage with the EU and the US on governance issues is a result of domestic factors, particularly the threat that reforms pose to the survival of their regimes, rather than the presence of China (Hackenesch, 2015). Although the Chinese model of development since 1979 has been based on the continuation of an authoritarian political system, China is not promoting such a model in SSA. In fact, unlike the West, which has pushed a neoliberal economic model under the Washington Consensus and its own political model in the guise of ‘good governance’, China’s adherence to the principle of non-interference in the internal affairs of other countries explicitly rules out such a strategy. China’s approach in SSA has been described as one of

23

Dreher et al. (2016), using AidData statistics and a different measure of democracy, also found that for all the different types of finance considered, there was no tendency to favour lessdemocratic regimes.

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‘flexigemony’, which is contrasted with US hegemony (Carmody, 2011, Ch. 3). It is characterized by a willingness to engage with a variety of different regimes, accepting the internal distribution of power and political structures, whether democratic or authoritarian. Despite the claims that Chinese involvement promotes authoritarianism, there is no evidence that closer economic links with China generally leads to a reduction in democracy. The regressions reported in the Appendix (Table A8.4) show that none of the indicators of a country’s economic reliance on China had a significant impact on the WGI’s Voice and Accountability indicator. There are no cases where China has promoted coups against elected governments.24 Nor is there any support for the claim that relations with China have led to creeping authoritarianism. Changes in levels of authoritarianism are likely to be determined more by internal developments within the countries concerned than by the growth of economic relations with China. As one Chinese official at the Central Foreign Affairs Office pointed out: We are able to negotiate large business deals and make governments abide to the One-China principle. Yet this is by no means the same as having an impact on internal political tensions. Even if we had some political influence, it would be naive to assume that these problems can be managed by external powers. (Quoted in Holslag, 2011, p.18)

8.3.2 Corruption Although problems of corruption are often merged with those of authoritarianism under the general heading of ‘poor institutions’, the relationship between the two is neither inevitable nor fixed. It is quite possible for democracies to be corrupt and for dictators to be clean. Various arguments have been put forward to suggest that China tends to have closer economic relations with countries characterized by high levels of corruption. It has been claimed that Chinese actors actually prefer corrupt regimes because it is easier for them to achieve their objectives by doing business with corrupt elites. It has also been argued that Chinese business practices are highly corrupt, and that this gives Chinese firms a competitive advantage in countries where the control of corruption is weak. ‘This Chinese way of business effectively matches with some traditional social norms in many African countries and greatly oils the wheels of bureaucracies in host countries to facilitate deals’ (Wang and Elliot, 2014, p.1016).

24 As this was being written, there were rumours of China’s involvement in the removal of President Robert Mugabe in Zimbabwe. This was categorically denied by the Chinese government.

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It is claimed that while Western firms are subject to pressure from civil society and legal constraints such as the US Foreign Corrupt Practices Act of 1977 and the Organization for Economic Co-operation and Development (OECD) Anti-Bribery Convention signed in 1997 to avoid situations in which they are likely to be required to pay bribes and engage in other corrupt practices, Chinese firms face fewer pressures.25 The latest Bribe Payers Index from Transparency International, which ranks major countries according to perceptions of the likelihood that firms pay bribes abroad, lists China as twenty-seventh out of twenty-eight countries, ahead of only Russia.26 It is also argued that the lack of transparency in many Chinese engagements in SSA tend to create scope for corruption (CRS, 2008, pp.127–8). Chinese companies were initially reluctant to participate in the Extractive Industries Transparency Initiative (EITI), and the Chinese government has not signed up to it. However, recent evidence shows increasing numbers of Chinese companies reporting on their payments to the governments of SSA countries that are members of the EITI, such as the DRC, Liberia, and Nigeria (EITI, 2016). Relations between Angola (which does not participate in the EITI) and China illustrate the link between lack of transparency and corruption. The operations of Angola’s National Reconstruction Office, which handled largescale projects funded by Chinese loans, were dogged by accusations of corruption before it was dismantled in 2010 (Corkin, 2013, pp.131–4).27 While it is easy to provide examples of corrupt practices on the part of Chinese companies in SSA, corruption is by no means confined to the Chinese.28 A counterargument is sometimes put forward that the Chinese practice of providing loans as part of a package whereby work is undertaken by Chinese companies and aid is given in kind reduces the scope for the embezzlement of funds by local elites because most of the money never leaves China (Brautigam, 2009, pp.292–7). The Angolan experience, where corruption was rife despite the extensive use of resources for infrastructure deals, contradicts this. It also does not prevent political elites obtaining Chinese finance which benefits them by building prestige projects or projects that directly benefit their supporters. 25 However, as Transparency International has pointed out, about half of the countries that have signed the OECD Anti-Bribery Convention are taking minimal or no enforcement action (Chu and Wong, 2014). 26 Transparency International (2011). In 2011 China made bribery of foreign officials by Chinese firms a criminal offence for the first time. 27 Angola is one of the most corrupt countries in the world, ranked 161st in Transparency International’s Corruption Perceptions Index in 2014. 28 For example, two US construction firms, Halliburton and Kellogg Brown and Root, were found guilty in 2009 of paying bribes to Nigerian officials to win contracts worth $6 billion between 1998 and 2006 (Brautigam, 2009, pp.294–5). In 2015 a UK printing company, Smith and Ouzman Limited, was ordered to pay more than £2 million for bribing public officials in Kenya and Mauritania (Clare, 2016).

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As in the case of authoritarianism, the relation with corruption is complicated by the importance of oil and minerals as drivers of Sino-African trade and investment. The resource-curse literature argues that the existence of substantial rents in resource extraction, particularly of oil and minerals, provides fertile ground for corruption. There is considerable evidence that resource abundance and resource windfalls are associated with corruption, both between and within countries over time, particularly in undemocratic regimes (van der Ploeg, 2011, p.386). Given the significance of oil and minerals in China’s relations with SSA, it would not be surprising if there was a tendency for Chinese trade, loans, and investment to be concentrated in countries with high levels of corruption. However, the real question is whether there is a link between Chinese involvement and corruption over and above that which would be predicted by a country’s dependence on natural resources. When the WGI’s ‘Control of Corruption’ indicator was added to the variables used to explain the various types of Sino-SSA relations, the only case where it was found to be significant was for Chinese exports to SSA, and it was a positive and not a negative relationship (see Table A8.2). This contrasts with previous studies which have found that China tends to import more from countries where the control of corruption is weak (Grauwe et al., 2012; Hu and van Marrewijk, 2013) and that corruption tends to be associated with higher levels of Chinese FDI (Cheung et al., 2012, 2013).29 It is consistent with previous studies of Chinese construction projects in Africa which have not found corruption to be a significant factor (Berthelemy, 2011; Cheung et al., 2014). Looking at financial flows from China, Dreher et al. (2016) found contrasting results between official development assistance (ODA)-like flows from China and those granted on a more commercial basis (‘other official finance’). There is no relation between the former and the level of control of corruption, whereas the latter tend to flow disproportionately to countries where the control of corruption is weak. The mixed evidence raises questions about the claim that China systematically prefers to operate in countries where there is weak control of corruption. Although China may not systematically engage with countries where the control of corruption is weak, does its presence in a country lead to less control of corruption? This was tested econometrically to see if any of the measures of Chinese presence had an effect on the WGI Control of Corruption indicator (see Appendix Table A8.4). As expected, a country’s gross domestic product (GDP) per capita had a positive effect on its control of corruption, whereas dependence on fuel exports was associated with weaker control. The only 29 The studies by Cheung et al. only cover FDI up to 2007, and, as shown earlier, Chinese FDI in SSA has grown rapidly since then. This may account for corruption no longer being a significant factor.

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indicator of Chinese involvement that was significant (and then only at the 10 per cent level) was the value of Chinese projects completed per head of population; but contrary to claims that China promotes corruption, this was associated with stronger control of corruption.

8.3.3 Conflict and Political Instability A third set of issues concerning China’s involvement in SSA relates to conflict and political instability. China’s extensive presence in the DRC and Sudan are examples of its involvement in such situations. Various arguments including the view that Chinese companies are less risk-averse than firms from other countries, and claims that China actively seeks to take advantage of conflict and political instability to further its own interests have been put forward to suggest that China has a greater presence in such countries. It has also been suggested that China’s presence may actually be a destabilizing factor and contributes to conflict in host countries. As in the case of authoritarianism and corruption, there is a clear association between dependence on resources and the risk of conflict in SSA. Conflict is particularly prevalent in countries which specialize in oil or minerals compared to land-abundant countries, which depend on agricultural exports (van der Ploeg, 2011, pp.389–90). Since resource-rich countries tend to be more prone to conflict than countries with limited resources, this raises the question of whether Chinese involvement in conflict situations such as Sudan and the DRC is merely a result of its quest for resources or there is a significant positive relation with conflict even when controlling for a country’s resource endowment. To test this hypothesis, the WGI indicator for Political Stability and Lack of Violence was added to the specification used in Chapter 6. There is weak evidence that China tends to import more from politically unstable countries, significant only at the 10 per cent level (see Table A8.3). On the other hand, there is stronger evidence that Chinese exports and infrastructure projects go to countries that are more stable. The overall level of bilateral trade, FDI, and loans are not affected by political instability. Previous studies of Chinese involvement in SSA have also found that there is either no relationship with political instability or that instability and conflict have a negative impact on Sino-SSA relations.30 Claims based on anecdotal evidence of Chinese 30 On trade, Grauwe et al., (2012) found no evidence that China tends to trade more with politically unstable countries. On FDI, a number of studies have found that conflict and political instability have a negative impact on the amount of FDI from China (Sanfilippo, 2010; Biggeri and Sanfilippo, 2009; Cheung et al., 2013; Drogendijk and Blomkvist, 2013). Previous studies of engineering projects have either found that they are negatively affected by conflict (Biggeri and Sanfilippo, 2009) or that there is no significant relation with political instability (Berthelemy, 2011; Cheung et al., 2014; Sanfilippo, 2010).

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involvement in politically unstable countries and conflict situations are not supported by a more systematic analysis of the pattern of Chinese operations in the region. Although there is no clear evidence that China tends to be more engaged in countries where there is conflict, another question is whether China fuels conflict in countries where it is present. One way in which it might do so would be by providing arms to the warring parties. China is now the thirdlargest exporter of arms to SSA, but there are many other international suppliers of weapons, so it is unlikely that this is an important factor in fuelling conflict. In fact one study has found that China tends to be less involved in exports of arms to countries involved in civil war than the US (de Soysa and Midford, 2012). When econometric estimates of the impact of China on political instability and conflict were made, as expected, GDP per capita tended to reduce conflict and increase political stability, while dependence on fuel exports had the opposite effect. However, the only indicator of China’s presence that was significant was the value of infrastructure projects, and this tended to increase stability (Table A8.4).

8.3.4 Other Aspects of the Political Impact of China’s Increased Economic Presence in SSA While considerable attention has been given to claims about the negative impact of China on governance in SSA, other political consequences of growing Chinese economic involvement have received less attention. These include the impact on the ‘policy space’ that it gives to SSA governments, the way that it affects Chinese foreign policy in the region, and the impact on the attitudes of Africans towards China. The ‘China-threat’ literature regards the decline of Western influence in SSA as a negative outcome, but this is not necessarily how it appears from an African perspective. By offering an alternative to economic relations with the West, China has increased the ‘policy space’ available to African governments (Huse and Muyakwa, 2008; Oya 2008). Governments in SSA have been able to use the advantage that increased trade, investment, and loans from China gives them to open up a wider range of policy options than those prescribed by the Washington Consensus. It has been claimed that this increase in policy autonomy was most marked in resource-rich African countries (Kragelund, 2012), although as was seen in Chapter 7 it was also the case in resource-poor Ethiopia. There are several examples where the direct and indirect effects of China’s growing impact in SSA have provided governments with more policy space. The loans obtained by the Angolan government from China Exim Bank

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enabled it to break off negotiations for an International Monetary Fund (IMF) loan and to avoid the economic conditionality that this would have involved (see Box 6.1). In Ethiopia Chinese support enabled the government to pursue its developmentalist policies, particularly through the expansion of its energy and transport infrastructure, without being subject to the conditionalities of the international financial institutions (see Chapter 7.5.2.). In Zambia too greater policy space was reflected in the drafting of a national development plan without direct involvement by Western donors and the deprivatization of some strategic enterprises (Kragelund, 2014). Growing Chinese involvement has not meant that Western neo-colonialism has simply been replaced by Chinese neo-colonialism in SSA. In contrast to the West’s efforts to promote neoliberal economic policies and ‘good governance’ in SSA, China has not attempted to export a particular economic or political model. Indeed it has been argued that there is no such thing as a ‘Beijing Consensus’ or ‘Beijing model’. The Chinese approach to development emphasizes the importance of context-specific policies rather than the adoption of a ‘one size fits all’ model (Lagerkvist, 2009). China’s own development was based on a process of experimentation, as implied by the saying coined by Deng Xiaoping, ‘crossing the river by feeling the stones’. Any attempt at exporting a Chinese model would also clearly contravene its declared policy of nonintervention in the internal affairs of other countries. A further consequence is that as China’s presence on the ground in SSA grows with increased numbers of Chinese citizens and investments in fixed assets, its interests will gravitate increasingly towards maintaining political stability and avoiding conflict which could affect its citizens and interests. There have already been several examples where Chinese citizens have been affected by conflict, including the killing of nine Chinese oil workers by the Ogaden National Liberation Front in Ethiopia in 2007, and the kidnapping of twenty-nine Chinese workers by Sudanese rebels in 2012. The overthrow of Gaddafi in Libya in 2011 led to losses of as much as $20 billion for Chinese contractors working in the country and the emergency evacuation of over 30,000 Chinese citizens (Sun, 2014, p.9–10). Although this was in North Africa, it illustrated the potential for political instability and conflict to affect Chinese interests elsewhere in Africa (Alden, 2014). Its growing economic presence on the ground in SSA is making it more difficult for China to maintain its traditional position of non-intervention in the internal affairs of other countries (Aidoo and Hess, 2015). As Gu and Carty (2014, p.60) point out, ‘China does not seek to shape African states in its own image or interfere in politics, but it is realizing that it cannot simply pretend that the problems of its local partners do not exist, or are exclusively the concern of those countries’.

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One way in which China has sought to reconcile the need to protect its interests while continuing to maintain its commitment to non-interference in the internal affairs of African countries is by acting with the African Union and the United Nations. It has already been involved in international peacekeeping missions in several countries including Liberia, Mali, South Sudan, and the DRC, and although this has partly been motivated by a desire to project China’s soft power as a responsible great power, protecting Chinese economic interests has also played a role in some of these cases (Duggan, 2018). The growing economic presence of China in SSA could potentially generate both positive and hostile responses within African society. There have been outbreaks of anti-Chinese sentiments in a number of countries. The most frequently mentioned example is Zambia, where opposition leader Michael Sata campaigned successfully for the presidency in 2011 on an anti-Chinese platform (Hess and Aidoo, 2014). There are other instances of hostile acts directed at the Chinese in SSA countries, which have not generated broader political campaigns. In 2014 workers at a Chinese- owned sugar mill in Madagascar burnt down the factory, and the police had to evacuate all Chinese nationals to the capital (Horta, 2015). In the DRC, rioters attacked around fifty Chinese-owned shops during anti-government protests in Kinshasa in 2015 (AFP, 2015). In 2016 work on the Nairobi-Naivasha railway was halted after Kenyan youths attacked Chinese construction workers (GCR, 2016). Despite such incidents and outbursts of anti-Chinese sentiment in a number of SSA countries, public opinion polls show that the majority of those surveyed in the region view China favourably (Sautman and Yan, 2009: Lekorwe et al., 2016; Pew Global Attitudes and Trends Database, n.d.). China’s economic involvement in the region is the main reason why it is viewed so positively. The most frequent factors cited by Africans are Chinese investment in infrastructure, the availability of low-cost Chinese goods, and Chinese business investment (Lekorwe et al., 2016, Fig. 15). It is clear that as far as public opinion in Africa is concerned, growing Chinese economic engagement is seen in a positive light by the majority of people.31 Political factors are less important in explaining both positive and negative views of China in the region.

8.3.5 Conclusion The evidence reviewed here suggests that many of the claims regarding the negative political impact of China in SSA have been greatly exaggerated. There 31

The main factors contributing to a negative view of China are also primarily economic. In order of importance, these are the poor quality of Chinese goods, displacement of local businesses, and extraction of resources from Africa (Lekorwe et al., 2016, Fig. 18).

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is no evidence to support the strongest claim that China is exporting its own authoritarian model to Africa or introducing its own corrupt business practices and destabilizing African countries. In all of these cases, internal conditions rather than outside influences, whether from China or the West, are the determining factors affecting political outcomes. There is also very little evidence to support the view that China has prioritized the development of economic relations with countries that have governments that are less democratic or where the level of corruption or political instability is higher. The main drivers of Chinese involvement in SSA are commercial and strategic considerations, and with the exception of diplomatic relations with Taiwan, political factors are not significant. The evidence is consistent with Chinese claims that it respects the sovereignty of SSA countries and is prepared to develop relations with different types of regimes. The debate premised on contrasting China’s influence with the West’s governance agenda in SSA has narrowed the discussion. This has led to relatively little attention being paid to the way in which the growth of China is creating more policy space for African countries, and how the increased economic involvement of China is affecting Chinese foreign policy in the region or the attitudes of Africans towards China.

8.4 Environmental Impacts A number of concerns have been raised over the environmental impacts of China on SSA (Bosshard, 2008). The fact that China’s own development over the past four decades has been accompanied by substantial environmental degradation, as discussed in Chapter 1, fuels suspicion that its activities abroad also generate major environmental costs. This is all the more likely in SSA, where China’s engagement has been particularly concentrated in environmentally sensitive sectors, such as oil and gas, mining, forestry, and infrastructure, and where the state often lacks either the will or the capacity to regulate. The risks are further intensified by the fact that as a latecomer in the race for resources in SSA, Chinese investments have often gone to remote and ecologically fragile areas and, in some cases, to protected National Parks. It is also claimed by critics that the environmental guidelines and standards applied by Chinese firms and financial institutions are less demanding than those of their Western counterparts, giving them a competitive advantage. It has even been claimed that the recent application of more stringent environmental policies in China may encourage China’s worst polluters to relocate to Africa. There are several channels through which China’s economic involvement in SSA may affect the region’s environment. This section considers first 205

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whether trade with China has had negative effects on the environment, looking particularly at the characteristics of Chinese demand for African products. It then discusses the activities of Chinese firms involved in investment and in infrastructure projects, to analyze the extent to which they take environmental considerations into account in their operations. It also looks at the role played by Chinese financial institutions in promoting (or failing to promote) more sustainable production in SSA through the environmental requirements that are attached to their loans. Many of these issues are illustrated by Chinese involvement in the African timber industry. As with the social and political impacts of China, the focus of media attention tends to be on the negative aspects of Sino-African relations, with little publicity given to examples of good practice (Shinn, 2016, p.26). It is important to balance these largely negative perceptions by also considering China’s role in helping to reduce carbon emissions through its involvement in developing solar and wind power in Africa.

8.4.1 Trade and Environment As seen in Chapter 6, virtually all of SSA’s exports to China are primary products and resource-based manufactures, particularly oil, ores, and metals, which tend to have substantial environmental impacts. The growing Chinese market and increased prices of many primary commodities, as documented in Chapter 3, has created incentives for increased production of oil, minerals, and timber, which may have damaging environmental impacts.32 Oil exploration, production, and transport can give rise to major spillages with devastating environmental effects, as seen in the Niger Delta. Mining can lead to direct environmental destruction through vast opencast mines, pollution as a result of the toxic chemicals used in ore extraction, and the creation of vast quantities of waste. Water supplies may also be affected by mines’ demand for water. Logging, much of which is illegal, is often unsustainable and leads to widespread deforestation (WWF-UK, 2009, EV 109). In the case of exports to China, there are numerous reports of environmental destruction in SSA, but what evidence is there that exports to China are more environmentally damaging than exports to other markets? Such an outcome could arise either because Chinese consumers are less aware or less concerned about the environmental impacts of their consumption than those in the West or because there is less government regulation of environmentally

32

It should be remembered that a significant part of this demand for resources is to produce goods which are then exported from China, so that the ultimate source of demand is elsewhere, mainly in the developed world.

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damaging imports in China or because there is a significant volume of illegal trade between SSA and China. Because the bulk of SSA’s exports to China and elsewhere are made up mainly of undifferentiated commodities such as oil and copper, which are not sold to the final consumer, it is unlikely that exporters will have any incentive to differentiate between a product sold to China and one sold to other, more developed countries. Consumers can only take account of the environmental impacts of a product that they buy when there is some form of certification in place (see Section 8.4.3 on timber). The ability of governments to take action against imports of goods produced in an environmentally damaging way is limited by World Trade Organization (WTO) rules that prevent discrimination on the grounds of how a product has been produced.33 Governments are, therefore, only able to restrict imports of environmentally damaging products under certain exceptional circumstances. Thus, neither consumer demand nor import regulations are likely to lead to a significant difference in the environmental impacts of goods exported to China compared to other markets. In fact the most likely cause of exports to China having a negative environmental impact is where there is extensive illegal trade. In recent years conservationists have pointed to demand from China for ivory and rhino horn as a major threat to the African elephant and rhinoceros (Gao and Clark, 2014).34 Although important from the point of view of conservation, from the environmental point of view, the illegal trade in ivory and rhino horn is less significant than the illegal trade in timber. The impact of Chinese trade and investment in forestry is discussed in more detail in Section 8.4.3.

8.4.2 Chinese Firms and the Environment There are numerous examples of Chinese firms causing environmental degradation in SSA. In Sudan and South Sudan, the China National Petroleum Corporation (CNPC) has been responsible for the destruction of farmland, deforestation, and the disruption of water flows (Patey, 2014, quoted in Shinn, 2016, pp.55–7). In 2013 the Chadian government suspended CNPC’s licence for oil exploration following the discovery of oil spills in the company’s area of operation (Tang and Sun, 2016, p.71). Prospecting for oil by the China Petroleum & Chemical Corporation (SINOPEC) in the Loango National Park created an outcry which led to the government of Gabon temporarily 33 The WTO generally prevents discrimination on the basis of ‘non-incorporated’ processes and production methods (PPM). The application of this principle has given rise to considerable debate (see Cottier, 2016). 34 In 2017 China announced a ban on trade in ivory, but it is too early to tell how effective this will be.

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suspending the company’s operations (Taylor, 2007). A number of small Chinese mining companies in the Katanga region of the DRC have been reported for their poor environmental track record (RAID, 2009), and, in Ghana, a number of illegal Chinese and other gold miners were arrested in 2013 and accused of soil and water pollution (Tang and Sun, 2016, p.79). Major Chinese dam-construction projects, such as the Merowe Dam in Sudan (Bosshard, 2008) and the Bui Dam in Ghana (Power et al., 2012, pp.211–4), have also had significant environmental impacts. While the Western literature on the environmental impacts of Chinese firms tends to focus on the negative aspects, Chinese studies tend to highlight successful cases and ways in which Chinese companies can reduce their environmental footprint in the future (Wang and Zadek, 2016). In Africa, the efforts of the China Road and Bridge Corporation to avoid harm to local wildlife during the construction of the Mombasa–Nairobi Railway have been commended (CAITEC et al., 2015, pp.72–3). CNMC’s activity in Zambia in reducing waste, recycling and increasing energy efficiency is another example of a Chinese company trying to reduce its environmental impact (ibid, pp.75–6). Chinese investment in renewable energy is also cited as a major positive contribution (see Section 8.4.4). A number of reasons have been put forward to explain Chinese firms’ poor environmental performance. First, as seen in Chapter 1, it is only relatively recently that environmental issues have come to the fore in China itself and that firms have become more accustomed to having to take their environmental impacts into account at home. Second, during the early years of the Go Global strategy, the Chinese government paid scant attention to the environmental impacts of FDI. The earliest attempts to provide guidance on the environmental aspects of Chinese companies’ overseas operations came with the State Forestry Administration and the Ministry of Commerce’s (MOFCOM) ‘Guide on Sustainable Overseas Silviculture by Chinese Enterprises’ in 2007, and the ‘Guide on Overseas Sustainable Forest Management and Use by Chinese Enterprises’ two years later. The first comprehensive environmental guidelines for Chinese foreign investors only came out in 2013, when MOFCOM and the Ministry of Environmental Protection (MEP) published their ‘Guidelines on Environmental Protection in Overseas Investment and Cooperation’.35 NGO criticism of the environmental effects of Chinese operations abroad has come mainly from international non-governmental organizations (NGOs), and very little concern has been expressed from Chinese civil society.

A survey of Chinese firms in three African countries carried out in 2015 found that 60 per cent of respondents had not heard of the Guidelines, and only 13 per cent could claim that they were familiar with them (Weng and Buckley, 2016, Fig. 4). 35

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As a result the China Council for International Cooperation on Environment and Development (CCICED) claims that Chinese firms are fifteen to twenty years behind their Western counterparts in terms of adopting environmental approaches in their foreign investments (CCICED, 2011, p.112). Third, it has been claimed that Chinese banks are prepared to fund projects which have been rejected by other lenders on environmental grounds and that Chinese firms have been able to win infrastructure and extractive-sector contracts because of lower environmental standards (Bosshard, 2008). Although the China Exim Bank has produced ‘Guidelines on Environmental and Social Impact Assessment of Loan Projects’ and the China Development Bank has its ‘Guidelines on Environmental Protection Project Development Review’, covering environmental impact assessments and project reviews of environmental impact, and requiring compliance with local environmental laws and regulations, these tend to be less comprehensive than those of multilateral lenders such as the World Bank, the International Finance Corporation, and the US Exim Bank (Gallagher, 2013). Critique of the environmental impacts of Chinese firms is often accompanied by an implicit, and sometimes explicit, assumption that Northern companies, which are subject to stricter environmental regulation at home and have been pressured by NGOs to adopt environmental codes of conduct, abide by significantly higher standards. However, this presents a rather rosy view of the environmental behaviour of Northern transnationals on the ground in SSA (Hilson, 2012). It also ignores the diversity of Chinese firms operating in the region, which, as seen in Chapter 6, range from large central SOEs to private SMEs and individual entrepreneurs. Several studies have shown substantial differences in the environmental performance of Chinese companies in SSA. A study of seven Chinese hydropower SOEs found that their environmental management ranged from good to poor (Jensen-Cormier, 2015, Tables 3 and 4). There is some evidence that large SOEs tend to perform better environmentally than smaller private companies (CCICED, 2011, p.112; Tang and Sun, 2016, p.74). A study in Mozambique, Kenya, and Uganda by the International Institute for Environment and Development showed greater awareness of Chinese government guidelines for foreign investors among SOEs than in private firms (Weng and Buckley, 2016). Despite this, the sheer scale of SOE operations is likely to mean that in absolute terms they have a greater environmental impact overall (Tang and Sun, 2016, p.75). Other factors besides national origin may contribute to poor environmental performance by Chinese companies. Chinese extractive firms have been latecomers in SSA, finding that US and European firms had already acquired the most accessible resources. They have, therefore, tended to operate in more remote areas which are often more ecologically sensitive and in some cases, 209

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are located in National Parks, such as SINOPEC in Gabon and the Bui Dam in Ghana. They also lack experience of operating in Africa, and there is evidence that Chinese companies with a longer history of operating overseas tend to perform better environmentally (CAITEC et al., 2015, Ch. 7). Although there are considerable differences in the environmental practices and performance of Chinese companies in SSA, the perception remains that, in general, Chinese firms tend to be more environmentally damaging than Western ones. Relatively few comparative studies have tested this empirically. One sector in which there has been more research on China’s environmental impacts on SSA is forestry.

8.4.3 Timber Case Study China’s imports of timber have increased rapidly since the year 2000, when restrictions were placed on domestic logging, and it is now the largest importer of tropical timber in the world. Although only a relatively small share of China’s imports of wood come from SSA, timber exports to China are a significant source of foreign exchange for several countries including Gabon, Equatorial Guinea, Mozambique, and the Republic of Congo (Wilkes, 2016, p.19). Exports to China and investment by Chinese firms have been widely criticized for contributing to deforestation in SSA (EIA, 2012; Freeman and Xu, 2015). EXPORTS TO CHINA

Several characteristics of the Chinese market influence the environmental impact that trade is likely to have in Africa, in contrast with the markets in developed countries. First, imports concentrate mainly on unprocessed logs. Although the share of round-wood logs in total Chinese imports of timber has fallen in recent years as some African countries have imposed restrictions on log exports, they still account for the bulk of imports from Africa (Wilkes, 2016, p.190). While there is a slight advantage in terms of a lower tariff than on processed wood, the main reasons for this preference for raw logs are the high efficiency of Chinese sawmills and the strong demand in China for by-products such as woodchips and shavings. As a result, logs account for a much higher proportion of timber exports from Cameroon and the Republic of Congo to China than to other markets, particularly the EU (Kozak and Canby, 2007). A second characteristic of the Chinese market is that there is a demand for a wide range of different kinds of wood, unlike demand in the North, which is much more selective in terms of the types of species required (Cerutti et al., 2011). Third, there is much less demand for certified wood products in China than there is in developed-country markets. Forestry has widely recognized certification schemes, such as the Forest Stewardship Council (FSC) Forest 210

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Management and Chain-of-Custody certificates and the Programme for Endorsement of Forest Certification, which provide for mutual recognition of national standards that meet certain sustainability benchmarks. These certification schemes are much more prevalent in developed-country markets than in China, and they provide a means by which consumers can distinguish between wood products made from sustainable timber and those that are not. A Greenpeace (2015) study of Chinese companies operating in the Congo Basin found that only three out of sixteen companies interviewed had been asked by their customers to provide FSC certification. The degree of Chinese consumers’ awareness of industry practices in tropical timber-producing countries is low (Huang et al., 2013, p.349). Fourth, government regulation of imported timber and wood products is stricter in developed-country markets than in China. The EU Forest Law Enforcement Governance and Trade Action Plan (FLEGT) and the US Lacey Act require importers of all wood products to demonstrate the legality of the timber source (Huang et al., 2013, p.349). Although the Chinese government has taken some action to check illegal logging, this has concentrated mainly on domestic Chain-of-Custody certification, and has no relation to the legality of wood imported from third countries (Freeman and Xu, 2015, p.332). As far as imported timber is concerned, China has preferred to issue guidelines rather than regulations and legal means (ibid, p.334). Finally, a significant proportion of Chinese imports of timber comes from illegal logging. Freeman and Xu, (2015, p.328) estimate that more than half of Chinese imports come from illegal sources. A number of major Chinese timber importers have been linked to illegal logging in the Congo Basin (Greenpeace, 2015, pp.16–19). As Table 8.1 indicates, a much higher proportion of exports to China from several SSA countries is likely to be illegal than is the case with the exports to the EU. These illegal imports are likely to be particularly harmful to the environment of the countries from which they are sourced because loggers ignore local regulations designed to restrict deforestation. Most of these characteristics of Chinese demand make it more likely that exporting to China will have a negative impact on forests in the country of Table 8.1. Percentage of Exports of Wood Products at High Risk of Illegality, by Destination, 2013

Cameroon Congo DRC Ghana

China

EU

37% 84% 79% 36%

14% 20% 38% 10%

Source: Based on illegality estimates compiled by Chatham House and official national trade statistics. Data compiled by James Hewitt for Chatham House.

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origin. The fact that wood is not processed within SSA means that a dollar of exports involves more environmental cost than would be the case if there was more value added locally. Although less selectivity might mean that exports to China would cause more deforestation, in fact, it has been suggested that because logging that is more selective requires strong penetration into core forest areas, the reverse is likely to be the case (Brandt et al., 2014). The limited demand for certified wood products and the lack of regulation of imports to China, together with the extensive trade in illegal timber, all tend to make exports to China more environmentally damaging than those to the EU or US. Two factors might modify any tendency for such a dualistic market structure to emerge, with sustainable timber exported to the US and the EU and illegal or unsustainably produced timber exported to China. First, a significant portion of the timber imported to China is incorporated into wood products and furniture for export, and where the destination market is the EU or the US, there is still a need to provide evidence of the origin of the timber used.36 This has been an important driver for firms in China to obtain FSC Chain-ofCustody Certificates. Between 2010 and 2013, 2,412 such certificates had been issued in China (Blackmore et al., 2013, Table 1). The second factor that might reduce differences between exports to China and those to developed-country markets is that large TNCs or SOEs may find it easier to adopt a uniform standard for their exports irrespective of the destination market.37 Overall, however, it is likely that wood exports to China have a greater negative environmental impact compared with exports to other markets. CHINESE INVESTMENT

Although the forestry sector in SSA accounts for a relatively small share of total Chinese outward foreign direct investment, the number of approved projects has increased significantly from eight in 2007 to eighty-four in 2015, with operations in twenty-five countries (Li and Yan, 2016). Chinese companies are particularly involved in Gabon, where about a third of logging companies are Chinese owned (Wilkes, 2016, p.27) and in other countries in Central and Southern Africa, including the Republic of Congo, Mozambique, and Zambia. Chinese firms investing in SSA include large 36 Between 1999 and 2009, exports accounted for about a quarter of total consumption of wood products in China (Huang et al., 2013, p.349). 37 Examples from other sectors include the Chilean copper SOE, CODELCO, which is reported to apply the same standards across its projects regardless of the end market (Blackmore et al., 2013, p.23), and TNCs such as Cargill, ADM, and Bunge, which export agricultural products from Brazil to both Northern and Southern markets and have well-developed sustainability policies (ibid, p.37).

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SOEs such as the Jilin Sengong Group in Equatorial Guinea, Zhong Lin International in Gabon, and large private firms such as Yihua Wood in Gabon, as well as SMEs (Wilkes, 2016, p.25). While there is evidence that wood exported to China is likely to be produced in a less sustainable way than exports to Northern markets, does the nationality of the firms involved also make a difference to the environmental impact? Here what little evidence exists is less clear. Most of the comparative studies that have been carried out look at different types of firms’ environmental practices and degree of regulatory compliance rather than their actual environmental impact. In Cabo Delgado province, Mozambique, it was found that European firms were more likely than Chinese companies to be operating with an approved management plan (Wertz-Kanounnikoff et al., 2013). A comparison of European and Asian (many of them Chinese) companies in the Republic of Congo also found that a higher proportion of the European firms complied with the requirements of the country’s Forest Management Plan. However, European firms had the greater impact on deforestation. This was attributed to the more selective logging by European firms, which meant that they had to open up more areas of core forest in order to obtain a given volume of timber (Brandt et al., 2014). Studies of Gabon have come to conflicting conclusions regarding the extent to which Chinese firms operate without management plans and the required licences, although it is noted that such practices are also common among nonChinese firms (Freeman and Xu, 2015, pp.339–41). A study of two European and one Chinese firm in Cameroon concluded that the market to which the firms exported affected their logging practices more than the nationality of the firm (Cerutti et al., 2011). The differences in deforestation by European and Asian firms in the Republic of Congo can also be explained by the fact that the Asian market for timber is much less selective than the European market in terms of species (Brandt et.al., 2014). More evidence is needed before coming to any definitive conclusions about the relative environmental impacts of Chinese and other firms. There is more convincing evidence that exports to China and those to Northern markets might have different implications. Although this may involve higher standards in exporting to the developed world, formal compliance may not always lead to less environmental degradation.

8.4.4 Wind and Solar Power While there are widespread concerns about the negative environmental impacts of many Chinese infrastructure projects in SSA, one area where there are potential positive impacts, particularly in terms of climate change, 213

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is the involvement of Chinese firms in renewable energy in the region. As seen in Chapter 1, China has become a world leader in renewable energy. According to the International Energy Agency, China will install 40 per cent of global wind energy and 36 per cent of solar capacity between 2015 and 2021 (Buckley and Nicholas, 2017, p.1), and half of the top-ten manufacturers of both wind turbines and solar cells in the world were Chinese companies in 2015 (Buckley and Nicholas, 2017, Fig. 2: Mints, 2016, Table 2). Chinese firms are involved in hydropower, solar, wind, and biomass projects in SSA. Renewables account for 56 per cent of new power generation capacity built in SSA since 2010, which is planned to come on stream by 2020. The bulk of this (49 per cent) is accounted for by hydropower, while other renewables account for 7 per cent (IEA, 2016, Fig. 4). Although hydropower projects produce low-carbon energy, large dams, which account for the bulk of such projects, can have negative social and environmental impacts, as discussed. In terms of positive environmental benefits, the focus is mainly on wind and solar power. At the Forum on China-Africa Cooperation meeting in 2009, Chinese Premier Wen Jiabo announced that China would carry out one hundred cleanenergy projects in Africa. It is not clear how far this pledge has been met or how far the projects that have been carried out were market driven rather than specifically linked to government commitments (Esterhuyse and Burgess, 2015, p.1). There has, however, been an increased presence of China in renewable energy in Africa. China’s involvement in wind and solar power in SSA has taken three forms: exports of renewable energy equipment; investment in manufacturing equipment; and construction of generation capacity (Conrad et al., 2011, Ch. 3). The most important has been the export of equipment such as photovoltaic (PV) panels, solar water heaters, and wind turbines. Although there has been talk of Chinese investment to produce such equipment in the region, the only significant example so far has been Jinko Solar, which opened a factory producing solar panels in Cape Town in 2014 (Shen and Power, 2017, p.13). An earlier attempt to set up a PV manufacturing plant in Kenya failed (Conrad et al., 2011, p.32). There has been talk of Longyuan establishing facilities to produce wind turbines in South Africa, but these have not yet materialized (ibid, p.33). Chinese firms have been more involved in constructing wind farms and solar power plants than in manufacturing equipment in SSA. These include wind farms in South Africa and Ethiopia and solar power projects in South Africa, Senegal, Kenya, and Rwanda (IEA, 2016, Map 1; Tan et al., 2013, Annex 1 and 2). China is also involved in a trilateral project with the United Nations Development Programme and African countries (Ghana and Zambia) to promote the transfer of renewable energy technology from China to Africa under the UN’s Sustainable Energy for All (SE4ALL) 214

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project, which aims to enhance off-grid, community-based electrification (IEA, 2016, Box 6). Chinese involvement in renewable energy in SSA has primarily been commercially driven. The rapid expansion of renewables in China has led to substantial overcapacity in both wind turbines and solar panels. New investment in wind farms in China slowed down from around 2010, and as a result Chinese firms began exporting on a significant scale, with exports of wind turbines tripling between 2011 and 2013 (Shen and Power, 2017 p.6). The solar industry was much more export oriented from the outset, but it has been hit by a slowdown in demand in developed-country markets and increasing protectionism against Chinese solar products. A number of Chinese PV manufacturers collapsed between 2012 and 2013, but even so, there continues to be substantial excess capacity. The firms that survived looked for new markets outside the EU and the US, and there has been a massive increase in exports to Africa (ibid, p.8). Although the Chinese government is able to point to its role in developing renewable energy in SSA as part of its contribution to international efforts to mitigate climate change, this has not been a major driver. It is hard to argue that environmental factors are an important factor behind China’s involvement in power generation in Africa when coal-fired and gas-fired power plants account for a much greater share of capacity compared with wind or solar power.38 While there is significant potential for expansion of wind and solar power in the region, and China is well placed to contribute to such expansion, so far this potential remains largely unexploited.

8.4.5 Conclusion The picture that emerges of China’s environmental impact in SSA is more mixed than the purely negative one that is often painted. There is evidence that in some cases, most notably timber, exports to China are likely to be more environmentally damaging than exports to developed-country markets are, although environmental damage is by no means confined to exports to China. In the case of petroleum or minerals, there is less reason to suppose that the destination of exports leads to significant differences in the environmental impact of production. In these sectors differences in environmental impact are likely to be associated more with differences between companies of different origin than with the destination of their exports.

38

The International Energy Agency (IEA) (2016, Fig. 4) estimates that 20 per cent of capacity added between 2010 and 2020 was based on coal, 19 per cent on gas, and only 7 per cent on renewables other than hydropower.

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The environmental impact of Chinese companies overseas is becoming a more important concern for both the Chinese government and some of the companies involved. From the government’s point of view, reports of environmentally destructive activities by Chinese companies undermine its narrative of ‘mutual benefit’ and South-South cooperation used to promote its soft power in Africa. The larger Chinese companies that now operate globally are also under increased pressure to operate in an environmentally responsible way. It is still too early to say how far the new guidelines from MOFCOM and MEP will be a significant factor in promoting a shift in behaviour, bearing in mind that they are only recommendations and companies are not obliged to follow them. There are signs, however, that Chinese companies’ environmental management and performance improves as they acquire more experience of operating abroad. The problems of environmental degradation arising from trade and investment in SSA are in large part a reflection of weak governance in the region. There is no doubt that in many SSA countries the lack of effective regulation is a major factor that has allowed Chinese (and other) resource extraction companies to cause environmental damage. As Tan-Mullins and Mohan’s (2013) comparison of Ghana and Angola shows, where there is a more active civil society and stronger local legislation, as in Ghana, Chinese companies are likely to cause less damage than in a country such as Angola, where power is highly concentrated in the hands of a narrow elite. Similarly, the relatively limited development of renewable energy (apart from hydropower) is also in part the result of the governments of the region’s lack of appropriate policies and commitment. A more sustainable pattern of development requires changes within the African countries and not simply better performance by external actors, whether they are from China or elsewhere.

Appendix to Chapter 8 Econometric Analysis of Political Factors 1. Political Determinants of China’s Economic Involvement in SSA In order to analyze the impact of political conditions in SSA on Chinese involvement, three additional variables were added to those used to explain Sino-SSA relations in Chapter 6. These variables measure the impact of the degree of democracy, the extent of control of corruption, and the level of political stability. If the critics of Chinese involvement are correct, each of these variables is negatively related to the level of Chinese trade, investment, projects, and loans in the region. Three political indicators obtained from the World Bank’s World Governance Indicators (WGI) are used in the analysis. These have the advantage of having been

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Social, Political, and Environmental Impacts in Sub-Saharan Africa published annually since 2002 for all of the countries covered. They are also widely used in the literature, and fit well with Western critics’ claims about China’s political role in SSA. ‘Voice and Accountability’ is taken as a measure of the extent to which a country is democratic in a broad sense. ‘Control of Corruption’ is assumed to be inversely related to the extent of corruption in a country and a measure of its government’s determination Table A8.1. Effects of Voice and Accountability on Sino-SSA Economic Relations Bilateral trade

Voice/ accountability Log China GDP Log SAA GDP Openness Landlocked Distance Minerals Fuels Recognition of Taiwan UN voting Random/fixed Observations R-squared

Chinese imports

Chinese exports

FDI stock

Contracted projects

Loans

(1)

(2)

(3)

(4)

(5)

0.007*

-0.03***

0.008**

-0.002

0.03**

1.54*** 0.56*** 0.005*** –0.60 –0.25 0.81*** 0.64*** –0.08

1.23*** 1.69*** 0.013*** 0.14 0.27 3.50*** 1.44** –0.01

3.40*** 1.47*** –0.002 Omitted Omitted 0.31 2.02*** –0.93**

0.69** 2.39*** –0.005 Omitted Omitted –0.06 3.15*** –1.63***

0.78* 0.59*** 0.01 0.04 –0.19 0.19 -0.57 –0.45

–0.26 FE 604 0.47

–0.71 FE 604 0.30

–0.24 RE 604 0.20

0.25 RE 604 0.46

–0.67 RE 594 0.70

1.65*** 0.82*** –0.001 –1.05*** 0.00 0.25 0.42** –0.52*** 0.08 RE 604 0.70

(6) -0.01

*, **, and *** significant at 10%, 5%, and 1% level

Table A8.2. Effects of Control of Corruption on Sino-SSA Economic Relations Bilateral trade

Control of corruption Log China GDP Log SAA GDP Openness Landlocked Distance Minerals Fuels Recognition of Taiwan UN voting Random/fixed Observations R-squared

Chinese imports

(1)

(2)

0.003

–0.01

1.56*** 0.56*** 0.005*** –0.62 –0.23 0.83*** 0.63*** –0.07 0.29 RE 604 0.48

1.15*** 1.64*** 0.013*** 0.28 0.17 3.60*** 1.72*** –0.07 –0.77 RE 594 0.67

Chinese exports (3) 0.01*** 1.68*** 0.82*** –0.001 –1.08*** 0.00 0.29 0.47** -0.50*** 0.14 RE 604 0.70

FDI stock (4)

Contracted projects

Loans

(5)

(6)

0.006

-0.008

3.39*** 1.49*** –0.002 Omitted Omitted 0.31 2.00*** –0.93**

0.72** 2.46*** –0.005 Omitted Omitted –0.01 3.10*** –1.60***

0.73* 0.57*** 0.01* 0.10 –0.24 0.27 –0.48 –0.47

–0.26 FE 604 0.47

–0.59 FE 604 0.31

–0.30 RE 604 0.19

-0.00

*, **, and *** significant at 10%, 5%, and 1% level

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How China is Reshaping the Global Economy Table A8.3. Effect of Political Stability on Sino-SSA Economic Relations Bilateral trade

Political stability Log China GDP Log SAA GDP Openness Landlocked Distance Minerals Fuels Recognition of Taiwan UN voting Random/fixed Observations R-squared

Chinese imports

Chinese exports

FDI stock

Contracted projects

Loans

(1)

(2)

(3)

(4)

(5)

(6)

0.002 1.56*** 0.56*** 0.005*** –0.61 –0.23 0.79*** 0.60*** –0.08

-0.01* 1.16*** 1.62*** 0.013*** 0.22 0.18 3.69*** 1.87*** –0.05

0.004** 1.67*** 0.83*** –0.001 –1.05*** 0.03 0.22 0.40** –0.51***

0.003 3.40*** 1.43*** –0.001 Omitted Omitted 0.29 2.04*** –0.93**

0.01** 0.80** 2.31*** –0.005 Omitted Omitted –0.12 3.12*** –1.62***

0.000 0.75* 0.56*** 0.009 0.13 –0.24 0.35 –0.21 –0.47

–0.24 FE 604 0.48

–0.56 FE 604 0.32

–0.27 RE 604 0.18

0.27 RE 604 0.49

–0.70 RE 594 0.66

0.11 RE 604 0.70

*, **, and *** significant at 10%, 5%, and 1% level

to deal with corruption problems. Finally, ‘Political Stability and Absence of Violence/ Terrorism’ provides an indication of the degree of political risk in a country. As in Chapter 6, panel regression was used and random or fixed-effect results are reported depending on the results of applying the Hausman test. As before, the dependent variables were lagged by one year to avoid problems of reverse causality. Because the WGI indicators are not available for 2001, a year of data was lost compared to the estimates in Chapter 6. The impact of each of the three variables on the six measures of Chinese relations with SSA was tested separately. The results are reported in Tables A8.1–3.

2. Political Effects of Chinese Economic Involvement in SSA In order to test the impact of China on governance in SSA, the same three WGI variables discussed earlier were used as dependent variables. Lagged values of several measures of China’s economic presence were used as independent variables: these were China’s share of a country’s total trade, its share of the FDI stock, the value of completed Chinese projects per capita, and China’s share in total loans received. Based on previous studies, several other control variables were also included in each of the regressions. These were GDP per capita, population, and the share of fuels and of minerals in total exports. GDP per capita was expected to be positively related to the levels of the governance variables, whereas the other three variables were expected to have a negative impact on them. These were also lagged to avoid problems of reverse causation.

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Social, Political, and Environmental Impacts in Sub-Saharan Africa Table A8.4. Impact of Economic Relations with China on Governance Control of corruption

Political stability

Voice & accountability

5.63*** –3.07* –17.7*** 1.22 –3.21 –1.47 0.28* –0.20 RE

8.0*** –5.22*** –11.02*** 10.34** –5.48 1.62 0.50*** –0.55 RE

4.77** –1.98 –0.94 4.50* 1.89 –0.64 0.11 1.00 FE

559 0.44

559 0.04

SSA GDP per capita SSA population Fuels Minerals China’s trade share China’s FDI share Chinese projects p.c. China’s loan share Random/fixed Observations R-squared

559 0.24

*, **, and *** significant at 10%, 5%, and 1% level

Data Sources: Variable

Source

Control of corruption Political stability Voice and accountability SSA GDP per capita SSA population Fuels Minerals China’s trade share China’s FDI share Chinese projects p.c.

World Bank, World Governance Indicators

China’s loan share

World Bank, World Governance Indicators World Bank, World Governance Indicators GDP per capita in constant US$: World Bank, World Development Indicators UNCTADStat Share of fuels in total exports: UNCTADStat Share of ores and minerals in total exports: UNCTADStat Share of China in total trade: UNCTADStat Share of China in total stock of FDI: MOFCOM and UNCTADStat Chinese economic cooperation per capita: National Bureau of Statistics of China and UNCTADStat Chinese loans divided by Chinese + DAC loans: SAIS-CARI and OECD

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Part III China and Latin America and the Caribbean

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9 China’s Economic Expansion in Latin America and the Caribbean

9.1 Introduction Relations between the Peoples Republic of China (PRC) and Latin America and the Caribbean (LAC) are a relatively recent development.1 Until the 1970s, all countries in the region, apart from Cuba, continued to maintain diplomatic relations with Taiwan. In 1971, Chile, under the socialist Popular Unity government, recognized the PRC, but many Latin American countries did not do so until after 1979, when the US and PRC established diplomatic relations and when China began its economic reforms. Nine countries in the region continue to recognize Taiwan and do not have diplomatic relations with the PRC, making the region the most significant concentration of countries that maintain relations with Taiwan. It was during the 1990s that China began to increase its political engagement with Latin America. It first established a ‘strategic partnership’ with Brazil in 1993. Relations with the region took off at the turn of the century. Further strategic partnerships were signed with Venezuela (2001), Mexico (2003), Argentina (2004), Peru (2008), and Chile (2012). Chinese Presidents Hu Jintao and Xi Jinping have visited Latin America on a number of occasions, while most Latin American leaders have undertaken state visits to China. Although relations with the region remain mainly at a bilateral level, China has engaged in a number of regional initiatives. It was eventually allowed to join the Inter American Development Bank (IADB) in 2008, after its application was initially blocked by the US. It has had observer status at the Organization of American States since 2004, and has established dialogues with

1

Latin America and the Caribbean, in this study, include thirty-three politically independent countries, which are listed in the Appendix to this chapter. It does not include Caribbean territories that are dependencies of other states, such as the Cayman Islands and the British Virgin Islands.

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regional organizations such as Mercosur and the Andean Community. However, the first regional summit between China and the countries of the region, the China-CELAC (Community of Latin American and Caribbean States) Forum, was not held until 2015. Economic relations between China and LAC remained extremely limited throughout the 1990s, but there has been dramatic growth since the start of the twenty-first century. Initially this focussed on trade, but since the late 2000s, there has been an increased presence of Chinese companies through foreign direct investment (FDI), construction and engineering projects, and lending by Chinese banks. Acquiring raw materials has been a key part of China’s involvement in Latin America, but it is by no means the only aspect. The need to find new markets for Chinese goods has also been a factor in the growth of Chinese exports to the region and of some FDI and loans. This chapter describes the main characteristics of Sino-Latin American relations, the main actors involved, and the drivers that have led to closer economic links.

9.2 The Growth of Sino-Latin American Relations China’s economic relations with LAC have taken a number of forms, all of which have increased considerably since the start of the Millennium. This section documents the growth of bilateral trade, foreign investment, and projects undertaken by Chinese firms in the region, and loans and aid provided by China to LAC. The significance of China for LAC varies considerably between the different kinds of relationships.

9.2.1 Trade Trade is central to Latin America’s economic relations with China. In the late 1990s, total trade (imports plus exports) between China and Latin America was only around US$5–8 billion a year. Bilateral trade grew dramatically from the turn of the century, to reach more than $255 billion in 2014. Between 1999 and 2014, China’s imports from Latin America increased more than forty-fold, and exports to the region more than twenty-fivefold, before falling in 2015, as both the Chinese and Latin American economies slowed down and global commodity prices fell sharply (see Figure 9.1). Trade between China and Latin America has been relatively balanced overall, in contrast with China’s deficit in trade with Sub-Saharan Africa (SSA), and since 2012, China has enjoyed a trade surplus with the region. This hides substantial variations between countries, with China running trade deficits 224

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US$ billions

100 80 60 40 20

Imports

Exports

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

–20

1995

0

Trade Balance

Figure 9.1. China’s Trade with Latin America, 1995–2015 (US$ Billion) Source: UNCTADStat

with Brazil, Chile, Venezuela, and Peru, while it has surpluses in trade with other Latin American countries, particularly Mexico. Trade between China and LAC is predominantly inter-industry trade, with relatively little of the intra-industry trade in parts and components, which characterizes flows within global value chains (GVCs) (Ortiz-Velásquez and Dussel-Peters, 2016). LACs participation in GVCs is much lower than in other regions such as the EU and Asia (OECD, 2016, p.108).2 The region has not, therefore, taken advantage of the possibility of more complex trade relations with China that integration into GVCs could provide. China’s imports from the region are dominated by primary products and resource-based manufactures, while exports are almost entirely of nonresource-based manufactures. China’s imports from LAC are more heavily concentrated in primary products than those of the US, the EU, and Japan (Figure 9.2). The share of primary products in China’s imports from LAC has also increased in recent years.3 As a result, the growing share of the region’s exports going to China has led to the ‘recommodification’ or ‘reprimarization’ of its export structure (Rosales and Kuwayama, 2012, pp.92–107; Su, 2017, pp.582–6). Agricultural products, fuels, and minerals account for about 85 per cent of China’s imports from the region. The top products that China imported from Latin America in 2013–15 were oil seeds (mainly soybeans), iron ore and 2

Mexico is an exception because of its high integration with the US as a result of NAFTA. The average share of primary products in Chinese imports from the region increased from 39 per cent in 2005–7 to 50 per cent in 2013–15, while the share of resource-based manufactures (RBMs) fell from 44 per cent to 38 per cent over the same period (own calculation from UNCTADStat data). 3

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How China is Reshaping the Global Economy 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

China

USA

High tech RBM

EU Medium tech Primary prods

Japan Low tech

Figure 9.2. Shares of Different Products in Imports from Latin America, 2013–15 Source: own elaboraon from UNCTAD STAT data based on the classificaon developed by Lall (2000)

concentrates, petroleum, copper ores and concentrates, and refined copper, making up more than two thirds of total imports from the region. They are all primary products or resource-based manufactures with a limited degree of processing, such as refined copper. Although the low level of processing of raw materials exported to China and the very limited exports of manufactured goods partly reflects the fact that Latin America’s comparative advantage is largely based on natural resources, the higher share of such products in exports to China than to other markets suggests that this is not the whole story. In fact Chinese policies to promote manufacturing at home have made it more difficult for exporters of processed products to access the market. One example of this is China’s import of soybeans from Argentina. In the 1990s China promoted its own crushing industry through a variety of incentives and protectionist policies, so that imports of soybean flour virtually ended, to be replaced by imports of unprocessed soybeans (see Box 9.1). There are success stories of Latin American exporters breaking into the Chinese market. Wine exports from Chile to China are growing rapidly, with exports from the leading producer Concha y Toro increasing from a few hundred cases in 2000 to more than 16,000 in 2011 (Thomson, 2012). There are also some cases of non-traditional exports from Latin America which occur within GVCs. These include integrated circuits from Costa Rica (until Intel switched production to Asia) and Mexico, and engine parts from Brazil and Mexico. However, these have not had a significant impact on the overall pattern of trade. 226

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One significant aspect of Chinese exports to Latin America is the way in which they have diversified from low-tech manufactures to products that are more sophisticated, so that they are now more or less equally divided between low-, medium-, and high-technology products. Chinese cars, computers, mobile phones, and machinery are becoming increasingly common in the region. Although Latin America is a relatively small trading partner for China compared with the US, EU, and China’s East Asian neighbours, the region has increased its share of both Chinese imports and exports in recent years. In the late 1990s, Latin America accounted for around 2 per cent of total imports to China, but by 2012, this had increased to almost 7 per cent, although it has fallen again since then (UNCTAD Stat, n.d.). China’s dependence on Latin America is particularly significant for certain key commodities: around a quarter of China’s imports of iron ore and more than half of its imports of copper ore come from Latin America. The region (mainly Brazil and Argentina) also provides more than half of China’s imports of soybeans. Prior to China becoming a member of the World Trade Organization (WTO), Latin America accounted for less than 3 per cent of Chinese exports. Since 2001, the region has increased in significance, and by 2012, it accounted for more than 6 per cent of Chinese exports worldwide (UNCTAD Stat, n.d.). Since 2012, the share of Chinese exports going to the region has declined as growth in Latin America has slowed. China is clearly more important to Latin America as a trade partner than Latin America is to China. The share of Latin American exports going to China rose from less than 2 per cent in the early 2000s to almost 10 per cent by 2013, while imports from China increased from just over 3 per cent to around 16 per cent over the same period. China has already overtaken the EU as a source of imports for the region, and is narrowing the gap as a destination for its exports. The US continues to be a more important market for Latin America than China, but this partly reflects the close ties between Mexico and the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) countries and the US.

9.2.2 Foreign Direct Investment Chinese investment in Latin America is a relatively recent phenomenon. Despite the rapid expansion of trade relations during the first decade of the twenty-first century, Chinese companies only began to invest in the region on a significant scale towards the end of the decade in the aftermath of the global financial crisis. As noted when discussing Chinese outward FDI (OFDI) in SSA in Chapter 6, the official Chinese data are problematic, and they underestimate the true 227

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level going to countries in the region. In the case of Latin America, a further source of confusion is that FDI figures sometimes quoted for the region include investment in Caribbean tax havens, particularly the Cayman Islands and the British Virgin Islands, which between them account for over 90 per cent of the stock of Chinese FDI in the LAC area as a whole. These tax havens are not included in the figures used here. According to the Chinese Ministry of Commerce (MOFCOM) figures, the total stock of Chinese FDI in LAC (excluding the Cayman and British Virgin Islands) at the end of 2015 was $12.2 billion (Fig. 9.3). This is a substantial underestimate of the real level of Chinese FDI in the region. In 2010, Sinopec spent $7.1 billion acquiring a 40 per cent share of the Spanish firm Repsol’s Brazilian operation. This was more than double the total stock of Chinese FDI reported by MOFCOM at the end of 2010. SINOPEC’s investment was not included in the official Chinese figures because it was made through a Sinopec subsidiary in Luxembourg, rather than by the parent company. Estimates of Chinese FDI in the region based on media announcements give much higher figures. ECLAC estimates that China invested US$7.3 billion in the region between 1990 and 2009, and a further $63.5 billion between 2010 and 2015 (Perez-Ludena, 2017, Table 2). Another recent estimate put total Chinese investment in LAC between 2001 and 2016 at US$113.7 billion (Dussel-Peters and Ortiz-Velásquez, 2017, Table 1). The American Enterprise Institute (AEI)/Heritage Foundation China Global Investment Tracker database reports over US$80 billion of Chinese investment in the region between 30,000 25,000 20,000 15,000 10,000 5,000

2015

2014

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2009

2008

2007

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2004

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FDI flows FDI Stock FDI Announcements

Figure 9.3. Chinese OFDI in Latin America, 2003–15 (US$ Million) Sources: MOFCOM for FDI flows and stocks and AEI/Heritage Foundaon for FDI announcements

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2005 and 2015.4 Figures based on media reports tend to inflate aggregate FDI because not all announced projects are actually implemented, and when they are, they may be scaled back. Nevertheless, these figures do confirm that the official MOFCOM figures underestimate the true level of Chinese investment in the region. How significant is Latin America as a destination for Chinese FDI? If one compares the MOFCOM figures with the global stock of Chinese outward investment, Latin America accounted for just over 1 per cent of the total in 2015. Even if Hong Kong is excluded from the total, Latin America’s share of China’s total FDI stock only came to less than 3 per cent (own calculation from MOFCOM data).5 This may well underestimate the true significance of the region if a high proportion of Chinese FDI comes via other countries. According to the China Global Investment Tracker, 11 per cent of cumulative Chinese investment between 2005 and 2016 was in LAC. How does the level of Chinese investment in Latin America compare to other sources of inward investment to the region? Despite large recent inflows, China’s share of total inward investment in Latin America remains very low. Recent estimates suggest that, based on official figures, China accounted for less than 1 per cent of the stock of FDI in the region (Table A9.1). Even taking the higher unofficial estimates of Chinese FDI, the share of China in inward investment in recent years has only been around 5–6 per cent of total inflows (ECLAC, 2015, p.36).6 This still means that it is a relatively minor player compared to the EU and the US (40 per cent and 25 per cent of the total, respectively; ECLAC, 2013, p.11). The bulk of Chinese investment in Latin America has been in natural resource sectors. Estimates vary with some putting the share as high as 90 per cent (Dussel-Peters, 2012, Table 5; Perez-Ludeña, 2017, p.14).7 This is much higher than the region’s FDI from other countries as only a quarter of all FDI in the region was in resources (ECLAC, 2015, p.37). The most significant sector in terms of Chinese OFDI in Latin America is oil and gas, which accounts for around 40 per cent of all Chinese investment announced in the region between 2005 and 2015, according to the AEI/Heritage Foundation.

4 China Global Investment Tracker, available at: http://www.aei.org/china-global-investmenttracker/ (Accessed 18 Oct. 2016). 5 In 2015 the stock of Chinese FDI in two Caribbean tax havens, the Cayman Islands and the British Virgin Islands, came to over US$60 billion, accounting for 11.5 per cent of the total worldwide. Since these are unlikely to be the final destinations of Chinese FDI, there is an argument for excluding them from the comparison with investment in Latin America. 6 Another estimate indicates that China accounted for 7.5% of total FDI in LAC between 2011 and 2016 (own calculation from Ray and Gallagher, 2017, Figure 5). 7 A lower estimate for the period 2001–16 shows only around two thirds of the total going into raw materials (Dussel-Peters and Ortiz-Velásquez, 2017, p.4).

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The other major sector for investment is metals, which accounted for almost 30 per cent of total Chinese investment in the region in 2005–15.8 All of these studies are based on information collected from published databases and media reports, and they only include large-scale investments and, thus, overestimate the share of extractive industries by failing to capture some smaller investments, particularly those by private firms. However, these are unlikely to change the general picture that emerges: that the recent surge in Chinese investment in Latin America has been heavily oriented towards resource extraction.

9.2.3 Contracted Projects Chinese construction and engineering projects, which are not regarded as FDI, are much less significant in Latin America than in SSA. The total value of completed contracts in Latin America between 2005 and 2015 came to $81.2 billion, according to the Chinese National Bureau of Statistics, while the AEI/Heritage Foundation gives a somewhat lower figure of $52.3 billion. Venezuela has been the most significant market for Chinese contractors in the region in recent years, followed by Brazil and Ecuador. According to the China Global Investment Tracker, energy has been the most important sector for contracts in the region, followed by transport. Between them, these account for over 80 per cent of the total between 2005 and 2015. Although energy accounts for two thirds of the value of contracts, the most important subsector is hydropower. Oil and gas together account for 16 per cent of the total (Figure 9.4). The main sector for transport contracts is railways, with large deals in Venezuela and Argentina.

9.2.4 Chinese Loans and Aid As noted in Chapter 6, China does not publish data on official financial flows on either a country or a regional basis. A recently developed database has put together information on loans provided by the Exim Bank, the China Development Bank (CDB), and other Chinese state institutions to the region. This estimates that between 2005 and 2015, these institutions lent a total of more than US$120 billion to LAC.9 As in the case of FDI, the bulk of this lending has occurred relatively recently. Before 2007, Chinese lending to the region was minimal, but since 2009, it has been substantial (see Figure 9.5). 8 Own calculation from American Enterprise Institute/Heritage Foundation, China Global Investment Tracker, available at: https://www.aei.org/china-global-investment-tracker/ (Accessed 18 Oct. 2016). 9 The Inter-American Development Dialogue China-Latin America Finance Data Base available at: http://www.thedialogue.org/map_list (Accessed 18 Oct. 2016).

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Hydro 23%

Gas 5%

Coal 6%

Construction 4% Utilities 1% Agriculture 5% Technology 2%

Figure 9.4. Sectoral Distribution of the Value of Chinese Project Contracts in LAC, 2005–16 Source: China Global Investment Tracker 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000

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Loans Economic Cooperation Contract Announcements

Figure 9.5. Chinese Loans and Projects in Latin America, 2005–15 (US$ Million) Sources: Loans—China–Lantin America Finance Database Economic Cooperation—NBSContract Announcements—China Global Investment Tracker

At its peak in 2010, Chinese lending to Latin America was significantly greater than that of either the World Bank or the IADB, while China’s Exim Bank has lent more than four times as much as the US Exim Bank in Latin America since 2005 (Gallagher et al., 2012, p.7). Chinese loans to Latin America were dominated by one country, Venezuela, which received more than half of the total loans identified by Inter-American Dialogue since 2005; and four countries together, Venezuela, Brazil, Argentina, and Ecuador, accounted for 95 per cent of the total. Comparing the figures for 231

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Chinese lending with total official finance for the Latin American countries from other sources shows that China is a major source of funds for two countries: Venezuela and Ecuador. In Latin America, around a quarter of Chinese loans went to the energy sector and 5 per cent to mining.10 Over 40 per cent of all Chinese loans to Latin America were classified as being for infrastructure. As in SSA, more than half of Chinese loans to Latin America were commodity backed, particularly in Venezuela and Ecuador (Brautigam and Gallagher, 2014, Table 1). Both Venezuela and Ecuador are regarded as high-risk countries, and they have low credit ratings, so ensuring repayment through commodity exports helps to reduce the risk for Chinese lenders. Because many Latin American countries are classified as middle income, they have not been major recipients of aid. According to China’s State Council, LAC accounted for only 12.7 per cent of Chinese aid funds in 2009 and 8.4 per cent in 2010–12. Based on the earlier estimates of global Chinese aid, this would only amount to around US$430 million in 2008. More recently it has been calculated that Chinese aid to the region came to $560 million in 2013, representing about 7 per cent of total aid flows to the region and making China the fifth-highest-ranked donor (Stallings, 2017, Table 4.2). It is clear that only a small proportion of Chinese financial flows to the region can be classified as ODA. Although total financial flows from China to Latin America in recent years have been roughly similar to those to Africa, its aid flows to the region are less than a sixth of the level of Chinese aid to Africa.

9.3 Key Actors in China-Latin American Relations Latin America plays a less significant role in China’s foreign policy than Africa does. China’s Ministry of Foreign Affairs (MOFA) issued its first policy paper on Latin America in 2008, two years after producing the equivalent document on Africa (PRC, 2008). Much of the paper is concerned with economic relations. A second policy paper published in November 2016 also emphasized economic relations (PRC, 2016). Although diplomatic relations are formally channelled through MOFA, economic relations have largely been driven via the policy banks and major state-owned enterprises (SOEs). Economic relations between Latin America and China involve a number of different actors (Dussel-Peters and Armony, 2015; Creutzfeldt, 2017). 10 Own elaboration from Inter-American Dialogue database. Versions of the database that are more recent show a much higher share of energy in total lending, but this appears to be because energy-backed loans are classified under energy, even though the loan does not go to the energy sector.

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Exports are dominated by a number of large companies, including some Latin American SOEs such as CODELCO in Chile and PDVSA in Venezuela, large private Latin American companies such as Vale in Brazil, and major transnational corporations such as Cargill, BHP-Billiton and Rio Tinto, as well as Chinese-owned oil and mining companies. These companies are responsible for the Latin American exports of oil, minerals, and soybeans that account for the bulk of all exports to China. The actors involved in importing from China are more diverse. They include major transnational corporations such as LG, Samsung, and Dell, who supply their Latin American subsidiaries from China. They also include major department stores and retail chains in the region that rely on imports of Chinese consumer goods. Chinese companies such as Lenovo and Huawei export to Latin America on a significant scale. There is also an important informal market for imported consumer goods from China in many Latin American countries, often involving contraband goods which may have been illegally produced.11 The main Chinese investors in Latin America are SOEs. DusselPeters and Armony (2017, Table 7) estimate that 72 per cent of the total amount invested by Chinese firms in the region between 2003 and 2016 came from SOEs. Although private firms accounted for more than half of all cases, they operate on a much smaller scale than investing SOEs. The companies with the largest investments in the region are Sinopec, Sinochem, the China National Offshore Oil Corporation (CNOOC), the China National Petroleum Corporation (CNPC), State Grid, and Chinalco (ECLAC, 2013, Tables 2 and 3; Dussel-Peters and Armony, 2017, Table 10), all of which are owned by the central government. Sub-national SOEs such as Shougang Iron and Steel, controlled by Beijing municipality, and Tongling Nonferrous Metals, owned by Anhui province, have also made significant investments in the region (Gonzalez-Vicente, 2012). Some private Chinese firms have also invested in Latin America on a smaller scale. A growing number of Latin American firms has invested in China. These include food producers such as the Mexican Bimbo and Gruma Groups and Marfrig from Brazil; companies such as the Brazilian aircraft manufacturer, Embraer, and electrical motor manufacturer, Weg; and the Argentinean firm Tenaris, which produces steel tubes (IADB, 2012, 2014). Although the amount of investment involved is far smaller than China’s OFDI in Latin America, it does mean that some firms in the region have a direct interest in relations with China over and above those that are purely trade related.

11 See for example Gomez-Aguiar (2012) on Mexico’s extensive imports of Chinese CDs and ´ Ødegaard (2017) on Chinese clothing imports in Peru.

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Like Chinese FDI in the region, project contracts in Latin America are dominated by central SOEs such as China Energy Construction, Sinomach, and Sinohydro. There is no significant private-sector involvement in this area. In contrast to the situation in SSA, where China’s main lender has been the Exim Bank, the CDB has led the way in Latin America.12 In addition to the two policy banks, the Industrial and Commercial Bank of China (ICBC) has also lent to the region.13 Unlike the Exim Bank, the CDB does not give aid, and much of its lending has been to Latin American SOEs such as Petróleos de Venezuela, S.A. (PDVSA) in Venezuela, and Petrobras in Brazil.14 As already noted, Chinese aid (narrowly defined) is very limited in Latin America, so there is little direct involvement by government ministries such as those for health or agriculture in China’s relations with the region. Table 9.1 summarizes the main types of actors involved in the various economic relations between China and LAC. The table distinguishes between public and private-sector actors and highlights the pervasive role of Chinese state actors including central SOEs, provincial and municipal SOEs, the policy banks, and the state-owned commercial banks.15 The private sector is mainly involved in trade, and this includes LAC and transnational companies, as well as some Chinese manufacturers and traders. Table 9.1. Key Actors in Sino-LAC Economic Relations

Exports to China Imports from China

Chinese FDI in LAC

Public Sector

Private Sector

LAC SOEs (CODELCO; PDVSA) Chinese SOEs (CNPC; Sinopec) LAC governments and SOEs Chinese SOEs

Extractive TNCs (Vale; BHP-Billiton) Agribusiness TNCs (Bunge; Cargill) Manufacturing TNCs (Dell; Samsung) Chinese manufacturers (Huawei) LAC retailers (Falabella) Individual traders Large Chinese firms (Huawei; Geely) (minor role)

Central SOEs (CNPC; State Grid) Sub-national SOEs (Shougang; Tongling)

LAC FDI in China Projects Loans

Chinese SOEs (Sinomach; Sinohydro) Chinese Policy Banks (CDB) Chinese State Commercial Banks (ICBC)

LAC Translatinas (Bimbo; Embraer) Insignificant None

12 Gallagher et al. (2012, p.5) estimates that the CDB accounted for 82 per cent of loans made by Chinese banks up to that time, whereas the Exim Bank’s share was only 12 per cent. Data from the Inter-American Dialogue database that are more recent show a lower share for the CDB and an increase in loans from Exim Bank and other lenders. 13 Its share, according to Gallagher et al. (ibid) came to 6 per cent. 14 For more information on the CDB’s involvement in Latin America, see Sanderson and Forsythe (2012, Ch. 4) and Downs (2011, Ch. 2). 15 See Dussel-Peters (2015) for a discussion of the omnipresent role of China’s public sector in relations with LAC.

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9.4 Chinese Interests in Economic Engagement in Latin America As elsewhere, China’s economic relations with Latin America can be analyzed in terms of the strategic political and economic interests of the Chinese state and the commercial objectives of Chinese firms. Most analysts of Sino-Latin American relations consider China’s interest in the region to be primarily economic and commercial rather than political. However, there are those, particularly in the US, who see China’s growing economic relations with Latin America as part of a broader geopolitical strategy to challenge US hegemony and bring about a multipolar world.16 In this view, ‘markets and raw materials are only part of the attraction that Latin America holds for Beijing . . . the larger and arguably more important motivation of Beijing’s strategy is geopolitical, not economic’ (Dreyer, 2006, pp.1–2). This section considers the relative importance of the various factors that have contributed to the growth of China’s economic relations with Latin America.

9.4.1 Strategic Diplomatic Objectives Latin America presents China with a rather different situation from SSA in terms of its political interests in the two regions. Whereas SSA has not been subject to a single hegemonic external power, the US has played this role in Latin America and the region is often referred to as ‘Uncle Sam’s backyard’. This has made China’s growing relations with Latin America a particular concern in the US, and has made China cautious in its involvement in the region. Some authors have identified competition with the US as one of China’s key objectives in expanding its presence in Latin America (see Ellis, 2009, Ch. 2; Johnson, 2005). Some claim that since 9/11, the US has tended to neglect Latin America, which has created a vacuum that China has moved in to fill (Urdinez et al., 2016). It has also been argued that China sees a growing presence in the US’s ‘backyard’ as a means of countering the US presence in East Asia (Yu, 2015). This implies that China will particularly focus its economic engagement on those countries which are most opposed to US influence in the region, such as Venezuela, Ecuador, and Bolivia. This view is particularly prevalent among neo-conservatives, who regard China’s growing involvement as a strategic threat to US interests in the region.17 16 This is part of a broader debate in international relations on whether China is a status quo power or a revisionist power, and how far it is seeking to change the global order. See Shambaugh (2013, Chs 3 and 4); Struver (2014). 17 See Sun (2012) for a Chinese perspective on US views of the threat posed by China.

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This view of the ‘Chinese threat’ to the US contrasts sharply with one that sees China’s growth in Latin America as driven by strategic economic and commercial concerns and plays down the significance of geopolitical considerations. Chinese scholars stress that China recognizes Latin America as a US sphere of influence and has been very careful to avoid antagonizing the US by allying itself too closely with Latin American governments that are hostile towards the US (Shixue 2008). This is consistent with the view, attributed to Deng Xiaoping, that China should keep a low profile in international affairs,18 and corresponds closely to the official view of the Chinese government, which emphasizes China’s ‘peaceful rise’19 and a ‘harmonious world’.20 Most non-Chinese commentators share the view that China’s increasing economic relations with Latin America are not primarily politically motivated, and that closer political relations with China are a consequence rather than a cause of China’s growing economic involvement (Trinkunas, 2016). The pattern of Chinese trade and investment in Latin America is consistent with China’s emphasis on national sovereignty and non-interference in the internal affairs of other countries, which means that it is willing to do business with a range of different regimes. It has developed strong economic links with countries such as Chile and Peru, which are friendlier towards the US, as well as with countries that have been critical of US imperialism, such as Venezuela and Ecuador.21 It has also been careful to maintain relations with Latin American countries even when their governments change from left to right of centre, as occurred in Argentina when President Macri replaced Christina Fernandez de Kirchner in 2015. One area where there is clear evidence that political factors have played a key role in determining economic engagement is in relation to Taiwan. Countries that recognize Taiwan obtain much less OFDI and virtually no loans from China, although the lack of diplomatic relations does not have a significant impact on trade flows with China (Piccone, 2016, Fig. 2). Competition with Taiwan to obtain diplomatic recognition under its One China Policy was a consistent feature of Chinese foreign policy up to 2008 and 18 The terminology used was that China should ‘bide its time, hide its brightness, not seek leadership, but do some things’. At the 2010 annual meeting of China’s Association of International Relations participants agreed to nine principal policy recommendations, among them ‘Do not confront the United States’ and ‘Do not be the chief of the “anti-Western camp” ’ (Shambaugh, 2013, pp.19–20). 19 The term ‘rise’ was regarded as too threatening and was replaced by ‘development’ in government terminology (ibid, p.21). 20 Ibid, p.25 21 Although the close economic links between China and Venezuela might seem to support the view that China is motivated by a desire to back a regime that is hostile to the US, in fact it was the Chavez government that sought support from China, which was reluctant to respond out of a concern about provoking a confrontation with the US (Corrales, 2010).

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was particularly intense in Central America, which has the largest concentration of countries of any size which still recognize Taiwan (Aguilera-Peralta, 2010). In 2007, Costa Rica broke off relations with Taiwan and established them with the PRC. As a result, China bought US$300 million of Costa Rican government bonds and provided US$20 million in aid for reconstruction after major flood damage occurred.22 Between 2008 and 2016, when there was an informal truce between Beijing and Taipei, there were no further switches of diplomatic allegiance. With the return of Taiwan’s Democratic Progressive Party to power in 2016, the PRC renewed its effort to get more countries to switch recognition, and Panama broke off relations with Taiwan and recognized Beijing in 2017, followed by the Dominican Republic and El Salvador in 2018. It is likely that other countries in the region will also establish relations with the PRC in the foreseeable future.23 It seems, however, that in recent years, diplomatic relations are no longer a prerequisite for Latin American countries to have economic relations with China. This is most dramatically illustrated by the planned construction by the Hong Kong Nicaragua Canal Development Investment Company (HKND) of the inter-oceanic canal through Nicaragua, which still has diplomatic relations with Taiwan.

9.4.2 Strategic Economic Objectives The Chinese government’s most important economic objective in Latin America is to ensure a secure supply of resources, particularly oil and minerals (Zheng et al., 2012, pp.11–13). Latin America is also important to China in terms of its strategy for food security, since it is a major supplier of soybeans, which are used as animal feed. As noted earlier, oil, minerals, and agricultural products have accounted for 85 per cent of China’s imports from Latin America in recent years. Although raw materials are clearly important in terms of Chinese imports from Latin America, this does not necessarily indicate that China’s involvement is driven by strategic concerns over resource security rather than commercial considerations that reflect comparative advantage. Oil is strategically the most important commodity from China’s point of view. Although access to minerals is critical for particular industries such as steel and electronics, the significance of oil is all pervasive through its role in energy supplies and

22 Taiwan responded by offering additional aid to two of its allies in the region, Guatemala and Nicaragua (Aguilera-Peralta, 2010, p.177). 23 During the truce between the PRC and Taiwan, the governments of Nicaragua and Paraguay also indicated an interest in establishing diplomatic relations with Beijing.

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transport. Food security is also a crucial objective for China, and while imports play a part, it is mainly achieved through domestic production. The clearest evidence of a strategic economic interest in the region can be found in the case of oil. Although oil does not constitute a major part of Latin America’s exports to China, the region has helped to diversify its sources of supply, increasing its share of Chinese imports from less than 1 per cent in 2003 to 8 per cent in 2011 (Camus et al., 2013, Fig. 4.6). The two main strategies for increasing control of supply are through direct ownership by Chinese SOEs and the use of long-term contracts for the supply of resources in return for Chinese loans. As noted earlier, Chinese FDI in Latin America has been concentrated in oil and minerals. However, two factors limit the extent to which FDI is helping to secure supplies for the Chinese market. First, the total production of oil by Chinese companies in LAC is only a fraction of Chinese imports from the region. Second, not all of the resources owned by Chinese companies find their way to China. In Venezuela, for example, it is estimated that 50 per cent of the oil obtained by Chinese companies does not go to China, most of it being sold to the much closer US market, which is more profitable for the companies (Hogenboom, 2014, p.636).24 China has made a number of oil-backed loans to Venezuela, Brazil, and Ecuador in recent years. The total amount lent in such deals between 2007 and 2011 came to US$47 billion (Brautigam and Gallagher, 2014, Table 1). The exact amount of oil supplied under these agreements is not generally published, but in the case of Ecuador it has been reported that they cover 90 per cent of oil exports (Ruiz, 2016). As in the case of ‘equity oil’ owned by Chinese companies, this is not a guarantee that oil obtained in this way will be shipped to China. In the case of copper, diversification of sources of imports to China has seen Latin America’s share decline, mainly as a result of a fall in Chile’s share, while those of Peru and Mexico have increased, contributing to increased diversification (Camus et al., 2013, Fig. 4.11). There is less evidence of diversification in the case of iron ore imports to China. There has been some investment by Chinese mining companies in Latin America, but there is no evidence that this has been part of a strategic plan by the Chinese state to secure supplies. The desirability of OFDI as a means of overcoming resource insecurity is controversial in China. While some policy thinkers see it as a major motive for investing in foreign mines, others argue that it is a high-risk strategy. A PRC State Council report in 2004 points to the risks of acquiring poor quality resources, unexpected changes in host

24

Sanderson and Forsythe (2012, Ch. 4), suggest that part of the oil obtained by Chinese companies in Brazil and Ecuador is sold on the world market rather than being exported to China.

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government policy, social instability, and macroeconomic problems (quoted in Koch-Weser, 2014, p.14). In contrast to oil, there have been no reported mineral-backed loans in the region, suggesting that strategic economic concerns have not been a significant factor. Three countries supply the bulk of China’s soybean imports: Argentina, Brazil, and the US. There has been little diversification of supply, but imports from Latin America help ensure that China does not become overly dependent on the US for a key input required to ensure food security. With growing demand in China, the government has had a clear strategic interest in expanding imports of beans from Latin America. Purchases and leasing of land by Chinese firms in the region have been very limited, and what there is does not necessarily contribute to food security in China (Jie and Myers, 2017); nor are there any reported loans backed by agricultural products in the region. The corollary of the view that China’s strategic objective in Latin America is to secure supplies of raw materials is the concern that has been expressed, particularly in the US, that China is seeking to ‘lock up’ the region’s resources. However, most experts agree that this is not happening (Kotschwar et al., 2012). Latin America’s main contribution to China’s resource security is allowing it to diversify its oil supplies, reducing its dependence on the Middle East. A second strategic economic objective for China is to obtain markets for its exports and reduce its reliance on the North American and European markets, particularly in the aftermath of the global financial crisis. Although Latin America only accounts for 6 per cent of China’s total exports, it contributed 10 per cent to the growth of Chinese exports between 2007 and 2012, as demand for Chinese goods in Europe and North America was affected by the crisis (UNCTADStat, n.d.). When China joined the WTO in 2001, many Latin American countries did not grant it market economy status, which made it easier for them to take antidumping measures against Chinese exports. Obtaining this status became an important aim in Chinese economic diplomacy, and several countries, including Argentina, Brazil, Chile, and Peru, agreed to recognize China as a market economy during President Hu Jintao’s visit to the region in 2004. China has also signed free trade agreements (FTAs) with three Latin American countries, Chile, Peru, and Costa Rica, improving Chinese exporters’ access to their markets. Chinese loans to Latin America have also been used to promote exports through directly tying them to Chinese goods or denominating part of the loan in Renminbi (RMB), which can only be used in China. In Venezuela, for example, loans have been used to import machinery from the XCMG Construction Machinery Company (Sanderson and Forsythe, 2012, p.137). In 2010 the Venezuelan government signed a contract to buy 300,000 239

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household electrical appliances for low-income households from the Chinese firm Haier. A third objective has been to build up Chinese companies so that they can compete on an international scale against Western multinationals. This provides a further motive for supporting the expansion of large Chinese companies in Latin America as part of the Go Global strategy. A large part of the loans provided by the Chinese government has gone to fund projects that are carried out largely by Chinese construction and engineering companies. In Venezuela, for example, an ICBC oil-backed loan in 2012 was used for 20,000 units of social housing built by CITIC Group (Sanderson and Forsythe, 2012, p.137). Finally, China has used mercantilist policies to ensure that imports from the region tend to be in unprocessed form. This is reflected in the structure of exports from the region to China, which include a larger share of primary products than Latin American exports to other markets (see Fig. 9.2). This is partly due to the Chinese government’s strategy of promoting downstream value-added activities in China and importing raw materials in unprocessed form. The experience of the Argentine soya industry illustrates this, as shown in Box 9.1.

Box 9.1 ARGENTINA AND CHINA: THE SOYBEAN CONNECTION Soybeans have been described as ‘one of the most essential inputs in the global food industry’ (Turzi, 2017, p.170). Soybeans are processed in crushing plants to produce oil and soybean meal. The latter has a high concentration of protein and is widely used as feed in intensive livestock farming. It can also be processed into products for human consumption, such as soy flour, soy sauce, and tofu, as well as being used as a meat substitute in a variety of vegetarian foods. Soybean oil is the world’s most commonly used edible oil. Chinese imports of soybeans have grown rapidly since the mid-1990s. In 1995 China was essentially self-sufficient in soybeans, but since then, domestic consumption has risen five-fold while production has remained unchanged (Turzi, 2017). Increased demand in China has been driven by the improvement in living standards, which has led to growing consumption of meat and, hence, the need for animal feed derived from soybeans. Argentina is the third-largest producer and exporter of unprocessed soybeans in the world after the US and Brazil, and the largest exporter of soy oil and soy meal (Oviedo, 2015, p.119). Soybeans and soybean oil account for more than two-thirds of all Argentinean exports to China (ibid, Table 3). Argentina is the third-largest supplier of soybeans to China after the US and Brazil. China accounts for more than 80 per cent of Argentina’s total soybean exports. However, despite being the world’s largest exporter of soybean oil and meal, less than 20 per cent of Argentina’s oil and none of its soybean meal are exported to China (ibid, Table 1). This pattern of trade, in which Argentina’s exports to China are concentrated on unprocessed soybeans, was not always the case. In the late 1990s, processed soybeans (oil and meal) accounted for a much greater share of Argentinean exports than

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9.4.3 Commercial Objectives The commercial objectives of Chinese firms are not entirely separate from the strategic economic objectives of the Chinese state. Indeed, government policies are often intended to ensure that commercial interests coincide with the strategic aims of the state. There are also areas where the interests of firms and those of the state overlap, for example, where oil companies and the government have a common interest in diversifying their sources of supply. It is nevertheless worth considering the role of market forces in explaining the behaviour of Chinese firms and financial institutions, particularly given the perception in many quarters that Chinese firms act at the behest of the Chinese state or the Chinese Communist Party. The pattern of trade between China and Latin America is to a considerable extent a reflection of their comparative advantage, with Latin America a relatively resource-rich region with abundant agricultural land relative to its population while China is resource-scarce and labour-abundant. Although market forces are modified by government trade and industrial policies, commercial considerations play a major role in driving both China’s imports from Latin America and its exports to the region. Latin America is a low-cost source of the copper, iron ore, and soybeans, which Chinese producers require, and China a booming market for Latin American exporters. At the same time, transnational corporations producing computers, mobile phones, TVs, and many other products have used China as a low-cost base to supply their Latin American operations, and department stores and retailers in the region have sought out cheap Chinese products in order to increase their profit margins. 241

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Meanwhile, Chinese manufacturers, facing intense competition and excess capacity at home, have been motivated to find new markets. The bulk of Chinese FDI in Latin America has been by SOEs, making the debate between those who see Beijing as a ‘puppeteer’ and those who argue that ‘the business of business is business’ (Blanchard, 2011) particularly relevant. Both camps are represented in the literature on Chinese FDI in the region. Dussel-Peters (2012) argues that ‘ownership matters’ and that as most Chinese FDI is controlled by the Chinese state it is, therefore, qualitatively different from other FDI in Latin America. In contrast, Lin Yue (2013) highlights the differences between central and provincial SOEs and argues that there is no coordinated strategy (p.26). Despite the fact that the majority of Chinese investment has been by SOEs, studies of particular sectors and firms support the view that, while they enjoy government support, they operate with considerable autonomy and their investments reflect their commercial interests. The importance of resource seeking as a motive for Chinese FDI in Latin America is clear from the concentration in the oil and gas and mining industries discussed earlier. Chinese companies have entered the oil industry,25 partly through the acquisition of stakes in existing firms such as Sinopec’s purchase of 40 per cent of the subsidiary of the Spanish firm Repsol in Brazil and CNOOC’s acquisition of a 50 per cent stake in Bridas in Argentina in 2010. In other cases, particularly in Venezuela and Ecuador, they have entered the industry by forming joint ventures with state-owned companies. The oil industry accounts for a major share of Chinese investment in the region and is all in the hands of the four central SOEs. However, despite this, the oil companies enjoy considerable autonomy, and their investments in Latin America are largely motivated by long-term profitability and growth. This is reflected in the fact that, as mentioned earlier, a significant portion of the oil that they export from Latin America does not go to China. In this case it seems that the commercial interests of the oil companies weigh more heavily than China’s resource security. In mining, there is a greater variety of forms of Chinese ownership than in the oil and gas industry including provincially, municipally, and centrally owned SOEs and private firms.26 Despite receiving state support, these firms follow profit-driven strategies. Some are vertically integrated and own mines in Latin America to supply their downstream operations in China. Shougang Iron and Steel made the first investment by a Chinese SOE in Latin America in

25 On Chinese investment in oil and energy in Latin America, see Koch-Wesser (2015); Hogenboom (2014); and Sun, H. (2014). 26 For accounts of Chinese mining investment in Latin America, see Koch-Weser (2014); Gonzalez-Vicente (2012); and Kotschwar et al. (2012).

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1992, when it bought the Marcona mine from the Peruvian government. This was long before China adopted its Go Global strategy, and was prompted by a desire to obtain reserves with a high iron ore content to supply its Chinese iron and steel plants (Gonzalez-Vicente, 2012, p.51). Other Chinese companies such as Minmetals and some private miners were content to sell their Latin American production on the world market. Although the bulk of Chinese FDI in Latin America is of the resource-seeking variety, there are examples of market-seeking investment in manufacturing and services (Rosales and Kuwayama, 2012, pp.111–12). It has been estimated that market-seeking investment accounted for 11 per cent of all Chinese FDI in the region between 2000 and 2011 (Dussel-Peters, 2012, Table 5). While FDI by SOEs is reported to be almost entirely in resource extraction, the overwhelming majority of private Chinese FDI (84 per cent in terms of value) was linked to the domestic market (Dussel-Peters, 2012, p.15). Lin (2013) also finds that whereas central government SOEs tend to concentrate in resource extraction and construction, provincial SOEs and private firms tend to focus mainly on manufacturing and commercial activities. Chinese investment in manufacturing in Latin America has often involved firms first exporting from China and then moving to assembly and local production to avoid import restriction (ECLAC, 2011, pp.177–8). Gree, a Chinese manufacturer of air conditioners, was one of the first Chinese companies to begin production in Latin America when it opened a plant in Brazil in the late 1990s, after a number of years importing its products from its factories in China (ECLAC, 2011, Box III.5). In other cases, Chinese firms have established operations in Free Trade Zones in Latin American countries where they can assemble and package products imported from China and sell them on the local market without paying import duty. Huawei and TCL assemble electronic products in Tierra del Fuego for the Argentinean market, while Lenovo has used the Manaus Free Trade Zone to supply the Brazilian market.27 There are also examples of Chinese companies acquiring Latin American firms in order to enter the local market. One of the most significant was the purchase of seven electricity transmission companies in Brazil in 2010 by State Grid, the Chinese SOE that is the largest electricity company in the world.28 This was the company’s largest investment outside Asia. There has been some market-seeking investment in Latin America to supply not just the domestic market but also neighbouring countries. The Chinese motor manufacturers Chery and Lifan have both established assembly

27

See Lopez and Ramos (2014) on Huawei in Argentina and Barbosa et al. (2014) on Lenovo in Brazil. 28 See Barbosa et al. (2014) for a case study of State Grid’s operations in Brazil.

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operations in Uruguay, mainly as a platform for entering the Mercosur market (Bittencourt and Reig, 2014). Chery is also establishing a vehicle plant in Brazil.29 There are a few cases where Chinese FDI in Latin America has been motivated by strategic asset acquisition. These have mainly been a result of global investments made by Chinese companies which have resulted in their acquiring Latin American subsidiaries. The most noteworthy example was the acquisition of IBM’s PC business by Lenovo, which gave the Chinese firm subsidiaries in Mexico and Brazil. More directly, it has been suggested that the links between Sinopec and Petrobras in Brazil were partly motivated by the Chinese company’s interest in accessing Petrobras’ experience in deep-water operations (Husar and Best, 2013). As shown in Chapter 5, both the CDB and the Exim Bank are policy banks with specific mandates to support the development of the Chinese economy and Chinese exports. As such, they are more liable to be subject to strategic government priorities than other SOEs. However, they are also expected to operate on a commercial basis. The debate over Chinese commodity-backed loans is central to interpreting the role played by the Chinese banks. One view sees these loans as part of a strategic move by the Chinese government to secure supplies of oil, but in practice a significant proportion of the oil obtained in these deals does not end up in China. An alternative view that emphasizes the commercial interests of the banks sees the loans-for-oil deals into which the CDB has entered in Venezuela and Ecuador differently: rather than a means by which China obtains a secure supply of oil, they are a strategy used by the Bank to reduce the riskiness of loans to countries with a low credit rating. By lending to these countries it can obtain relatively high returns without having to bear an excessive level of risk, because payment is made through the sale of oil to Chinese companies (Sanderson and Forsythe, 2012, Ch. 4).30

9.5 Latin American Interests in Expanding Economic Relations with China The other side of the growing Sino-Latin American economic relations is Latin American interest in expanding ties. Although the response to China’s re-emergence in Latin America has been largely reactive, it is clear that it has

29

For more details on Chery’s operations in Brazil, see CEBC (2011). Economy and Levi (2014, p.56) point out that some loan-for-oil agreements allow the amount of oil supplied to be reduced when the oil price rises. This makes sense if the purpose of the deal is to reduce the risk of the loan, but not if the aim is to secure supplies for China. 30

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been partly shaped by interests in the region. Again, these interests can be usefully divided into Latin American states’ strategic political and strategic economic objectives, and the commercial motives of economic actors. From a geostrategic point of view, the re-emergence of China has been seen by some as providing an opportunity to counterbalance US influence in the region.31 The most obvious case where a Latin American government has sought Chinese support to counter the US politically was in Venezuela under President Chavez (1999–2013).32 However, China was reluctant to be seen as deliberately challenging the US in the region. Recently, the Bolivian and Ecuadorean governments have also looked to China as a counterweight to US hegemony. However, most of the governments of the region have not sought to develop their relations with China for geostrategic purposes. Some governments in the region have seen expanding relations with China as a way of increasing ‘policy space’: it makes them less vulnerable to the conditionalities of the Washington Consensus and gives them greater scope to pursue alternative economic policies free from external pressures (Kaplan, 2016). This is particularly attractive for left-wing governments in the region that reject neoliberalism and are keen to re-establish a significant role for the state in their economies. For example, in Ecuador, when the National Assembly passed a law in 2010 which required the renegotiation of contracts with transnational corporations in the oil industry, Chinese companies proved more willing than Western ones to accept the new terms (Hogenboom, 2014). Despite the political interest of some Latin American states in developing closer economic relations with China, the main strategic objectives of most governments in the region in expanding relations with China are economic. The rapid growth of the Chinese economy has made it an attractive market for governments which are keen to increase their exports and find new markets. There have been numerous visits to China by Latin American presidents, frequently accompanied by trade delegations. Although exports continue to be concentrated in a narrow range of primary products, governments have been keen to diversify exports. The expansion of non-traditional exports was an important motive for the Chilean and Peruvian governments in negotiating FTAs with China.33 In some countries, such as Chile, where SOEs contrib-

31

See, for example, Cesarin (2007) and Le-Fort (2006). See Chapter 11.3.4 for a discussion of relations between China and Venezuela. 33 See Wise (2016), who notes that these FTA negotiations were initiated by the Latin American side. The case of Costa Rica, the third Latin American country to sign an FTA with China, is rather different. Because the trade agreement followed the establishment of diplomatic relations in 2007, Costa Rica’s exports to China, unlike those of the other two countries, were mainly manufactures not primary products, and an FTA was seen as a way of getting a foothold in trans-Pacific value chains. 32

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ute significantly to exports, and Argentina, which taxes agricultural exports, governments have also seen their revenues rise as a result of their growing relations with China.34 Governments in Latin America, as elsewhere around the world, have also been keen to attract Chinese FDI in order to raise the rate of accumulation. In Chile, Peru, and Costa Rica, the expectation that the agreements would help attract Chinese investment was an important motive for negotiating FTAs with China (Wise, 2016). Although levels of Chinese FDI in Latin America have remained modest overall, this has not dented expectations in the region. Those countries in the region that have defaulted on debts in the recent past, such as Argentina, Ecuador, and Venezuela, and, therefore, find it difficult to access international capital markets or can only do so at very high interest rates, have a particular interest in obtaining loans from China. As one South American diplomat is quoted as saying, ‘given the choice between the onerous conditions of the neoliberal Washington Consensus and the nostrings-attached largesse of the Chinese, elevating relations with Beijing was a no-brainer’ (Piccone, 2016, p.6). It is not surprising, therefore, that these countries are among the top recipients of Chinese loans in the region. This is a reminder of the fact that the distribution of such loans cannot be explained solely in terms of China’s interests as it also reflects Latin American governments’ desire to borrow. In some cases, these loans have helped incumbent governments to obtain support in the run-up to important elections. In Venezuela, Chinese loans were seen as having helped the government increase social spending during the 2012 presidential election campaign (Ellis, 2017). Although the strategic economic interests of governments have played some role in the region’s relations with China, on the Latin American side they have been largely driven by commercial interests. Exports have boomed as a result of Latin American firms and transnational corporations taking advantage of high commodity prices. Some Latin American companies have also invested in China as part of their global expansion, taking advantage of the rapidly growing Chinese market. The growth of imports from China has also been driven by Latin American retailers’ interest in obtaining cheap consumer goods and by many transnational corporations (TNCs) with operations in Latin America optimizing their global supply-chain strategies to import parts and components or finished products from affiliates or contract manufacturers in China.

34

See Lopez and Ramos (2009, pp.110–12) on the contribution to Argentinean tax revenues of agricultural exports to China, and Barton (2010, Table 10) on the increase in Chilean revenues from copper.

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9.6 Empirical Analysis of the Determinants of Sino-LAC Economic Relations In order to explore further the factors behind the growth of economic relations between China and Latin America, we use a similar economic model to that used in Chapter 6 to analyze Sino-SSA relations. Because three countries in the region have signed FTAs with China, a dummy variable was included to indicate whether or not a country had an FTA with China, so that the full model specification becomes: logYit ¼ c þalogChinaGDPt1 þ blogLACGDPi;t1 þ dOPEN;i;t1 þeDISTi þfLANDLi þgMINi;t1 þhFUELi;t1 þ jTAIi;t1 þkUNi;t1 þ lFTAi;t1 þ έ Where: Y China GDP LAC GDP OPEN DISTD LANDL MIN FUEL TAI1 UN FTA1

Indicator of economic relation with China in constant US$ China’s GDP in constant US$ Latin American countries’ GDP in constant US$ Trade/GDP Ratio istance from China in ‘000 miles 1 for landlocked countries Share of ores and minerals in total exports Share of fuels in total exports for countries which recognize Taiwan Share of country’s votes that coincide with China for countries with FTA with China

The data used cover thirty-two Latin American and Caribbean countries over the period 2002–15. The dependent variables reflect the whole range of Chinese economic relations with LAC and include LAC exports to and imports from China, the stock of Chinese FDI in Latin America, the value of Chinese economic cooperation projects, and Chinese loans to the region.35 As in Chapter 6, commercial variables are identified with market size (measured by Chinese and Latin American GDP variables) and trade costs (measured by an economy’s openness and geographic variables such as distance and being landlocked). Since China’s main strategic economic concern in the region is to obtain secure supplies of natural resources, we again use the share of minerals and fuels in a country’s exports as indicators of its strategic significance. Two variables are used as indicators of political alignment: whether a country has diplomatic relations with Taiwan or with the PRC,

Data for trade flows and the value of Chinese projects were available for the full period. FDI stock covers the period from 2003 onwards, and Chinese financial flows are for the period from 2005. See the Appendix for a list of variables and sources. 35

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and the extent to which a country’s votes at the UN coincide with those of China. Finally, all of the independent variables are lagged by one year to avoid problems of reverse causation.

9.6.1 Trade Flows Total trade flows between LAC and China are, as would be expected, positively affected by both China’s GDP and that of its Latin American partners (Table 9.2, col. 1). The more open the economy in the region, the more it trades with China, although perhaps surprisingly, the existence of an FTA does not appear to generate more bilateral trade. Other factors that are usually regarded as affecting trade costs, such as the distance between partners and whether a country is landlocked, are not significant.36 Rather surprisingly, specialization in mineral or fuel exports is not associated with a higher level of trade with China, despite the importance of such products in the basket of LAC exports to China. This may reflect the fact that unlike SSA, LAC is a significant exporter of agricultural products to China, as well as of minerals and fuels. There is no evidence that trade is affected by strategic diplomatic considerations. Having diplomatic relations with Taiwan does not have a significant negative effect on bilateral trade, and alignment with Chinese foreign policy

Table 9.2. Determinants of Sino-LAC Economic Relations, 2002–15 Bilateral trade (1) Log China GDP Log LAC GDP Openness Landlocked Distance Minerals Fuels Recognition of Taiwan UN voting FTA Random/fixed Observations R-squared

1.47*** 0.98*** 0.003* –0.62 0.01 0.71 0.26 0.05

Chinese imports (2) 1.81*** 1.72*** 0.009*** 0.05 0.3*** 3.62*** 0.23 0.43

Chinese exports (3) 1.29*** 1.09*** 0.005*** .089* –0.0004 1.08*** –0.19 0.04

FDI stock Project (4) contracts (5)

Loans (6)

2.49*** 0.82*** 0.03*** 0.19 –0.02 6.23*** 0.03 –4.63***

1.40*** 0.69*** 0.02*** –2.91* 0.006 3.21 3.81*** –2.14***

3.93** 0.49** 0.006 –1.02 0.48* –0.90 9.56*** –0.92

0.23 –0.15 RE

–0.87 –0.81** RE

0.63* 0.06 RE

–1.44 –0.20 RE

–0.68 0.54 RE

4.53 –1.59 RE

443 0.85

430 0.86

443 0.92

411 0.57

443 0.49

348 0.28

*, **, and *** significant at 10%, 5%, and 1% levels

36 All Latin American countries are quite distant from China, which may explain why the distance variable is not significant. There are only two landlocked countries in the region.

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as reflected in a country’s voting pattern at the UN does not have a positive impact. When Chinese imports and exports are considered separately, the pattern remains broadly similar (see Table 9.2, cols. 2 and 3). Chinese and LAC GDP and openness are significant for both imports and exports. The major difference is that although specialization in minerals does not have a significant impact on the level of bilateral trade, when considered separately, both exports and imports tend to be higher for mineral exporters. This is consistent with the high share of ores and metals in Latin American exports to China. Paradoxically, China appears to import less from countries with which it has an FTA, although aggregate trade is unaffected.

9.6.2 Chinese FDI Although there are reasons to believe that the official Chinese data on FDI underestimates China’s level of investment in Latin America it may still provide an indication of the drivers of FDI, provided that it is not systematically biased in favour of certain countries. Since flows of FDI to individual countries can fluctuate significantly from year to year, the variable analyzed was the stock of FDI, which provides a better indication of the determinants of long-term Chinese involvement than annual inflows. The commercial factors that explain trade (GDP in China and LAC, and the openness of the LAC economy) are also significant determinants of FDI (Table 9.2, col. 4). The theoretical effects on FDI of geographic factors, such as distance and a country’s access to the sea, are ambiguous because they depend on the type of FDI involved. Higher trade costs tend to encourage market-seeking investment and discourage efficiency-seeking investment. Neither variable has any effect on Chinese FDI in Latin America. Given that so much of Chinese FDI in Latin America has gone into the oil and gas industry, it is perhaps surprising that there is no significant relationship between FDI stocks and specialization in fuels. There is some evidence of an impact of mining on FDI. Despite the fact that Chinese FDI in LAC is dominated by SOEs, the effects of strategic economic considerations are less clear than might be expected. The importance of strategic political considerations in determining a country’s stock of FDI is shown by the large and statistically significant negative impact of relations with Taiwan. Given the importance of SOEs in FDI, this is likely to reflect the effect of policies to isolate Taiwan that Beijing pursued up to 2008. The fact that China does not have diplomatic relations with a country is also likely to increase the risk and difficulty of investing there for Chinese firms. However, there is no evidence that alignment with China’s international positions in the UN has any effect of Chinese FDI. 249

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9.6.3 Contracted Projects The determinants of Chinese projects in Latin America are very similar to those of OFDI (Table 9.2, col. 5). China’s GDP and that of each of its Latin American partners have positive impacts on the value of projects completed, as does the openness of the host economy. Distance has no significant effect, whereas being landlocked has a weak negative effect. There is a significant difference in terms of strategic economic factors in one area: whereas FDI tended to be positively correlated with specialization in mineral exporting, more economic cooperation projects are located in fuelexporting countries. Although, as shown previously, the projects that China carries out in LAC are not in the main in the oil and gas industry, China has been active in signing resources for infrastructure (R4I ) projects in the region, all of which have been backed by oil exports. Chinese contractors have a high level of involvement in infrastructure projects carried out under these deals, and this explains why a disproportionate share of Chinese contracts is in fuelexporting countries. The most significant diplomatic factor affecting Chinese projects in the region is whether a country recognizes Taiwan. Alignment with China in the UN, however, does not have any impact. These results are very similar to those observed for FDI, suggesting that SOEs involved in construction and engineering projects may be subject to very similar pressures to those that investors face.

9.6.4 Chinese Loans Although the data on Chinese bank lending to LAC are limited, it is possible to estimate the main drivers using data from the Inter-American Dialogue ChinaLatin America finance database for the period 2005–15.37 Like other aspects of China’s economic relations with LAC, there is a significant relationship between the levels of loans and GDP levels in both China and LAC (Table 9.2, col. 6). Other factors affecting trade costs, including openness, are not significant determinants of lending.38 In terms of strategic economic considerations, there is evidence of a strong positive relationship between loans and specialization in fuel exports. This is hardly surprising, given that loans-for-oil deals account for more than half of

37 The Inter-American Dialogue data on loans are based on media reports and may, therefore, be less comprehensive in terms of its coverage, particularly of the smaller countries in the region, than the official statistics that are used here for trade, FDI, and contracted projects. 38 There is a positive correlation between loans and distance, but this is only significant at the 10 per cent level, and it does not make any economic sense.

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Chinese lending to LAC (Brautigam and Gallagher, 2014). Mining does not have the same strategic significance in terms of Chinese loans. What is surprising is that strategic diplomatic factors do not have a statistically significant impact on Chinese lending to a country. Given that loans are provided by Chinese state banks, one would expect political factors to play a significant role. However, in contrast to the situation for FDI stocks and Chinese projects, where relations with Taiwan had a significant negative impact, Table 9.2 shows no such relationship in the case of loans.39 Nor is there any evidence that China lends more to countries that support it within the UN,

9.7 Conclusion The relative importance of different factors in Sino-Latin American relations depends on the type of relation involved. Trade, which remains the most important economic relationship, is mainly driven by the commercial interests of Chinese, Latin American, and transnational companies. While the Chinese government’s strategic objectives sets some of the parameters within which companies make their decisions, particularly by providing support to Chinese firms to ‘Go Global’ and through the trade and industrial policies used to encourage processing within China, major decisions about where to sell or to invest are made at the corporate level. Chinese FDI and projects in Latin America are also largely driven by commercial factors. Strategic economic considerations, particularly the acquisition of secure supplies of resources, play a part, but appear to be trumped by the commercial interests of firms seeking to make a profit when it comes to deciding whether to export to China or to the world market. The econometric analysis in Section 9.6 shows that mining economies tend to attract more Chinese FDI, and that engineering projects tend to be concentrated in fuelexporting countries. Strategic diplomatic considerations are also important in relation to countries that recognize Taiwan, which receive less Chinese FDI and a lower value of projects. Strategic economic considerations play a more significant role in Chinese lending to the region, although here again, the main lender, the CDB, enjoys considerable autonomy and adopts strategies which will earn good returns while at the same time trying to reduce its exposure to risk. Loans are used strategically to promote Chinese exports through tying part of them to 39

Although in this specification, diplomatic relations with Taiwan are not statistically significant, in a specification which includes control of corruption as an additional independent variable, recognition of Taiwan did have the expected negative effect (see Table A11.1).

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purchases of Chinese goods or denominating them in RMB. Loans can also be used to try to increase the security of resource supply, although this is not entirely successful in the case of oil. Loans do, however, help Chinese companies expand globally in line with China’s Go Global strategy. Geopolitical considerations also play a role, since loans are not usually granted to countries that do not have diplomatic relations with Beijing.40 Although the distribution of Chinese loans, of which more than half go to Venezuela, might appear to support the view that China is using its economic resources to support left-wing regimes that are hostile to the US, Gallagher and Irwin (2017) see this rather differently. They point out that most Chinese loans to Latin America are not subsidized and are made on commercial terms by the Chinese banks. Although the interest rates charged are lower than those charged by Western banks, this is mainly because of the way in which loans are structured to ensure repayment, reducing the risk to the Chinese lender. There is no evidence that China’s loans have been motivated by a desire to support regimes that oppose the US, and the Chinese government tried to distance itself from the anti-US rhetoric of Venezuela’s President Chavez. What is true is that countries, such as Argentina, Ecuador, and Venezuela, that have found it difficult to access international financial markets or have only been able to do so at very high interest rates because of their past records of default, have been keen to borrow from China. These countries have found the terms offered by the CDB and other Chinese lenders relatively attractive, so it is not surprising that they account for a significant proportion of China’s loans in Latin America. This, however, is a reflection of economic interests on both sides, rather than evidence of a politically motivated strategy to expand Chinese influence in the region. The most clearly political form of economic engagement is through aid, but as shown earlier, the amount of Chinese aid to Latin America is relatively limited. It is also widely distributed to almost all of the countries in the region that recognize Beijing.41 Aid has been used strategically to compete with Taiwan for recognition among the countries in the region. The smaller Caribbean islands have received a disproportionate share of Chinese aid, relative to their size, reflecting the importance of competition with Taiwan in the region, and the fact that as independent countries, they all have votes in the UN (Stallings, 2017).

40 The only example included in the China-Latin America Finance Database of a Chinese loan to a country which recognizes Taiwan was made to Honduras in 2013. 41 The exceptions are Argentina, Brazil, and Chile, which China regards as too advanced to receive aid (Stallings, 2017).

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Appendix to Chapter 9 Table A9.1. Significance of Economic Relations with China by Country in LAC Chinese loans 2005–15 ($ p.c.)

Share of China in imports 2015

Share of China in exports 2015

Chinese OFDI stock (% total inward FDI) 2015

Chinese projects 2005–15 ($ p.c.)

Antigua and Barbuda Argentina Bahamas Barbados Belize Bolivia Brazil Chile Colombia Costa Rica Cuba Dominica Dominican Republic Ecuador El Salvador Grenada Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St Kitts and Nevis Saint Lucia St Vincent and the Grenadines Suriname Trinidad and Tobago Uruguay Venezuela

19.4% 19.7% 3.7% 3.7% 8.5% 13.5% 17.9% 23.5% 18.6% 10.9% 11.7% 3.0% 10.0% 19.0% 8.4% 3.3% 10.6% 8.9% 2.2% 13.6% 8.2% 17.7% 11.5% 17.8% 23.5% 22.7% 1.9% 0.3% 7.1%

0.1% 9.1% 0.9% 2.1% 1.8% 5.2% 18.6% 26.3% 6.3% 5.1% 14.7% 0.0% 2.0% 3.9% 0.9% 0.1% 1.8% 3.2% 1.0% 2.2% 2.3% 1.3% 0.6% 5.6% 0.5% 22.1% 0.2% 0.2% 0.0%

0.2% 2.1% 0.0% 0.0% 0.0% 2.7% 0.5% 0.1% 0.4% 0.0% N/A 0.4% 0.0% 6.8% 0.0% 1.5% 0.0% 8.8% 0.0% 0.0% 1.6% 0.1% 0.0% 0.6% 0.8% 0.8% 0.0% 0.0% 2.2%

3583 99 4937 359 274 99 61 57 38 53 21 2270 77 659 0 996 24 654 23 16 799 40 42 182 17 80 79 135 526

0 353 255 598 0 188 105 8 2 82 0 0 0 942 0 0 0 169 0 37 543 8 0 0 0 2 0 0 0

6.1% 6.8% 18.4% 15.3%

1.7% 0.6% 13.9% 13.8%

6.8% 2.2% 0.8% 9.9%

890 1021 77 1010

0 1875 3 1799

Total LAC

17.5%

8.9%

0.7%

129

186

Sources: Cols. (1) and (2): UNCTADStatCol. (3): UNCTADStat for total inward FDI and MOFCOM (2016) for Chinese OFDICol. (4): NBS Database for value of Chinese projects and UNCTADStat for populationCol. (5): Gallagher and Myers (2016) for loans and UNCTADStat for population

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10 China’s Economic Impacts on Latin America

10.1 Introduction Debate over the impacts of China on Latin America has raised many of the same issues that were discussed in the case of Sub-Saharan Africa (SSA), but with different emphases. This chapter considers the economic impacts. Once more there are divergent views between the official Chinese position, which emphasizes mutual benefit, and those in the West and within the region who are often critical of key aspects of the relationship. The critics claim that the growth of China has contributed to the primarization of Latin American exports and to premature deindustrialization. The framework presented in the Introduction (Table 0.1) and that was used to discuss China’s impact on SSA in Chapter 7 is also relevant in looking at Latin America. The distinctions between complementary/competitive and direct/indirect impacts have been used to analyze the effects of China on the region (Jenkins et al., 2008). The complementary/competitive dichotomy is sometimes discussed in terms of some Latin American countries being ‘winners’ and others ‘losers’ as a result of China’s impact (Funakushi and Loser, 2005; Gonzalez, 2008). Broadly speaking, South American countries whose economies are complementary to China are identified as winners, while Mexico and the Central American countries and the Dominican Republic are seen as losers. There are also likely to be winners and losers within countries in terms of both sectors and particular social groups. Section 10.2 considers the impact of China on Latin American exports of commodities, and its effects on economic growth in the region. Chinese involvement in infrastructure has, until very recently, been much less significant in Latin America than in SSA, so this is discussed briefly in the third part of the chapter. More emphasis is put on the impact on the manufacturing sector, which has been a major area of concern in the region. The chapter ends with a more detailed consideration of China’s impact on three key countries in the region: Brazil, Mexico, and Chile.

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10.2 Exports to China and the Commodity Boom As seen in the last chapter, commodity exports from Latin America to China grew rapidly from the end of the 1990s, and China became the most important export market for several countries in the region. However, dependence on the Chinese market was not as high in Latin America as in SSA; even in Chile, where China accounted for the largest share of exports, only around a quarter of the country’s total exports went to China.1 While this suggests that the direct effect of exports to China was less than in SSA, the region was also affected indirectly by the growth of Chinese demand and its effect on commodity prices and the terms of trade. As a result there were significant gains for some commodity exporters, but also worries about the possibility of catching Dutch Disease.

10.2.1 Direct Effects The countries in the region which rely most heavily on the Chinese market apart from Chile are Cuba, Peru, and Brazil.2 As discussed in Chapter 9, the main products that China imports from Latin America are soybeans, iron ore, copper, and petroleum. Only a small share of Latin American petroleum exports go to China, so the direct effects on the oil industry in the region are not significant. China imports a much higher share of Latin America’s minerals, suggesting that the effects here may be more important. The main exporters are Chile and Peru, for copper, and Brazil, for iron ore. Both minerals have alternative markets, and as standardized commodities, they could be sold elsewhere by exporters in the absence of demand from China. China has not played a major role in the growth of mineral production in Chile or Brazil, but Chinese firms have made significant investments in Peruvian mining (Sanborn and Chonn, 2015). China has had a significant direct effect on Latin American exports in the case of soybeans, which it imports mainly from Argentina and Brazil. Threequarters of Brazil’s soybean exports and over 80 per cent of Argentina’s go to China, and it would not have been possible for such a massive expansion of soybean acreage to have taken place in the two countries in the absence of the growing demand from China.

1 This compares with more than half the total exports of Mauritania, the Democratic Republic of the Congo (DRC), Sudan, and Angola. 2 Cuba represents a special case because of the US trade embargo. Since the US would be the natural market for Cuban exports in the absence of trade restrictions, the pattern of Cuban trade is highly distorted, and the high share of trade with China is primarily due to political factors.

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10.2.2 Indirect Effects Although the direct impacts of trade with China on Latin American exports are limited to a few countries, the indirect effects are more widespread. These vary according to the type of product in which different countries specialize. One indicator of the indirect effects is the change in the terms of trade.3 Between 2002 and 2011, fuel-exporting countries such as Bolivia, Colombia, Ecuador, and Venezuela saw a significant improvement in their terms of trade, as did mineral exporters (Chile and Peru). Argentina and Brazil, which export a range of products including fuels, minerals, agricultural products, and some manufactures, also saw their terms of trade improve. A second group of countries, made up mainly of agricultural exporters, saw little change in the terms of trade over the period. The only countries which experienced a significant fall in their terms of trade were those that specialize in exports of manufactures such as Costa Rica, the Dominican Republic, and El Salvador.4 There is a clear geographical pattern, with the South American economies seeing an improvement in their terms of trade while Central American and Caribbean countries experienced little change or deterioration. Although demand from China is by no means the only factor affecting the terms of trade, it is clear that countries which have experienced improvements in their terms of trade have tended to produce commodities that China demands, while those specializing in commodities where China has had a limited impact such as tropical agricultural products, and those which export manufactured goods, have been the losers. This is confirmed by studies which have tried to separate out the effect of China from other factors affecting commodity prices. Looking at the period before the global financial crisis (2002–7), the Latin American countries which gained most in terms of net exports as a result of the effects of China on commodity prices were Peru, Chile, Bolivia, Brazil, and Venezuela, while Uruguay and most Central American countries lost out (Jenkins, 2011, Table 6).

10.2.3 The Downside of Commodity Exports Latin America is the original home of the Prebisch-Singer thesis concerning the tendency for the terms of trade of primary commodity exporters to deteriorate. It is hardly surprising then that the increased reliance on exports of such products to China is not necessarily seen as beneficial. Although during the commodity boom the tendency was for the prices of primary products to increase relative to those of manufactured goods, this could be seen as a 3

What follows is based on UNCTADStat data. Although Mexico is also an exporter of manufactures, its terms of trade improved over the period since it is also an oil exporter and benefitted from increased oil prices. 4

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temporary interruption to the long-term trend, which would eventually reassert itself. The decline in commodity prices since 2011 lends support to this view. A second concern is the possibility that increased demand for commodities leads to Dutch Disease effects. One indicator of such a possibility is the appreciation of a country’s real exchange rate. The Latin American country where the real exchange rate appreciated most between 2002 and 2011 was Brazil. It is often cited as an example of a country that experienced Dutch Disease while benefitting from increased Chinese demand and rising commodity prices. Although other factors, contributed to the appreciation of the exchange rate, particularly high capital inflows, increased trade with China was also a factor (Jenkins, 2015). As pointed out earlier, commodity booms do not necessarily lead to Dutch Disease. Other Latin American countries which benefitted from increased exports to China and rising commodity prices did not suffer from such large appreciation as Brazil. Chile, which saw virtually the same improvement as Brazil in its terms of trade between 2002 and 2011, experienced a much smaller appreciation of its exchange rate over that period.5 Chile is often cited as an example of a country which has developed effective policies to deal with the problems generated by a commodity boom (Kulkarni and Hartman, 2014). This underlines the point that the effect of China on commodity exports does not have to lead to negative outcomes associated with Dutch Disease. Another concern is that commodity prices tend be volatile. Indeed, in the period between 2003 and 2010, commodity prices in Latin America were more volatile than in any other period since 1960 (UNCTAD, 2012, Fig. 1). As seen in Chapter 9, the region’s exports to China are more concentrated in primary products and resource-based manufactures than exports to traditional markets, and the share of such products in total exports has been increasing over time. There are grounds for concern that such primarization or re-commodification of exports will contribute to increased volatility, and that this can have a negative impact on economic growth (van der Ploeg, 2011, pp.386–8).

10.2.4 Exports and Economic Growth There is little doubt that China’s growth and integration with the global economy has had a positive impact on the exports of the region as a whole. The real question is whether this contributes to economic growth. Before 2000 5 Whereas Brazil’s Real Effective Exchange Rate appreciated by over 80 per cent between 2002 and 2011, Chile’s only increased by 12 per cent over the period.

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there was very little connection between growth in China and growth in Latin America. The increased weight of China in the global economy and the growth of bilateral ties between China and the region have meant that the correlation between the two regions’ economic performances has increased since the start of the millennium.6 This suggests that in the short and medium term, the growth of China has had a positive effect on economic growth in Latin America. The longer term impacts of increasing commodity exports are less clear-cut. One particular problem is that it has led to deindustrialization as capital and labour shift out of manufacturing (see Section 10.4). More generally, there are concerns that the structural changes which have been brought about in Latin America as a result of China’s increased global presence will create a ‘resource curse’ in the region. However, most of the economic mechanisms that are held to contribute to the negative impact of natural resources are not set in stone, and can be affected by government policy.7 Governments can operate counter-cyclical macroeconomic policies to offset the effects of fluctuations in revenue from commodity exports with prudent long-term fiscal policies. They can also use various policies to prevent excessive appreciation of the exchange rate in the face of a resource boom and put in place measures to protect the manufacturing sector. Industrial policies can also be used to encourage local processing and local suppliers in extractive industries, and taxes can be levied to raise the share of revenue retained locally. This suggests that Latin American governments are, at least in part, responsible for any longer term negative consequences of the growth of Chinese demand for resources.

10.3 China’s Contribution to Infrastructure Development In Latin America the share of gross domestic product (GDP) spend on infrastructure investment averaged 2.4 per cent between 1992 and 2013 (Serebisky et al., 2015, p.8). A significant infrastructure deficit emerged in the 1980s with the debt crisis and the subsequent privatization of many state-owned utilities. The share of public infrastructure investment fell dramatically, and this was not compensated for by an increase in the share of private investment (Perrotti, 2011, Table 1). Several estimates suggest that the region needs to invest at least 5 per cent of GDP in infrastructure. This implies an additional 6 See Calderon, 2009, pp.51–4; Cesa-Bianchi et al., 2011, Fig. 2; World Bank, 2011, Fig. 1.6 for evidence of the increased correlation between Chinese and Latin American output. 7 For discussions of possible policies to avoid some of the pitfalls associated with resource dependence, see Frankel (2012) pp.15–19 and Saad-Filho and Weeks (2013), pp.15–18.

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$120–50 billion a year (Serebisky et al., 2015, pp.7–8). The priority sectors in terms of investment requirements are electricity and roads (CAF, 2011, Table 4). Chinese involvement in infrastructure in Latin America has not been on the same scale as in SSA. Projects completed by Chinese firms in the region between 2005 and 2015 were less than a quarter of the value of contracts in SSA over the same period.8 The gap was even wider for the sixty-five Chinese companies ranked amongst the top international contractors, which earned more than five times as much revenue in Africa9 as in Latin America and the Caribbean (LAC). These Chinese contractors accounted for only an eighth of the Latin American market in 2014, compared to half in Africa (ENR, 2015, p.40). Chinese projects are concentrated in three countries, Venezuela, Brazil, and Ecuador, which between them account for two-thirds of the total spend. These are also the countries which, along with Argentina, have received the lion’s share of loans from the Chinese policy banks. In the case of Venezuela and Ecuador, many of these loans have been backed by oil sales to Chinese stateowned enterprises (SOEs) (Gallagher et al., 2012). A significant portion of the loans has been used to finance transport and energy infrastructure projects carried out by Chinese companies (Grasnow, 2015). In Venezuela companies involved have included China Railway Engineering Corporation, Sinohydro, China Construction Corporation, China CAMC Engineering Co., and State Grid (Ellis, 2014, pp.60–1; Sanderson and Forsythe, 2012, pp.136–9). In Ecuador Chinese companies have been particularly active in energy projects with Sinohydro building the Coca Codo Sinclair Dam and the Gezhouba Group involved in the Soplodora hydroelectric project (Ellis, 2014, pp.62–3).10 China’s contribution to meeting the infrastructure needs of other Latin American countries has been relatively limited up to now. This may well change in the not-too-distant future. In 2015 the China Development Bank (CDB) launched the Special Loan Program for China-Latin America Infrastructure Project with a total credit line of $20 billion, to provide funds for Chinese firms undertaking projects in the region.11 A number of major infrastructure projects, such as the Nicaraguan Canal and the Inter-Oceanic Railway from Brazil to Peru, will significantly increase the Chinese contribution to infrastructure development in the region if and when they are implemented. 8

Calculated from China National Bureau of Statistics database. This includes North Africa, as well as SSA. 10 Several major Chinese infrastructure projects in Ecuador and Venezuela have experienced problems and delays (Deniz and Boria, 2017). In 2016 plans to build a high-speed rail link between Tinaco and Anaco in Venezuela were abandoned in the face of the country’s deepening economic crisis. 11 China-CELAC Forum, http://www.chinacelacforum.org/eng/ltdt_1/t1269472.htm (Accessed 10 Dec. 2016). 9

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10.4 China’s Impact on Latin American Manufacturing A major concern in Latin America has been that China is having a negative impact on the region’s manufacturing sector and contributing to deindustrialization.12 The rapid growth of imports of Chinese goods has given rise to complaints by business leaders and their trade associations and to demands that governments impose protectionist measures. In Colombia the shoe manufacturers claimed that more than 70 per cent of shoe factories had closed because of Asian competition, and demanded more protection from the government (El Espectador, 2013). In Peru, the National Industries Society (SNI) accused China of dumping textiles and garments at prices that did not even cover the cost of the raw materials used (Murphy et al., 2007). In Brazil the Federacão das Indûstrias do Estado de São Paulo (Federation of Industries of the State of São Paulo, FIESP) and a number of sectoral associations affected by Chinese competition have called for increased government support and the implementation of safeguard measures against China (Paraguassu, 2007). At the regional level, calls have been made for joint actions to stem the tide of Chinese competition. At the eighth World Footwear Congress held in Guanajuato, Mexico in 2010, China was strongly criticized, and the president of Argentina’s Chamber of the Footwear Industry called on Latin American countries to join to form a strong united front ‘to defend local industries from the diverse Chinese practices such as under-billing or using Panama to triangle and ship their shoes to the rest of the continent’ (MercoPress, 2010). The president of the Mexican steel association, CANACERO, pointed to the impact that Chinese competition is having on the region’s steel industry at a meeting of directors of the Latin American Iron and Steel Institute (ILAFA) in Mexico City in May 2011 (CANACERO, 2011), while the president of ILAFA has spoken of the need to reverse the process of deindustrialization in the region (Ternium, 2011). Latin American manufacturers face competition from Chinese products not only in their domestic market; those who have successfully developed exports complain that they are losing out to Chinese exporters in third markets as well. Furthermore, they face barriers when they want to export to China, which means that the playing field is not level. How justified are these complaints, and how real is the fear that Latin American countries are losing their industrial base to China? Is the picture as dark as it is sometimes painted, or are there positive aspects to the increasing

12 This section focuses on the effect on Latin American and Caribbean (LAC) manufacturing of competition from Chinese products in both the domestic market and the export market. There is a further indirect effect associated with the shift in capital and labour out of manufacturing into commodity exporting sectors as a result of the commodity boom discussed in Section 10.2.

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availability of Chinese products, and is there evidence of technology transfer and increased opportunities for local suppliers which can offset any negative effects?

10.4.1 Competition in the Domestic Market After World War II, the Latin American countries embarked on strategies of import-substituting industrialization using tariffs and other protectionist measures to promote the development of local manufacturing activities. These policies were to a large extent maintained for more than three decades until the debt crisis of the early 1980s. This led to a reversal as most countries adopted the policies that came to be known as the Washington Consensus, of which the most prominent was trade liberalization. Tariffs in the region were reduced from an average of almost 60 per cent in 1985 to under 15 per cent a decade later, and many non-tariff barriers were also removed (Lora, 2011, pp.369–71).13 As a result the Latin American economies became much more open and the share of imported goods in the region’s markets increased. This contributed to a relative decline of the manufacturing sector in many Latin American countries that has been characterized as ‘premature deindustrialization’ (Palma, 2008; Rodrik, 2016a). The share of manufacturing value added in GDP in Latin America fell by more than ten percentage points between 1980 and 2003, and the share of manufacturing employment also fell, although by a smaller amount.14 This was a marked change from the situation that existed before 1980, when, with the exception of Argentina, the manufacturing sector increased its share of employment in Latin America (Palma, 2011, Fig. 23.15). This process of deindustrialization in Latin America, triggered by the switch in economic policy in the 1980s, was already well under way by the time China joined the World Trade Organization (WTO) in 2001. As a member, China would eventually face the same tariffs as other WTO members, although there was a transition period during which imports from China continued to be restricted. Despite these remaining restrictions, as discussed in Chapter 9, Latin American imports from China grew rapidly, and, as a result, the share of Chinese-produced goods in local consumption increased significantly. The latest figures show that imports from China account for 10 per cent or more of the apparent consumption of manufactures in Colombia, 13 Whereas non-tariff trade barriers applied to more than a third of the region’s imports before trade began to be liberalized, by the mid-1990s, they only affected 6 per cent of imports (Lora, 2011, p.371). 14 In 1980 manufacturing accounted for 28.2 per cent of GDP and 16.5 per cent of total employment. These shares fell to 16.7 per cent and 14.2 per cent respectively in 2003 (Palma, 2008, Tables 1 and 2).

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Mexico, Peru, and Uruguay (see Fig. 10.1).15 Only in Brazil, with its more developed and protected industrial sector, and Costa Rica was the share of Chinese products less than 10 per cent.16 The average shares shown in Figure 10.1 hide much higher levels of Chinese import penetration in particular industries.17 In Colombia and Peru, Chinese imports accounted for more than half of apparent consumption in leather and footwear, and in office, accounting, and computing machinery (see Table 10.1). Two types of industries stand out in terms of the share of Chinese goods: traditional low-technology products such as textiles, clothing, footwear, and furniture, and high- and medium-high-technology products such as computers, electronic and electrical products, and in the more advanced countries, electrical and non-electrical machinery (see Table 10.1).18 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0%

Colombia

Mexico

15

14

20

13

Peru

20

12

20

20

11

20

10

09

20

08

Costa Rica

20

07

20

20

06

05

20

04

20

03

20

02

Brazil

20

20

01

20

20

00

0.0%

Uruguay

Figure 10.1. China’s Share in Apparent Consumption of Manufactures in Selected Latin American countries, 2000–13 Notes: Uruguay 2006 esmated by interpolation Source: UNIDO: OECD STAN for Mexico

15 Apparent consumption is defined as production plus imports minus exports. Import penetration is usually measured as imports divided by apparent consumption. 16 Given the existence of the free-trade agreement (FTA) between Costa Rica and China, it is rather surprising that import penetration is not higher, but the country continues to rely significantly on imports from the US. 17 Brazil, Colombia, Mexico, and Peru were the only major LAC countries where sufficiently disaggregated data was available to arrive at meaningful estimates of import penetration at the industry level. 18 The classification of industries by technological intensity is based on the Organization for Economic Co-operation and Development (OECD)’s taxonomy. It is worth bearing in mind that products classified as high technology do not necessarily involve advanced technological processes, since they may only be assembled in China from parts and components produced elsewhere.

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China’s Economic Impacts on Latin America Table 10.1. Industries with the Highest Level of Chinese Import Penetration Brazil 2012 Office, accounting, and computing machinery* (24.1%)

Colombia 2012 Leather & footwear (76.9%)

Peru 2011 Office, accounting, and computing machinery (77.7%)

Mexico 2015 Computer, electronic, and optical equipment (49.4%)

Textiles (15.7%)

Office, accounting, and computing machinery (62.5%) Radio, TV, & communications equipment (49.1%) Furniture & other manufacturing (37.2%) Basic metals (28.7%)

Leather & footwear (54.9%)

Electrical equipment (34.1%)

Radio, TV, & communications equipment (50.8%) Textiles (28.1%)

Furniture & other manufacturing (16.7%) Leather & footwear (15.4%)

Other transport equipment (24.5%) Furniture & other manufacturing (21.9%) Wearing apparel (20.6%)

Wearing apparel (13.7%) Textiles (12.3%)

Electrical machinery (13.3%) Non-electrical machinery (11.4%) Wearing apparel (10.3%) Furniture & other manufacturing (9.6%) Leather & footwear (9.1%)

Textiles (24.9%)

Wearing apparel (23.9%)

Other transport equipment (10.4%)

Notes: Brazil, Colombia, and Peru are based on International Standard Industrial Classification (ISIC) Rev.3 classifications, and Mexico on ISIC Rev.4. * Also includes ISIC Rev.3 industries 32 and 33 (Radio, TV, & communications equipment; and Medical, precision, & optical equipment). Sources: United Nations Industrial Development Organization and World Integrated Trade Solution for Brazil, Colombia, and Peru; OECD’s Database for Structural Analysis for Mexico

These two groups of industries represent rather different situations in terms of the impact of increased imports from China. Since the early 2000s, China’s increased market share in low-technology industries has come mainly at the expense of domestic manufacturers, despite the fact that in Latin America these are often the industries with the highest level of protection.19 Chinese exports in these sectors have also been a significant target of anti-dumping actions by Latin American governments.20 In contrast, high-technology sectors tend to be less protected and to have higher overall levels of import penetration. Here the increased presence of imports from China in recent years has come mainly at the expense of imports from other countries. In Colombia and Peru, which are typical of the majority of countries in the region, domestic production accounts for a low share of the market for high-technology goods, so there has been very little impact on local producers. Even in Brazil, where these industries are more developed,

19 Labour-intensive industries tend to be the most protected in the region (Moreira, 2016, p.43 and Fig. 33). 20 Textile and footwear is the second most important sector in value terms for Latin American anti-dumping measures against China, after plastic and rubber products (Moreira, 2016, Fig. 43).

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much of the gain made by imports from China has been at the expense of a fall in the share of other imports. The increased share of imports from China in these industries reflects the changing sourcing strategies of the transnational corporations, which have relocated their production, or at least the final stages of production, of computers, radios, TVs, and other electrical and electronic products to China.21 As a result there is less hostility towards Chinese imports in these sectors, and they are less of a target for anti-dumping measures than the low-technology industries (Moreira, 2016, Fig. 43). It would be a mistake, therefore, to assume that all of the growth of imports from China has displaced domestic production in Latin America. In Colombia only just over a quarter of the increase in China’s share of the market came at the expense of local producers between 2000 and 2012, and, in Peru, it was just under half between 2001 and 2011. In the case of Brazil, between 2000 and 2013 40 per cent of the increased Chinese share came at the expense of domestic manufacturing. Only in Mexico, of the four countries examined, did more than half of the increase in China’s imports displace local production.22 As discussed later, Mexico is a very specific case. How big an impact have imports from China had on local production in these countries? One indication of this is how much larger it would have been if local production had not lost market share to China. If Chinese import penetration had not displaced local production since the early 2000s, the latter would have been 2.5 per cent higher in Brazil, 3.2 per cent higher in Colombia, 6.0 per cent in Peru and 6.2 per cent higher in Mexico in the latest years for which data is available. As with the data on the extent of import penetration, this is a relatively modest impact on the manufacturing sector as a whole. Again the impact on production is much greater in certain industries, at over 20 per cent in textiles in Brazil, Colombia, and Peru, and in leather and footwear in Colombia and Peru. Despite the complaints of some local manufacturers, increased imports from China are not necessarily negative for all producers. Imports of lowcost Chinese inputs or capital goods can help reduce production costs and increase profitability for local producers. They may involve technology transfer. There are also benefits to consumers where cheaper Chinese goods help to reduce the cost of living.

21 In some cases, Chinese companies such as Huawei and ZTE, which have become increasingly competitive internationally, particularly in lower-end products, have also contributed to the increased share of Chinese imports. 22 Using the same methodology as that applied in the other countries, it was calculated that 85 per cent of China’s increased market share was at the expense of domestic manufacturing.

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10.4.2 Competition in Export Markets Concern over the impact of China on Latin American manufacturing is not confined to competition in the domestic market. Many countries in the region have developed significant exports of manufactures, and these too face increased competition from China. Although initially it was thought that this would only be a problem for Mexico, because of its exports to the US, recent research has shown that it has affected a wider range of countries including Brazil, the Central American countries, and the Dominican Republic (Jenkins, 2010b; Jenkins, 2014; Dussel-Peters, ed., 2016). Mexico is the country where most concern has been felt about the effects of Chinese competition. Since the signing of the North American Free Trade Agreement (NAFTA) with the US and Canada in 1994, Mexico had become increasingly dependent on the US market and was the second-most-important source of imports to the US, after Canada. However, many of the products that Mexico exported to the US competed directly with Chinese goods. In 2003 China overtook Mexico as the second-largest exporter to the US.23 Mexico saw its share of the US market for a range of products including textiles, garments, TVs, PCs, telephone equipment, and furniture fall as China’s exports increased (Watkins, 2007; Ruiz Chávez, 2007). The small Central American countries (El Salvador, Guatemala, Honduras, Nicaragua, and Costa Rica) and the Dominican Republic were also badly affected by Chinese competition in the US market. These countries were in a similar situation to Mexico in that they had established export-processing and free trade zones in the 1960s and 1970s and had seen their exports to the US, particularly of textiles and garments, grow significantly in the 1990s. However, following China’s entry into the WTO in 2001 and the ending of the Agreement on Textiles and Clothing, which had imposed quotas on international trade in these products, at the beginning of 2005, the Central American countries and the Dominican Republic lost market share in the US to China on a significant scale (Jenkins, 2010b). Indeed the threat posed by Chinese competition in the US market was one of the arguments put forward in favour of signing the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) between these countries and the US. At the time, the Office of the US Trade Representative (2005, p.1) claimed that DR-CAFTA would ‘provide regional garment-makers . . . a critical advantage in competing with Asia’. The impact of Chinese competition on Central America has been felt primarily in the garment industry, which accounts for the bulk of the region’s

23

See Section 10.5.2 for a fuller discussion of the Mexican case.

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manufactured exports to the US and is a significant source of employment in the region.24 While Central America and China held roughly similar shares of US imports of garments at the start of the 2000s (around 12 per cent each), by the end of the decade, China’s share had increased to 38 per cent, while that of Central America had fallen to 8.7 per cent (Gallagher, 2010). The original members of MercoSur (Argentina, Brazil, Paraguay, and Uruguay) also lost market share in the US to China after 2001, although they were not as seriously affected as Mexico and the Central American countries (Jenkins, 2010b). The least-affected countries in the region were the Andean countries, because their exports to the US were mainly of primary products which did not face Chinese competition. However in terms of the impact on the exports of manufactured goods, these countries also experienced losses to China ( Jenkins, 2010b, Table 11.5). Concern over the impact of Chinese competition on Latin American exports initially focussed on developed-country markets, particularly the US, but it has also become an issue within the regional market since the mid2000s.25 Recent research has shown that the increased presence of China has led to a reduction in the level of regional integration with LAC as imports from China displace regionally sourced goods (Dussel-Peters, ed., 2016). Brazil has been particularly affected by increased Chinese competition in the Latin American market, as it has the most developed industry in the region. Since regional exports tend to have higher technological content than those to developed-country markets, Chinese competition in these markets is making it more difficult for other countries to upgrade their manufactured exports (Dussel-Peters, ed., 2016). Not only has a much larger number of Latin American countries seen their exports affected by Chinese competition than was initially thought, but also upgrading in China and the increasing range of products in which Chinese production is internationally competitive has meant that the effects have been felt beyond labour-intensive, low-technology industries. This has made it difficult for Latin American exporters to move up the technological ladder and offset the losses of market share to China in low-technology or labourintensive products by increasing their exports of high-technology products (Gallagher and Porzecanski, 2010, Ch. 4).

24 In Honduras, apparel maquiladora firms employed 130,000 workers in 2004 (Agosin et al., 2004). 25 See Gallagher and Porzecanski (2010, Table 3.4) on the impact of Chinese competition on intraregional exports from Argentina, Brazil, Chile, Colombia, Costa Rica, and Mexico; Hiratuka et al. (2012) on Argentina, Brazil, Mexico, and Uruguay; Jenkins (2014) on Brazil; and Dussel-Peters (ed.) (2016) on the major sub-regions within LAC.

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10.4.3 Latin American Exports of Manufactures to China As seen in Chapter 9, there is little sign of Latin American countries starting to diversify their exports to China; they continue to be heavily concentrated in primary products and resource-based manufactures involving limited processing. Even countries which enjoy preferential access to the Chinese market, such as Chile and Peru, which have signed Free Trade Agreements (FTAs) with China, have not developed significant exports of manufactures (Wise, 2016). One factor which has contributed to the lack of manufactured exports from the region has been Chinese tariff and non-tariff barriers. Protection, which increases with the level of processing, makes it more difficult for Latin American exporters to add value to the raw materials that they export to China. As the Inter-American Development Bank economist Mauricio Mesquita Moreira (2016, p.5) comments: LAC’s exporters still face significant barriers to penetrating the Chinese market, which are particularly binding for natural resource-intensive sectors, where LAC has strong comparative advantages and where diversification is more likely to occur. Even more worrying is the fact that the relevance of these barriers often increases with the levels of processing and the sophistication of the exports. It is not surprising that, given the highly competitive nature of Chinese manufacturing and the barriers to increased levels of processing, LAC exports of manufactures to China have been very limited and have not compensated for Latin American producers’ loss of domestic and foreign markets.

10.4.4 Technology Transfer and Local Linkages Two potential positive impacts on Latin American manufacturing of growing trade and investment with China are technology transfer and new opportunities for local producers through backward and forward linkages. Official Chinese documents identify technology transfer and research and development (R&D) as important areas for cooperation between China and Latin America. China’s 2016 Policy Paper refers to ‘the expansion of cooperation with Latin American and Caribbean countries in high-tech fields such as information industry, civil aviation, civil nuclear industry and new energy, to build more joint laboratories, R&D centres and high-tech parks’ (PRC, 2016, para 2.8), and to helping Latin American and Caribbean countries in their industrial upgrading. The China and Community of Latin American and Caribbean States (CELAC)Forum Cooperation Plan, adopted in Beijing in 2015, also refers to increasing the transfer of technology and know-how between the two sides (CELAC, 2015). These statements are a reflection of aspirations more than achievements in terms of technology transfer from China to Latin America. Although China 267

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has invested heavily in R&D at home, there is little evidence that Chinese firms are transferring technology to Latin America on a significant scale. A study of technology transfer between China and Brazil in the energy sector concluded that so far the extent of transfers has been limited, despite the objectives set out in high-level agreements between the two governments (Husar and Best, 2013). There is some evidence of Chinese technology in renewable energy being transferred to Latin America (see Borregaard et al., 2017 on Chile), but the overall picture does not suggest that China is making a significant contribution to technological upgrading in the region.26 Overall, as discussed in the last chapter, Chinese foreign direct investment (FDI) in the manufacturing sector in LAC is quite limited, and much of it has been in market-oriented assembly operations which do not require much by way of advanced technology. This has also meant that few local linkages are developed, since Chinese firms rely mainly on imported parts and components. Some Chinese manufacturing companies have set up in free trade zones such as Manaus in Brazil and Tierra del Fuego in Argentina, where they can import parts duty-free to assemble products which are then sold throughout the country. Major Chinese companies such as Lenovo in laptops and TCL in televisions, air conditioners, and mobile phones have established plants in Tierra del Fuego. In Manaus the Chinese firm Kinski assembles motorbikes, and Gree makes air conditioners, while the electronics firm CCE, owned by Lenovo, makes laptops, desktop computers, tablets, and televisions. Even when operating outside such free trade zones, Chinese firms often rely heavily on imports from China for their inputs.

10.4.5 Conclusion The Latin American economies had already seen a weakening of their manufacturing sectors before China emerged as a significant player. Some commentators have described many of the countries of the region as being caught in the ‘middle-income trap’, unable to compete with low-wage countries in labour-intensive low-technology industries and lacking the technological capabilities to compete with developed countries in high-technology sectors (Paus, 2017). The rise of China has intensified this squeeze on middle-income countries in LAC as it upgraded its manufacturing production. The trade liberalization that occurred in the late 1980s and 1990s meant that once China had become a member of the WTO its exports of manufactures were well placed to enter the Latin American market. In some cases these exports were the result of transnational corporations (TNCs) switching 26 Huawei has an R&D centre in Mexico, but this only has fourteen employees and is mainly involved in modifying software for local clients (Micheli and Carrillo, 2016, pp.52–3).

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production from other Asian countries to China, and had relatively little effect on production within Latin America. In low-technology industries and increasingly in medium-low-technology industries, such as rubber and plastic products and basic metals (especially iron and steel), Chinese imports came to replace domestic production in the region. At the same time, WTO membership gave China better access to developed-country markets, and increased competition affected exports from Mexico and the Central American and Caribbean countries, particularly to the US. These negative effects on some Latin American manufacturers were not offset by significant gains in terms of growing exports of industrial products to China or increased Chinese investment or technology transfer in Latin America.

10.5 China’s Economic Impact on Brazil, Mexico, and Chile Brazil, Mexico, and Chile represent three contrasting situations in terms of their economic relation with China. Brazil is China’s most significant economic partner in Latin America and the Caribbean (LAC). It has elements of both complementary and competitive relations with China with significant exports of primary products, while at the same time the manufacturing sector has faced increased competition from Chinese products at home and abroad. Mexico’s relations with China have been mainly competitive with particular attention being given to the loss of market share to China in the US. Chile’s economy is complementary to China’s as it benefitted from the growing Chinese demand for copper, its main export.

10.5.1 Brazil Brazil is the largest and most diversified economy in Latin America, and is China’s most significant partner in the region. It was the first country in Latin America to be recognized as a strategic partner by China in 1993. Brazil and China are both members of the BRICS (Brazil, Russia, India, China, and South Africa) group of countries, and cooperate internationally. Brazil is China’s most significant economic partner in Latin America in terms of trade and investment.27 From the Brazilian point of view, China has been its most important export market since 2009 and is its most important source of imports. 27 Official Chinese data show that Brazil is the second-most-important country in terms of the stock of Chinese outward foreign direct investment (OFDI) in Latin America after Venezuela. Other sources suggest that because much of Chinese investment in Brazil has been channelled through other countries, it is in fact the most important destination in the region.

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Because of the size and diversity of its economy, Brazil has a complex economic relationship with China. As an exporter of primary products, it benefitted from the growing Chinese market and the commodity boom between 2002 and 2011. On the other hand, parts of the manufacturing sector have faced competition from Chinese products both at home and in export markets in the North and in Latin America. Not surprisingly, there are very different views of the economic impact of China on the country. COMMODITY EXPORTS

Brazil’s two most important exports to China are soybeans and iron ore, which account for almost two-thirds of its total exports. Around three-quarters of Brazil’s exports of soybeans and half of its exports of iron ore go to China, making it by far the most important market for these products. Soybean exports to China increased from 3.2 million tonnes in 2001 to 40.9 million tonnes in 2015, accounting for virtually the entire growth of Brazil’s soybean exports. The increase in cultivation in Brazil during this period was therefore almost entirely down to the growth of demand from China. Brazil also benefitted from the increase in world prices for soybeans, which rose by more than 150 per cent during the commodity boom (2002–11). Again, as seen in Chapter 3, this was partly a result of increased demand from China. The bulk of Brazil’s soya exports to China have been unprocessed beans to supply the Chinese crushing industry. Although there have been some exports of soybean oil to China, these have been less than 10 per cent of the value of exports of unprocessed soybeans, and in 2015, fell to less than 1 per cent of total soy exports. Clearly exports to China are concentrated at the initial stages of the value chain, with very little processing taking place in Brazil. This is a result of the removal of export taxes on unprocessed soybeans in 1995 and the measures taken by the Chinese government to promote its local crushing industry. As a result the proportion of Brazil’s total soybean production that was crushed domestically fell from 95 per cent in 1995 to less than 50 per cent in recent years (Oliveira and Schneider, 2016, p.172). The economic gains from the soy boom in Brazil have been captured mainly by global and Brazilian agribusiness, including the leading commodity traders ADM, Bunge, Cargill, and Dreyfus, and large-scale Brazilian agribusinesses such as Grupo Amaggi and Vanguarda Agro. Unlike Argentina, where the government imposes significant export taxes on agricultural exporters so that soybeans made a significant contribution to government revenues (Lopez and Ramos, 2009, pp.210–13), in Brazil, soybean exports have not been taxed since the mid-1990s. Proposals to introduce a tax on exports have been consistently blocked by the agricultural lobby. In 2016 the Brazilian Minister of Agriculture, Blairo Maggi, one of the largest soybean producers in 270

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Brazil, described the tax idea as ‘crazy’, and the proposal was dropped (Cordonnier, 2016). Brazil’s exports of iron ore to China increased from 28 million tonnes in 2001 to 185 million tonnes in 2015. The share of Brazil’s iron ore exports going to China went up from under a fifth to over half over the same period. The foreign exchange generated by exports increased even more rapidly up to 2011 as a result of the commodity boom. Since then, falling iron ore prices have led to a decline in the value of exports to China. As seen in Chapter 3, the growth in demand from China was a major contributor to the increase in iron ore prices during the commodity boom. The global market for iron ore is highly integrated, and supply is dominated by three major companies: BHP-Billiton, Rio Tinto, and the Brazilian firm Vale. Although Brazilian exports of iron ore to China grew significantly, this was a reflection of China’s increased share in global steel production, and Brazil’s share of Chinese ore imports fell slightly during the commodity boom. Chinese firms were not directly involved in the expansion of Brazilian mining, so that the major impact on the Brazilian industry was through increasing prices. As was the case with soybeans, the bulk of Brazil’s exports of iron ore to China is exported without further processing. Exports of iron and steel have been less than a tenth of the value of Brazil’s iron ore exports in recent years. The Brazilian iron ore mining industry is dominated by Vale (formerly CVRD), which was government-owned until it was privatized in 1997. The second-largest iron ore exporter is CSN Mining, a subsidiary of the Brazilian Steel Company, another formerly state-owned enterprise. Major TNCs such as BHP-Billiton and Anglo American are also involved in the sector. Clearly, the benefits of the boom in iron ore have been highly concentrated amongst a small number of Brazilian and transnational companies. These companies benefit from low mining royalty rates and an absence of any taxes on exports of iron ore. A proposed 10 per cent tax on exports was turned down by the Brazilian Congress in 2012, and there has been a conflict over government efforts to require iron ore exporters to sell to their subsidiaries overseas at arm’s-length prices rather than lower internal transfer prices. It has been estimated that these measures would increase taxes paid by Vale and CSN by 5 per cent (Kinch, 2012). A new mining law which would increase the royalties paid by iron ore mines is being introduced to Congress, but if it is passed miners in Brazil would still pay much less to the government than their competitors in Australia. EFFECTS ON MANUFACTURING

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problem of identifying countries in Latin America as winners or losers in terms of their complementary or competitive relationship with China. The share of manufacturing in Brazil’s GDP has been falling since the 1980s, and has led to a debate between orthodox economists who see it as a return to a more normal pattern following the artificial expansion of industry as a result of import-substituting policies (Bonelli and Pessoa, 2010), and heterodox economists who argue that it is the result of specific economic policies, particularly in terms of financial openness and the overvaluation of the exchange rate (Bresser-Pereira and Marconi, 2009; Soares et al., 2011). Although it is clear that Brazilian manufacturing was declining relatively (although not absolutely) before China joined the WTO, the increased import penetration of goods from China and competition from Chinese products in export markets has put further pressure on Brazilian industry. As seen in Figure 10.1, China’s share of the Brazilian market for manufactured goods increased from less than 1 per cent in 2000 to 6.5 per cent by 2013. Brazil remains a relatively protected economy, with only about a third of apparent consumption of manufactures provided by imports. Since China has been the main target of anti-dumping cases brought by the Brazilian government in recent years, it is likely that in the absence of such protectionist measures its market share would have increased even more rapidly.28 The industries which have been most affected by Chinese competition in the domestic market are textiles, clothing, electrical and non-electrical machinery, and computers, radios, TVs, and communications equipment (see Table 10.1). Manufacturers producing for the domestic market have frequently called on the government to take action against Chinese imports. In 2010 the Brazilian Shoe Manufacturers Association, (Abicalçados) was successful in obtaining anti-dumping duties on footwear imports from China. In 2011 the Brazilian Textile Industry Association (ABIT) called on the government to investigate imports of denim from China, while the Brazilian Machinery and Equipment Association, (ABIMAQ) made several requests for safeguard measures to be applied against Chinese imports. However, all of these requests were rejected (Rossone et al., 2011). Although Brazilian manufacturing produces mainly for the domestic market, with government assistance some sectors have been successful in developing exports. Chinese competition has led to the loss of export markets in both developed countries and other Latin American markets. A survey by the National Confederation of Industry (CNI) reported that over half of the 28 China was affected by forty-six of eighty-two trade defence measures adopted by Brazil (Global Trade Alert database at http://www.globaltradealert.org/site-statistics (Accessed 31 Oct. 2013). Although the Brazilian government agreed in 2004 to recognize China as a ‘market economy’ within the WTO, this was never formally approved, making it easier for Brazil to impose restrictions on Chinese exporters.

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Brazilian exporters covered faced competition from China in foreign markets, and two-thirds of these had lost customers to Chinese exporters (CNI, 2011). Several reports by FIESP have made estimates of the negative impact of Chinese competition on Brazilian exports to the US, the EU, and Argentina suggesting that there have been significant losses (FIESP, 2007; FIESP, n.d.). A number of academic studies have analysed the impact of China on Brazilian exports to the US, the EU, and other Latin American countries (Filgueiras and Kume, 2010; Hiratuka and Cunha, 2011; Jenkins, 2014; Lélis et al., 2012; Machado and Ferraz, 2006). These too show that Brazilian exports have been negatively affected by Chinese competition. Export industries that have lost market share to China include footwear, electrical and non-electrical machinery, and wood and furniture, as well as iron and steel, rubber, organic chemicals, and vehicles in the Latin American market (Jenkins, 2014, Table 8). FDI, LOANS, AND INFRASTRUCTURE

As the largest economy in the region, it is not surprising that Brazil has been an important destination for Chinese FDI. However, China’s share of FDI in Brazil is still very low, accounting for a mere 2 per cent of the total stock of inward investment in 2015, putting China thirteenth amongst countries investing in Brazil (BCB, 2016, Table VI).29 The major destination of Chinese FDI has been the extractive industries, which in 2015 accounted for more than half of the total. The other significant sector was gas and electricity, with almost a third of the total, reflecting the Chinese SOE State Grid’s acquisition of several Brazilian power companies. Manufacturing accounted for only 2 per cent of total Chinese FDI (BCB, 2016, Table XIV). In terms of economic impacts, Chinese FDI has tended to reinforce Brazil’s dependence on primary commodities and has done little to counter the trend of deindustrialization. Chinese loans to Brazil have gone mainly to the oil industry. In 2009 the CDB lent the Brazilian state oil company Petrobras $10 billion for the development of the pre-salt oil fields, with repayment to be made in oil. The CDB provided a further $10 billion loan to Petrobras in 2016 to help it meet its debt obligations. Although China has provided more than $30 billion in loans to Brazil since 2007, its share of total Brazilian debt remains relatively low.30 Until recently, Chinese involvement in construction and infrastructure projects in Brazil has been relatively limited. The Brazilian construction industry is dominated by large local companies such as Odebrecht and Camargo Correa. Although Brazil is the most important market in Latin America for 29 These figures refer to the ultimate origin of FDI in Brazil and, therefore, include investment from China which is channelled through other countries. 30 Trinkunas (2016, Table 3) estimates that in 2015 Chinese loans accounted for just over 3 per cent of Brazil’s total foreign debt.

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Chinese contractors, their share of the local market remains quite small. This is likely to change in the future with the announcement in 2017 of a $20 billion infrastructure investment fund, with three-quarters of the capital contributed by China and a quarter by Brazil. The fund will be used mainly to support railway construction to link Brazil’s soy- and corn-growing regions to the ports (Reuters, 2017). As with FDI, the effect will be to reinforce dependence on commodity exports. CONCLUSION

The growth of China has contributed to both the deindustrialization of the Brazilian economy and a shift in the composition of its exports towards primary products. The differential effects of growing relations with China have created both winners and losers within Brazil. The main beneficiaries have been a relatively small group of powerful global and Brazilian agribusinesses and mining corporations. These are represented by the Brazil-China Business Council (CEBC), which brings together major exporters to China such as Vale, Usiminas, and Suzano Papel e Celulose, investors in China such as Embraer, and Chinese firms with interests in Brazil. They emphasize the benefits that the growth of China brings to Brazil through trade and investment and stress the contribution that Chinese imports and investment make to increasing Brazilian competitiveness. On the other hand, industrial interests represented by the National Confederation of Industry (CNI), FIESP, and sectoral chambers of commerce have been highly critical of the negative effects of Chinese competition on the manufacturing sector. The Brazilian government did not capitalize on the growth of exports during the commodity boom to obtain significant increases in government revenue that could be used to promote upgrading. Chinese competition did help to keep down prices of manufactured goods, which benefitted consumers, but attempts by the Brazilian government to use industrial policy to restructure the economy proved ineffective. Once the commodity boom came to an end, the Brazilian economy struggled.

10.5.2 Mexico Although Mexico is China’s second-largest trade partner in Latin America after Brazil, the nature of this bilateral relationship is very different. Mexico overtook Brazil as China’s largest market in the region in 2015, but Chinese imports from Mexico are only about a fifth of the amount of those from Brazil. As a result Mexico has a large trade deficit with China.31 31 The size of the deficit is a matter of debate, since Mexican and Chinese sources give very different estimates (Dussel-Peters, 2005). In 2015 China reported a trade surplus of $23.8 billion

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This relationship has given rise to tensions between the two countries going back as far as the negotiations on China’s accession to the WTO. Mexico was the last country to give its approval for accession, and maintained restrictions on imports from China for as long as possible. This reflected concern amongst Mexican policymakers that Mexican exports would suffer from competition from Chinese goods in its major markets, particularly the US. Several studies identified Mexico as the Latin American country most likely to face Chinese competition (Blázquez-Lidoy et al., 2007; Devlin et al. 2006, Ch. 2). There was also concern that domestic manufacturers would lose out to imports from China, where wages were much lower. In contrast to Brazil and other South American countries, Mexico’s exports to China are mainly of manufactured goods, and it has not developed largescale exports of primary products or resource-based manufactures.32 While this might be desirable in terms of the sophistication of the export profile, it has meant that a deficit in trade in manufactures with China has not been compensated for by a large surplus in primary commodities. In the absence of substantial commodity exports to China, much of the discussion of the effect on Mexico has revolved around the impact on the manufacturing sector, particularly on manufactured exports. Mexico developed significant exports of manufactures to the US in the 1980s and 1990s, initially through the maquiladora programme along its northern border. The maquiladoras were in-bond plants which were allowed to import inputs duty-free, as well as obtaining a number of other privileges provided that their production was for export.33 The US also had special categories in its tariff schedule to allow imports from such plants, only paying duty on that part of the value of the product that had been added in Mexico. As a result the industry boomed in Northern Mexico with a particular concentration in textiles and apparel and the electrical and electronics industries. These were of course the industries in which China was to become particularly competitive. In 1994 NAFTA came into force, giving a range of Mexican manufactures duty-free access to the US (and Canadian) markets, and Mexico overtook Canada as the main source of imports to the US. Its accession to the WTO in 2001, however, gave China access to the US market on most-favoured-nation terms, which cut the tariff preference margin enjoyed by Mexico. In 2003 it overtook Mexico as a source of imports to the US. with Mexico, whereas Mexico reports a deficit of almost three times this amount ($65.1 billion) (International Trade Centre (ITC) data). 32 There has been some growth of exports of copper in recent years, but non-resource-based manufactures continue to account for the bulk of exports. 33 See Sklair (1989, Ch. 3) and Wilson (1992, Ch. 3) for accounts of the development of the maquiladora industry in Mexico.

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If Chinese competition were to have an effect on Latin American exports anywhere it would be on the Mexican maquiladoras. Indeed the industry, which had grown rapidly during the 1990s, suffered a serious reverse in the early 2000s. Employment, which had peaked at over 1.3 million in 2000, had fallen by almost 300,000 by the end of 2003 (Sargent and Matthews, 2009, Table 2). Over the same period, total US imports from Mexico stagnated in dollar terms, while imports from China increased by more than 70 per cent (own calculation from Sargent and Matthews, 2009, Table 1). The Mexican Ministry of Labour estimated that 300 firms, mainly in the electronics industry, relocated to China between 2001 and 2003 (Watkins, 2007, p.155). While this could indicate that China was a major cause of the crisis in the maquila industry in the early 2000s, there were other contributory factors, including the rising value of the Mexican peso and the removal of textile quotas with the ending of the WTO Agreement on Textiles and Clothing in 2005. However, despite the existence of confounding factors, there is strong evidence that Chinese competition did have a negative impact on Mexico’s maquila exports. Unusually, there are several studies based on plant-level data rather than industry aggregates, which permits a much more disaggregated analysis of the impact of Chinese competition taking account of the possible heterogeneity of impacts.34 All of these studies agree that US imports from China had a negative impact on the Mexican maquiladoras. This is reflected in both sales and employment, as well as in plant exits and entries. In other words the greater the level of Chinese competition, the more likely it is that firms will face falling sales and be forced to lay off workers or shut down plants altogether. It is also more difficult for new firms to enter the industry, and to survive if they do. The industries which faced the greatest competition from Chinese imports to the US were apparel, footwear and leather, toys, and sporting goods. These are relatively unskilled labour-intensive industries. On the other hand, the lowest level of Chinese threat was in chemicals, auto parts, and food processing, which tend to be more capital-intensive or resource-based industries (Utar and Ruiz, 2013, p.271). This is consistent with the overall shift in the composition of maquila exports away from traditional, labour-intensive products. It is also reflected in the contrast between the trends in employment in the three main sectors of maquila, with apparel declining while electronics regained some of the levels lost at the beginning of the decade, and auto parts expanded (Sargent and Matthews, 2009, Table 2).

34

Studies include Shigeoka et al. (2006) and Utar and Torres Ruiz (2013), which both use official Mexican data that have been made available at the plant level, and Sargent and Matthews (2008, 2009), who use their own plant survey.

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How have firms responded to Chinese competition in the US market? There is some evidence of upgrading within plants, with increases in productivity and skill-intensity (Utar and Torres Ruiz, 2013). However Sargent and Matthews (2008, 2009) have argued that the firms which have been most successful in terms of surviving increased competitive pressure have adopted a strategy that takes advantage of Mexico’s geographical position and its 2000-mile border with the US. These firms have concentrated on exports of products with a high ratio of weight to value, and those which require a high level of flexibility in response to demand.35 Firms that have lost out have tended to be those producing highly standardized commodity-type items which compete on the basis of price. These firms, whether technologically sophisticated or producing low-technology products, have struggled. Chinese competition has affected not only Mexican exporters but also those who are producing for the domestic market. As Figure 10.1 shows, China’s share of apparent consumption in Mexico increased from less than 5 per cent in the early 2000s to more than 20 per cent a decade later. Industries with particularly high levels of Chinese import penetration included computers and electronic goods, electrical equipment, leather and footwear, furniture, textiles, and clothing (Table 10.1). Mexican manufacturers complain that Chinese goods are smuggled into the country and that they face unfair competition (Luna, 2014). In 2011 the Mexican Economy Secretary expressed concern to the Chinese Commerce Minister about Chinese firms declaring goods at falsely low prices and misclassifying products in order to minimize import duties (Rojas-Mena, 2011). Recently some commentators have claimed that Mexican wages are now lower than Chinese wages (Yuk, 2013) While this may be an exaggeration, it is certainly the case that the gap in wages between Mexico and China has narrowed considerably since the mid-2000s (Kamil and Zook, 2013, Chart 3). This should enable Mexico to regain some of its competitiveness with China. Since the global financial crisis, Mexico has reversed the decline in its share of US imports of manufactures.36 However, this has not been at the expense of China, which, despite increasing labour costs, has managed to maintain its share of US manufactured imports at over a quarter of the total. Mexico has become more competitive against other exporters to the US as a result of increased productivity and the depreciation of the peso against the dollar (Sirkin et al., 2014). It also benefitted from proximity to the US market at a 35 This is supported by Watkins’s analysis of China and Mexico’s exports to the US that shows that Mexico is most competitive in products characterized by a high ratio of weight to value; quality rather than price competition; just-in-time delivery or frequent design changes; and where protection of intellectual property is important (2013, p.47). 36 Between 2008 and 2014, Mexico’s share of US imports of manufactures rose from 10.7 per cent to 13.4 per cent (own calculation from UNCTADStat data).

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time when high oil prices made it relatively more expensive to import goods from Asia and US firms were increasingly adopting just-in-time manufacturing to hold down the cost of inventories.37 This is in line with the emerging strategy of manufacturers in Mexico to concentrate on exports of products which are costly to transport or require speedy response to customer demand. FDI, LOANS, AND INFRASTRUCTURE

Although it is an important market for Chinese goods, Chinese investment in Mexico has been limited. According to the official Chinese statistics, Mexico only ranked eighth amongst LAC countries in terms of the stock of Chinese outward FDI at the end of 2015 (MOFCOM, 2016). According to Mexican sources, China ranked thirty-first amongst countries which invested in Mexico between 1999 and 2015, and contributed less than 0.1 per cent of the total FDI in the country over the period (Dussel-Peters and Ortiz Velásquez, 2016, p.15). The main sectors in which China invested were mining (25 per cent of the total), trade (22 per cent), and manufacturing (21 per cent) (Dussel-Peters and Ortiz-Velásquez, 2016, Table 8). However, given the low overall level of Chinese investment, its contribution in each of these sectors was minimal. A similar picture emerges in terms of Chinese lending to Mexico, with the country ranked eighth in terms of total loans to LAC countries since the mid2000s. The China-Latin America Finance Database reports only one loan to Mexico, to purchase oil-drilling equipment, provided by the China Exim Bank (Gallagher and Myers, 2016). This loan of $1 billion represented less than 1 per cent of total Chinese lending to the region between 2005 and 2015. China’s involvement in infrastructure projects in Mexico has been limited and beset by problems. Less than 5 per cent of all Chinese engineering contracts in LAC have been in Mexico in recent years (NBS, 2016). The highest-profile project, the high-speed rail link between Mexico City and Queretaro, was cancelled as a result of a corruption scandal (Webber and Mitchell, 2014). CONCLUSION

The economic effects of China on Mexico are the consequence of China’s emergence as a global manufacturing powerhouse. This has affected Mexico both directly and indirectly. The most widely discussed impacts have been the indirect effects on Mexican exports, particularly to the US. It is clear that this has had a negative impact on Mexican manufacturers, who face increased competition from China, and has been a factor in reducing the level of regional integration within NAFTA (Gallagher and Dussel-Peters, 2013). There have also been direct effects in terms of the increasing penetration of 37

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Kamil and Zook (2013). It remains to be seen whether low oil prices will reverse this shift.

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the domestic market by Chinese imports. Although this has brought some gains to consumers in terms of lower prices, these need to be offset against the losses in terms of employment and industrialization. Since Mexico does not export primary commodities to China on a major scale, the trade losses for the industrial sector are not compensated for by gains elsewhere, and nor has there been any significant contribution from China through FDI, loans or infrastructure projects.

10.5.3 Chile Although Chile is a medium-sized economy in the Latin American context, its trade with China is more significant than its size would suggest. It is China’s second-most-important source of imports from Latin America and the fourthlargest destination for Chinese exports. It was also the first country to sign an FTA with China, in 2006. China’s imports from Chile are dominated by copper, which in various forms accounts for around three-quarters of the total. Chile benefitted both directly from increased copper exports to China and indirectly from higher copper prices owing to the growth in Chinese demand for copper during the commodity boom. Although the value of imports from Chile has declined with the fall in copper prices since 2011, the volume of Chinese imports has continued to grow. Copper exports are an important source of revenue for the Chilean government. The country’s largest exporter is the state-owned mining company CODELCO, the bulk of whose profits accrue to the state. The government also receives significant royalties and taxes from the country’s privately owned copper mines.38 This significant share of government revenue means that the benefits from increased copper prices and exports to China can be spread much more widely than in other cases where exports were in the hands of private firms and taxes were minimal. There is widespread agreement in the literature that copper revenues have contributed to the improvement of living conditions in Chile (AfDB, 2016, p.20). Although Chile enjoyed a substantial improvement in its terms of trade during the commodity boom, it did not experience the symptoms of Dutch Disease. The Chilean government applied fiscal rules and created a stabilization fund to ensure that fluctuations in copper prices and tax revenues did not lead to excessive swings in government expenditure.39 As Kulkarni and 38 In 2006 and 2007, copper accounted for a third of all government revenues, although by 2014, this had fallen to less than 10 per cent (AfDB, 2016, p.8). 39 The Copper Compensation Fund (FCC) operated from 1987 to 2006, when it was replaced by the Economic and Social Stabilization Fund (FEES) (AfDB, 2016, pp.15–20).

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Hartman (2014) show, Chile was able to use government policies to avoid Dutch Disease during the commodity boom. Chile was the first country in the region to open up its domestic market to foreign competition, following the military coup of 1973. This began a process of trade liberalization which reduced import tariffs to 6 per cent by 2002 (Montfort, 2008, p.3). Chile’s protected industrial sector was hard-hit as a result, beginning the process of deindustrialization. By the time China joined the WTO, the overall level of import penetration in the Chilean manufacturing sector was already over a third (OECD, 2016, Fig. 4.7). Chile has one of the highest levels of Chinese import penetration of any country in Latin America. In 2015 China accounted for almost a quarter of all Chilean imports, and Chinese products accounted for almost a tenth of all manufactured goods consumed in Chile.40 CHILE-CHINA FTA

Chile began to negotiate an FTA with China in 2004. The agreement came into force in 2006, and was followed by supplementary agreements on trade in services (2010) and investment (2014). The Chilean government hoped that this would help to increase non-traditional Chilean exports to China and attract Chinese FDI to Chile (Wise, 2012, 2016). From the Chinese point of view, an FTA would provide Chinese exporters with a competitive advantage in the Chilean market, although given the low tariffs in Chile, this was relatively small. Some Chilean industrial sectors were, nevertheless, concerned about increased Chinese competition. Opposition to the FTA was particularly vocal in the textile and metallurgical industries and amongst small and medium enterprises (Leon-Manriquez, 2011, pp.165–6). In 2006 the president of the Small and Medium Enterprise Confederation, Conapyme, called for special support from the government in the face of Chinese competition (Gachuz, 2012, p.144). When it was signed, the agreement excluded certain products in order to meet these concerns.41 The period following the creation of the FTA saw rapid growth in trade between Chile and China. Exports to China continued to be dominated by copper. Although exports of some non-traditional products, particularly agricultural products such as fruit, wine, and salmon grew quickly, they accounted for a small share of total exports. Imports from China grew even faster than exports, although Chile continued to have a large trade surplus with China.42 40

Own calculation from UNCTADStat and UNIDO data. For some products, complete liberalization did not occur until 2015, while 152 products imported from China, concentrated in textiles and clothing, were excluded altogether. Other exclusions included specific types of cement, tyres, glass, and metal products. 42 Between 2005 and 2014, exports to China grew at an average of just under 16 per cent, and imports grew by over 19 per cent per annum (Direcon, 2015, Table 2.3). 41

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To what extent can the growth of this bilateral trade be attributed to the FTA? The econometric estimates for the region as a whole show no evidence that the existence of an FTA boosts bilateral trade (see Table 9.1). A limited impact on Chilean exports to China is not surprising, since most of the copper exported entered China duty-free before the FTA, and Chile does not enjoy preferential terms compared to other exporters. The facts that Chile was already a very open economy with low tariff rates prior to the signing of the FTA with China and that it had FTAs with a number of other countries meant that any preference margin for Chinese exporters was also small.43 Although there was some diversification of Chilean exports to China, the gains were disappointing. Copper, which accounted for 80 per cent of exports in 2005, still made up 77 per cent of the total in 2014, despite the fall in copper prices. Industrial products, broadly defined to include salmon and wine, experienced a slight drop in their share from 13.8 per cent to 13 per cent over the same period. Agriculture, fishery, and forestry increased from a very low level to make up 4.6 per cent of exports in 2014 (Direcon, 2015, Table 2.3). The number of firms exporting to China increased from over 400 to more than 1,000 between 2005 and 2014, although only just over 100 were regarded as well-established in the Chinese market (Direcon, 2015, p.19). China’s share of Chilean imports increased from around 10 per cent immediately before the FTA came into force to over 20 per cent a decade later. As elsewhere in the region, the imports included a wide range of manufactured goods. The most important products imported included mobile phones, computers, steel, cars, footwear, and toys (Direcon, 2015, Table 2.8). According to Organisation for Economic Co-operation and Development (OECD) estimates, the share of imports from China in total apparent consumption of manufactured goods in Chile increased from around 5 per cent in 2005 to almost 10 per cent by 2012 (OECD, 2016, Fig. 4.7). The share was much higher in certain sectors such as textiles and apparel, where it increased from 23 per cent to 65 per cent between 2000 and 2011, and in computers, machinery, and electronics, where it went up from 23 per cent to 41 per cent over the same period (OECD, 2016, p.99). FDI, LOANS, AND INFRASTRUCTURE

Chile has not been a significant destination for Chinese FDI. It accounted for only 3 per cent of the total stock of Chinese FDI in LAC in 2015, according to official Chinese data (MOFCOM, 2016). Chilean figures show that only 0.1 per cent of the accumulated stock of FDI in Chile was from China in 2014 (Direcon, 2015, Table 2.12), and total Chinese FDI since the FTA came into 43 Between 2003 and 2007, Chile also signed FTAs with its other major trading partners, the EU, the US, and Japan.

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operation was only $55 million, mainly in mining (Direcon, 2015, p.27). The expected surge in Chinese investment has clearly not happened. Nor has China been a significant source of finance for Chile. Unlike its neighbour Argentina, Chile has a good credit rating on international markets, and has not needed to seek loans from the Chinese policy banks. The only major finance that it has received from China was a $550 million loan in 2006 as part of an agreement between CODELCO and Minmetals which was tied to Chilean copper exports. The level of Chinese involvement in infrastructure and engineering contracts in Chile is also very limited.44 Historically the Chilean construction industry has been dominated by domestic and European firms, but there has recently been increased interest amongst Asian, including Chinese, firms (Reuters, 2017). Chile also became a member of the Chinese-led Asian Infrastructure Investment Bank in 2017. It is likely that the presence of Chinese construction firms in Chile will increase in the future. CONCLUSION

Perhaps more than any other country in the region, China’s impact on Chile revolves around the bilateral trade relationship. Chile has been a major beneficiary of China’s demand for copper and continues to be so, despite the drop in global copper prices. The potential downside in terms of Dutch Disease has been avoided through the Chilean state’s control of copper revenues and the establishment of fiscal policy rules to avoid excessive swings in public expenditure. Copper revenues have also been used in part to fund social programmes, which have helped ensure a wider distribution of benefits than in other countries in the region. The fact that the Chilean manufacturing sector had already declined as a result of the neoliberal policies of the Pinochet regime from the mid-1970s meant that the impact of increased Chinese imports were not so devastating in terms of plant closures and job losses as in countries with a larger and more protected industrial sector. On the other hand, the benefits which the Chilean government had hoped to obtain from signing the FTA with China in terms of diversifying exports and expanding Chinese FDI have yet to be realized.

10.6 Conclusion There is some truth in the picture that divides LAC countries into winners and losers in terms of China’s economic impact. Whether a country is regarded as 44 In 2015 Chile accounted for 4 per cent of the value of completed contracts by Chinese firms in LAC (NBS, 2016).

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a winner or loser, at least in the short to medium term, depends on the way in which it was integrated into the global economy at the beginning of the twenty-first century: those countries, mainly in South America, which had a comparative advantage in minerals, fuels, and agricultural raw materials were the main beneficiaries, while Mexico and a number of Central American and Caribbean economies which served as export platforms for labour-intensive manufactures supplying the US market were the main losers. The winners also tend to be the countries that have received most investment and loans from China. This categorization of winners and losers, which is based on the export specialization of different countries, only gives part of the picture. The differences between countries are far less marked in terms of the increasing share of Chinese manufactures on the domestic market. Throughout the region, manufacturers complain about ‘unfair’ competition from China. In the longer term, concerns over deindustrialization and the primarization of exports arose across LAC. For the winners, resources were attracted into the commodity sector and away from manufacturing; for the losers, Chinese competition made exporting manufactured goods less profitable and again led to resources moving out of the manufacturing sector. Taken together with the increased competition from Chinese imports which affected both groups of countries, the overall effect was to accentuate the regressive structural changes that had begun in LAC in the 1980s with the adoption of neoliberal economic policies. Despite claims that China’s relations with LAC involve South-South cooperation and are mutually beneficial, the reality is that they are reproducing the kind of centre-periphery relations which have had negative impacts on LAC growth in the past. Analysis that discusses the impacts of China on LAC in terms of countries that are winners or losers also diverts attention from the distributional consequences within countries. In fact it is sectors and groups within countries that are the winners and losers. Extractive companies (both transnational and state-owned) and agribusiness have been winners, while local manufacturers and unskilled workers are often the losers from China’s changing role in the global economy. The economic outcomes are not predetermined by a country’s position in the global economy and its pattern of specialization: they also depend on the local political economy of different countries and the capacity of the state. Some states have been better able than others are to capture some of the gains from increased Chinese demand for resources and changing patterns of global accumulation, and to avoid the problems of Dutch Disease. The state also has a role to play in terms of distributional outcomes through its tax and expenditure policies.

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11 Social, Political, and Environmental Impacts in Latin America

11.1 Introduction Chapter 10 showed that the rise of China has had varied economic impacts on the countries of Latin America and the Caribbean (LAC). There has been a tendency for attention to be focussed mainly on the economic aspects of the relationship. Rather less has been written on the social, political, and environmental consequences of China’s growing involvement with the region. Nevertheless, these are also potentially very significant and, thus, form the subject of this chapter. In terms of the social impact, one of the reasons why deindustrialization is such a cause of concern is that it can lead to the loss of well-paid manufacturing jobs and undermine hard-won labour rights and working conditions. The primarization of LAC exports has also created problems in the region because the growth of extractive industries often brings them into conflict with local communities. The debate concerning the political implications of growing Sino-LAC economic relations has mainly been about whether it poses a threat to US interests in the region. Headlines claim that ‘Rising China threatens US clout in Latin America’ (Grudgings and Gardner, 2011) and that China is ‘Undermining America while Washington sleeps’ (Coyner, 2016). On the other hand, there are those who claim that Chinese interests in LAC are solely economic, and that the Chinese government has sought to ensure that growing economic relations are not seen as a challenge to the US. From a Latin American perspective, the growth of relations with China is seen as providing the countries of the region with more policy space (Kaplan, 2016). A third area of concern is the environmental impact of growing economic relations with China. This is often linked to the primarization of LAC exports because extractive industries are often major drivers of environmental

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degradation (Cooney, 2016; Ray, 2017). Mining and oil and gas extraction often give rise to high levels of pollution, while soybean and timber exports contribute to deforestation. Major infrastructure projects such as dams, roads, and railways also have a significant environmental impact.

11.2 Social Impacts 11.2.1 Labour Market Effects Chapter 10 showed how increased competition from China in both domestic and export markets has had a negative effect on Latin American manufacturing. This has led to protests and demonstrations against Chinese imports across LAC. In Brazil, trade unions have joined forces with industrialists to lobby the government over the issue, and, in April 2012, a demonstration against deindustrialization and job losses was held in Sao Paulo with support from both employers’ organizations and trade unions. In 2013, thousands of workers from the shoe industry took to the streets in six Colombian cities to protest against Chinese imports (El Universo, 2013). In 2017 workers from an Adidas factory in Argentina blocked roads to protest against dismissals as a result of the firm deciding to import from China (Diario Popular, 2017), and, in Mexico, 10,000 steel workers marched in the city of Monclova to protest against the ‘dumping’ of steel from China and the loss of 4,500 jobs (Reforma, 2015). There are a number of reasons why Chinese competition might be expected to have a negative impact on labour. Reduced output and plant closures as a result of increased imports or loss of export markets lead to job losses and put downward pressure on wages. The fact that Chinese competition has been particularly intense in a number of labour-intensive industries such as clothing, footwear, furniture, and toys in several Latin American countries suggests that the impact on employment is likely to be even greater than on production. This may be reinforced within industries when the firms that are worst hit are the smaller, most labour-intensive firms, as is often the case. Responses at firm level to Chinese competition can also disproportionately affect workers, particularly unskilled workers, when firms invest in more capital-intensive technologies or move out of more labour-intensive products or processes and concentrate on those which rely less on low wages. Studies of several Latin American countries have shown that Chinese competition has led to job losses in manufacturing.1 As would be expected, Mexico 1

See Dussel-Peters and Armony (2017) on Argentina, Brazil, Chile, and Mexico; Artuc et al. (2015) on Argentina, Brazil, and Mexico; Mendez (2015); Caamal-Olivera and Rangel-González (2015); Blyde et al. (2017); and Chiquiar et al. (2017) on Mexico; Saslavsky and Rozemberg (2009)

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How China is Reshaping the Global Economy Table 11.1. Estimated Impact of Trade with China on Manufacturing Employment in Latin America, 1995–2011 Employment loss (’000)

% of 2011 Manufacturing employment

Argentina Brazil Chile Mexico

120.5 46.2 39.4 511.2

5.3 0.4 4.3 7.1

Total 4 countries

717.3

3.1

Source: Own elaboration from Dussel-Peters and Armony (2017), Tables 1A, 2A, 3A, 4A, and 5A.

has been the most severely affected of the larger Latin American countries. However, even in the Mexican case the reduction in employment since the mid-1990s as a result of increased Chinese competition was well below 10 per cent of the total number employed in manufacturing (Table 11.1).2 Argentina, Brazil, and Chile have all experienced negative employment impacts, although on a smaller scale than Mexico.3 Studies that distinguish between skilled and unskilled workers agree that it is the latter who have been most affected by Chinese competition. Although there is considerable evidence that manufacturing employment has been negatively affected, evidence of the impact on wages is less clear-cut. Some studies have found a negative impact of Chinese competition on wages in Mexico and Brazil,4 while others have found no impact.5 Even those studies which do find that Chinese competition has reduced wages conclude that the effect is relatively small.6 Another concern over the impact of Chinese competition on the labour market is that it may lead to the increasing casualization of labour and the and Paz (2016) on Brazil; Lopez and Ramos (2009) and Castro et al. (2009) on Argentina; and Alvarez and Claro (2009) on Chile. 2 Other estimates for Mexico include Blyde et al. (2017) who give a figure of 4.2 per cent, and Artuc et al. (2015), whose simulations show a reduction of 6 per cent in formal and 2.6 per cent in informal manufacturing employment. 3 The figure for Brazil seems low. This is because employment created in the food, beverages, and tobacco industry by exports to China partly offset the loss of jobs as a result of increased Chinese import penetration in other sectors. 4 See Blyde et al. (2017); Chiquiar et al. (2017); Artuc et al., (2015); and Caamal-Olvera and Rangel-González, (2015) on Mexico, and Costa et, al. (2016) on Brazil. 5 See, for example, Mendez (2015) on Mexico, and Paz (2016) on Brazil. 6 There are a number of possible reasons why, despite a negative impact on employment in manufacturing, this is not reflected in a substantial fall in wages. First, reductions in manufacturing employment can be offset by increases in employment in other sectors, which affects the overall level of wages. Second, where it is the lower-paid, less-skilled workers who are most affected by job losses and where firms respond to Chinese competition by upgrading to more skill-intensive products, the average wage within firms may increase as employment shrinks. Third, where the level of wages is institutionally determined by trade-union bargaining or minimum-wage legislation, or where there is a surplus of labour which keeps down wages, changes in labourmarket conditions affect employment rather than wages.

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growth of informal employment. The outcome will depend on how firms respond to increased competition. If smaller, less efficient firms, which tend to be more informal, are most affected, or if large firms contract by laying off temporary workers, it is possible that informality declines as competition intensifies. On the other hand, if firms respond by trying to reduce labour costs by replacing formal workers with cheaper ones, informality is likely to increase. In Mexico, Blyde et al. (2017) found that increased import penetration was associated with a reduction in the number of permanent workers and an increase in casual labour.7 In Brazil, on the other hand, there was either no impact of import competition on informality (Costa et al., 2016) or even a decline in informality (Paz, 2016).8 It is difficult, therefore, to generalize about the impact of China on the nature of employment. However, the concern about the impact of Chinese competition on labour is not really about the impact on the economy as a whole but rather the way that it plays out for particular groups of workers in specific industries and localities. As seen in Chapter 10, the level of Chinese import penetration varies considerably across industries. This means that although at the macroeconomic level the impacts on employment and wages may be relatively modest, it hides substantial impacts within certain industries and regions. The main manufacturing industries where jobs have been displaced as a result of competition from Chinese imports are computers, electronic and optical equipment, and textiles, clothing, leather, and footwear in Brazil and Chile; computers, electronic and optical equipment, and chemicals in Argentina; and computers, electronic and optical equipment, and electrical machinery in Mexico (Dussel-Peters and Armony, 2017, Table 6). Some sectors are much more affected by Chinese competition than others are; therefore, workers in the regions in which these industries are concentrated are most severely affected. In the case of Mexico, these are the areas nearest the US border such as Tijuana, Juarez, and Mexicali (Chiquiar et al., 2017). For example, whereas one estimate suggests that the overall level of manufacturing employment in Mexico would have been just over 4 per cent higher had import penetration from China not increased between 1998 and 2013, employment in Mexicali would have been 27 per cent higher in 2013 (Blyde et al., 2017, p.17). In Brazil there were considerable differences in wage growth between microregions that faced competition from Chinese imports and those which specialized in producing goods that Brazil exported to China (Costa et al., 2016).

7 Simulations for Mexico in Artuc et al. (2015, Fig. 15) also show a reduction in formal employment. 8 The simulations for Brazil in Artuc et al. (2015, Fig. 12) show little change in the ratio between formal and informal employment as a result of China’s impact.

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Although Chinese imports displace local manufacturing jobs, there is an offsetting effect from increased employment generated by exports to China. A report for the International Labour Organization (ILO) estimates that when these are taken into account, trade with China had a positive impact on employment in Brazil and Chile, a small negative effect in Argentina, and a substantial negative impact in Mexico (Dussel-Peters and Armony, 2017, Table 5).9 Taking the four countries together, it is claimed that trade with China led to a net increase of more than 1.1 million jobs between 1995 and 2011. It is likely that these estimates exaggerate the positive impact of exports to China on employment in Latin America. The most important sectors in terms of generating employment are agriculture, mining, and wholesale and retail trade. However, these are very broad sectors, and the sectoral employment coefficients that are used in the study to calculate employment effects are likely to be quite different from the actual number of jobs created per dollar exported to China; for instance, in the case of agriculture, the bulk of LAC exports to China consists of soybeans produced using capital-intensive techniques on large commercial farms. Indeed, soybean production is the least labourintensive crop produced in Argentina (Choumert and Phelinas, 2016). It is also difficult to believe that exports to China created more than half a million additional jobs in wholesale and retail trade in the four Latin American countries between 1995 and 2011 (Dussel-Peters and Armony, 2017, Table 6). The overall effect of growing trade with China on employment in Latin America has not been very large, but there have been shifts in the composition of employment out of manufacturing and into agriculture and mining. The negative impacts have been felt by particular groups of workers, especially unskilled workers in industries such as clothing and footwear and electronics, and in regions which specialized in those industries. The main impact has been on employment levels, and the effects on wages and working conditions, including casualization, are much less clear. CHINESE FOREIGN DIRECT INVESTMENT

Although the effects of trade are the most important in terms of the impact on the labour market, foreign direct investment (FDI) by Chinese firms has also contributed to employment in the region. Unfortunately, very little data are available on employment by Chinese firms in Latin America. One estimate of employment associated with Chinese investment in Latin America between 2003 and 2009 put the total at around 50,000 jobs, more than half of which were in Brazil (Rosales and Kuwayama, 2012, Table II.12). Chinese FDI in the 9

The differences between the four countries partly reflect the fact that Brazil and Chile’s trade with China have been in surplus in recent years, whereas Argentina’s has been closer to balance, and Mexico has had a large trade deficit.

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region has increased significantly since then, and a more recent estimate claimed that total employment created by Chinese FDI between 2003 and 2016 came to more than 260,000 (Dussel-Peters and Armony, 2017, Table 7). The estimates of employment by Chinese firms do not necessarily present an accurate picture of the extent to which local jobs are created. First, the degree to which the figures on employment by Chinese firms reflect the extent of job creation as a result of inward investment depends in part on the mode of entry. Where this involves the acquisition of an existing firm, there is no necessary new job creation, merely a change in ownership. On the other hand, if it is a greenfield investment, in other words, it involves the building of a new production facility, new jobs are created.10 According to one estimate, around half of all Chinese FDI in LAC between 2001 and 2016 was through mergers and acquisitions, and these cases involved slightly more than half of all employment by Chinese firms (Dussel-Peters and Ortiz-Velásquez, 2017, Table 1). CHINESE PROJECTS

A further source of employment by Chinese firms is on construction and engineering projects which are not classified as FDI. According to the ILO, based on information on sixty large Chinese infrastructure projects undertaken between 2005 and 2016, a total of almost 200,000 jobs were directly created, with a further 140,000 indirectly employed (Dussel-Peters and Armony, 2017, Table 11). However, the bulk of this employment was created during the construction phase, and the estimate of long-term employment once construction was complete was only around 10,000. Assuming that the construction phase lasted around two years for each project, the annual number employed as a result of these projects, including indirect employment, would be less than 100,000. Some of the jobs in Chinese projects in LAC are filled by Chinese nationals. According to official Chinese figures, around 26,000 Chinese workers were employed in projects in the region at the end of 2015 (NBS, 2016, Table 11.22). The use of Chinese workers has not been as extensive in Latin America as in Sub-Saharan Africa (SSA). There have been instances, however, where this has been an issue. In Peru, Shougang brought in a large number of Chinese workers when it acquired the Marcona mine in 1992, but violent protests quickly resulted in their being sent back to China (Sanborn and Chonn, 2015, p.35). Today only 20 to 40 of the company’s 2000 employees in Peru are Chinese (ibid, p.28). This oversimplifies matters in that the acquisition of a failing firm by a foreign investor might avoid job losses that would otherwise have taken place, and could, therefore, be regarded as job creating relative to the alternative in the absence of FDI. 10

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The larger, more developed LAC countries, such as Brazil, Argentina, and Mexico, have regulatory frameworks which require foreign companies to use local workers. In 2015 the Brazilian government refused to allow the Chinese company State Grid to bring in 11,000 Chinese workers to build the powertransmission line from the Belo Monte hydroelectric plant (Couto, 2015). Extensive use of Chinese workers in the Western hemisphere has tended to be concentrated in the smaller Caribbean countries which have less bargaining power to require the use of local workers, but even here, the trend has been towards reducing their number (Shortell, 2014). These intercountry differences underline the importance of the role of the state in permitting the entry of large numbers of unskilled Chinese workers for such projects. The larger Latin American countries also have a more skilled labour supply than the small Caribbean states. CONCLUSION

The overall impact of China on employment in LAC is relatively small. Since the total regional labour force in 2015 was around 300 million, even the most generous estimate of the total employment created by Chinese trade, FDI, and infrastructure projects comes to far less than 1 per cent of the total.11 It is not even clear whether, when the effects of exports on employment are properly accounted for, trade has a positive impact on employment. It also seems unlikely that the total additional employment created by Chinese outward FDI (OFDI) and infrastructure projects in the region is anywhere near the 600,000 estimated by Dussel-Peters and Armony (2017) once account is taken of the fact that a high proportion of Chinese FDI has come through mergers and acquisitions rather than greenfield investment and that most of the employment included for projects only lasts during the construction phase, with relatively few permanent jobs created. The real concern over the effect of relations with China on employment is the job losses that tend to be concentrated in certain industries and regions. Because the aggregate employment effects are relatively small, the impact on average wages is not very large. Nor is there much evidence on the impact of China on working conditions and labour rights in the region. This is an area where more research is required.

11.2.2 Impacts on Local Communities The social effects of the growing economic relations between China and LAC go beyond the impact on the labour market. Extractive industries and major 11 Dussel-Peters and Armony (2017) give a figure of 1.8 million for the total employment created.

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infrastructure projects such as roads and dams not only affect those employed in these activities but often also have major impacts on the local communities in the regions where they are located. Some of these impacts are positive. They may create employment and business opportunities for those who live locally. The resulting infrastructure may benefit the communities and the companies involved. They may also bring additional revenues to local authorities where host-country legislation ensures that not all the revenue goes to central government. Foreign investors also often include community development programmes in local communities in their corporate social responsibility activities in order to retain local support. On the other hand, large-scale projects can also have negative effects on local communities, particularly when there is little or no consultation with those affected and where regulation is weak. Open-cast mining and dams often require communities to be moved and resettled elsewhere. This may also involve the loss of agricultural land or encroachment on traditional communal lands. Increased pressure on resources, particularly water, may affect existing economic activities such as agriculture or tourism. There may also be local environmental impacts such as water or air pollution as a result of the activities. Finally, there are the sociocultural impacts of resource-based development on indigenous peoples. Extractive industries and infrastructure projects can often give rise to conflict with local communities which sometimes become violent.12 Such conflicts have a number of underlying causes. Some are directly related to the negative effects of the project, such as the displacement of people, conflict over access to land and water, and damage to the local environment and/or people’s health. Others are caused by disputes over the distribution of revenue generated by the project, including the extent to which communities are compensated and/or share in such revenue. There can also be tension where local officials are suspected of corruption, and conflict where communities’ expectations concerning the benefits that a project will bring are not met, either because they have been exaggerated or because of a failure by companies to keep their promises. This is all the more likely to occur when there is a lack of consultation and dialogue with the affected communities. China’s involvement in resource extraction in Latin America has had both positive and negative effects on local communities. One estimate claims that new investment by Chinese firms in raw materials in Latin America created over 60,000 jobs between 2001 and 2016 (Dussel and Ortiz-Velasquez, 2017,

12

In Peru, for example, it was reported that 53 people were killed and almost 1,500 injured in social conflicts, most of which were related to extractive industries, between 2011 and 2016 (The Economist, 2016).

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Table 2).13 While some of those employed will come from local communities, others will be employed elsewhere or move to the affected region. This can create tension, particularly where local expectations regarding employment are not met. In Ecuador, in 2007, there was widespread violence as a result of grievances against the Chinese firm Petroriental when it failed to create the number of jobs for locals that had been expected (Ellis, 2014, p.156). Another, positive impact is the opportunities created for local businesses. Shougang, which has been much criticized in Peru in other respects, was found to perform better than other mining companies in terms of purchases of local goods and services in the area where it operated (Irwin and Gallagher, 2013). Chinese firms have also undertaken community development programmes, building schools and clinics in neighbouring communities. In Peru, Chinalco created the Fondo Social Toromocho, and MMG set up the Fondo Social Las Bambas, to support such activities. All extractive-industry and large-scale infrastructure projects are liable to have negative impacts which can give rise to conflict with local communities, and Chinese firms are no exception. In Peru Chinalco’s Toromocho mine involved the resettlement of 5,000 people from the town of Morococha to an entirely new settlement. Although this case is often quoted as an example of a Chinese company which engaged in consultation with the community and carried out the resettlement in a sensitive manner, other reports indicate that there were significant problems with the resettlement. Another area of conflict has been access to resources, particularly water. In Peru, attempts by a consortium of Chinese firms, led by the Zijin Mining Group, to develop the Rio Blanco copper and molybdenum mine in Piura near the border with Ecuador has been blocked by opposition from local communities supported by the Catholic Church and national and international non-governmental organizations (NGOs) (Sanborn and Chonn, 2015, pp.43–6). One of the objections raised against the Rio Blanco mine is that it will reduce the availability of water for agriculture in the region (Ellis, 2014, p.150). In Argentina, CMC had to suspend operations at the Sierra Grande mine because it was unable to reach an agreement with the government to obtain an adequate supply of water (Ellis, 2014, p.165). Other problems have arisen where local communities are affected by pollution. In Puebla, Mexico protestors opposed the reopening of a gold, silver, and copper mine by Chinese-owned JDC Minerals because of concern that it would contaminate the groundwater (Ellis, 2014, p.150), and Shougang’s iron ore mine in Peru has been criticized for dumping mine tailings in local rivers (ibid, p.165).

13

This does not include those employed as a result of mergers and acquisitions by Chinese firms.

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Some of these conflicts with local communities involve indigenous peoples. In Honduras, members of the Lenca indigenous group resisted displacement by Sinohidro’s Agua Zarca hydroelectric project (Ellis, 2014, p.151). In Ecuador the Sápara and Kichwa indigenous groups have protested against oil exploration by Andes Petroleum, jointly owned by the China National Petroleum Corporation (CNPC) and Sinopec, in the Tarapoa bloc (Ray and Chimienti, 2017). There are also conflicts as a result of companies failing to fulfil their promises or meet the expectations of local communities. In Peru, protests were triggered at the Las Bambas copper mine following changes to the design after it was taken over by MMG, a subsidiary of China Minmetals (The Economist, 2016). Shougang, also in Peru, failed to meet the expectations of the local community in terms of providing water and electricity, giving rise to tension (Ellis, 2014, p.157). As mentioned earlier, there are also examples of community expectations regarding employment not being met. Although there are numerous examples of conflict between Chinese companies and local communities in Latin America, Chinese extractive and infrastructure firms are by no means unique in this regard. There is a considerable body of literature on conflicts between foreign investors and local communities in Latin America (Bebbington, ed., 2012; Haslam and Tanimoune, 2016; Hazin, 2013; Viscidi and Fargo, 2015). Are Chinese firms any different from other foreign investors in Latin America in terms of their effects on local communities? A number of arguments have been put forward as to why Chinese firms may be less concerned about their social impact than other foreign companies. First, until recently, they have not needed to worry about such issues at home, and are merely transferring their domestic practices to Latin America. It comes as a surprise to Chinese companies when, having obtained government approval for their operations, they face local opposition and demands. They are not used to having to consult and enter into dialogue with local communities. Second, whereas Western companies’ activities in the region attract the attention of the media and NGOs in their home countries, this is far less likely to occur in China, where criticism of Chinese FDI is rare (Shankleman, 2011, p.57). Finally, conflict may arise simply from Chinese companies’ lack of experience in operating abroad, which gives rise to culture clashes with local communities. As the general manager at Lumina Copper SAC, a joint venture between Minmetals and Jiangxi Copper commented, ‘The Chinese are used to top-down management, [whereas] Peru functions more along the lines of a bottom-up approach. Learning how to work in Peru is a cultural quantum leap for China’ (quoted in Kotschwar et al., 2011). Although these explanations are plausible, there is a risk of presenting a homogenous view of Chinese companies which loses sight of the differences 293

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amongst them and the important role of contextual factors in determining the impacts of investment and the likelihood of conflict, attributing their impact simply to their nationality (Gonzalez-Vicente, 2013). There is a lack of systematic evidence to test claims that Chinese firms are more likely to have a negative impact on local communities in LAC than firms from other countries.14 In fact most of the examples of social conflict between foreign investors and local communities cited in the literature involve firms from countries other than China.15 This may reflect the fact that other foreign investors continue to be more significant than the Chinese in the region16 or biases in the reporting of such conflicts, but it certainly shows that such conflict affects a wide range of foreign firms. Many of the reasons given for expecting Chinese firms to be particularly damaging for local communities are changing over time. Concern about social impacts is increasing both at home and abroad, and Chinese firms are coming under greater scrutiny. They are also learning as they acquire more experience of operating in Latin America. The case of Chinalco in Peru is often cited as an example of such learning, and its experience in developing the Toromocho mine contrasted with the earlier example of Shougang in Peru. Despite initial resistance from the community, the majority of residents agreed to relocate to a new town by 2013, and although problems remain to be resolved, major conflict has been avoided. As Sanborn and Chonn (2015, p.42) comment, Chinalco ‘has raised the bar for community relocations by prioritizing dialogue and consensus building rather than sheer use of force’. There are other examples of Chinese companies which have made serious efforts to avoid negative impacts on local communities. In Bolivia a joint venture between China’s Jungie Mining and the Alto Canutillos mining cooperative found during consultation that the local community in Tacobamba was opposed to the opening of a tin-processing plant near the mine, and the firm agreed to locate on a site 25 miles away, avoiding potential conflict (Saravia López and Rua Quiroga, 2017). There is insufficient evidence to make systematic comparisons between Chinese and other transnational companies in terms of their impacts on local communities. In some cases it has been suggested that Chinese companies enjoy better relationships with local communities than the previous 14 Two comparative studies of Chinese and other mining companies in Peru focus mainly on labour issues and environmental impacts and provide little information on impacts on local communities (Kotschwar et al., 2012; Irwin and Gallagher, 2013). 15 Only 7 out of more than 200 mining conflicts recorded by the Observatory of Mining Conflicts in Latin America (OCMAL) involved a Chinese firm as the main investor (Shapiro et al., 2018, Table 5). Similarly, very few of the cases cited in a study of mining conflicts in Colombia, Mexico, and Peru involved Chinese firms (Hazin, 2013). 16 Shapiro et al., (2018, Table 5) find that relative to the number of mining projects in LAC, Chinese firms are more likely to have been involved in a conflict.

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owners or other foreign companies.17 If it is a factor, the nationality of a firm is only one of many that explain the impact of FDI on local communities. As some commentators have observed, the capabilities and interests of the host government and the degree of mobilization of the local population in the affected area are likely to be more important in determining the outcomes for local communities than the national origins of the firms involved (GonzalezVicente, 2013).

11.3 Political Impacts 11.3.1 The Debate As seen in Chapter 8, discussions in the West of the political consequences of China’s growing economic relations with SSA have focussed mainly on their impact on the internal politics of these African countries. The debate has been couched in terms of governance issues and whether China’s involvement in the region is an obstacle to the West’s efforts to promote ‘good governance’. Although there is some discussion of these issues in relation to LAC, the main political issues that are raised, particularly in the US, relate to international relations, often couched in terms of the ‘China threat’, which sees growing Chinese economic involvement in LAC as a challenge to strategic US interests in the region.18 In a statement at a hearing before the House of Representatives’ Subcommittee on the Western Hemisphere, Congressman Dan Burton highlighted these concerns: I am very concerned with the rise of influence China is pursuing in our Hemisphere and I believe it is important that the United States grasps the economic, social and national security implications of a Latin America under the thumb of China. Once China is able to move in and expand control, it will be difficult to turn the tide. (Burton, 2008)

In 2009 the then US Secretary of State Hillary Clinton expressed concern about the inroads that China (along with Iran) was making in Latin America, which she saw as a threat to US interests (Erikson, 2011, p.119). In 2018 President Trump’s short-termed Secretary of State Rex Tillerson warned that ‘Latin America does not need new imperial powers that only benefit their own

17 Ray and Chimienti (2017) claim that in Ecuador two Chinese-owned companies, Andes Petroleum and PetroOriental, have had a more positive relationship with both government and civil society than the previous owner, Canadian firm Encana. 18 For a Chinese review of US views on China’s role in Latin America, see Sun (2012), and for a US analysis, see Erikson (2011).

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people. China’s state-led model of development is reminiscent of the past. It doesn’t have to be the hemisphere’s future’ (quoted in Shixue, 2018). It is possible to distinguish two versions of the ‘China threat’ thesis. As was seen in Chapter 9, one version sees China’s growing economic relations with Latin America as part of a geopolitical strategy to replace the current global system by a more multipolar one in which China plays a leading role (Xiang, 2007, 2008). A second version of the ‘China threat’ thesis, while recognizing that the involvement of China in LAC has been driven by economic considerations, argues that growing economic relations give China considerable political influence, which it uses to garner international support. Although this view does not regard China’s economic expansion in the region as strategically motivated, nevertheless it does see growing Sino-LAC relations as a challenge to US hegemony in the region (Ellis, 2014, p.207). An alternative view of China’s growing economic relations with LAC sees them as a consequence of globalization and China’s deepening integration with the global economy (Erikson, 2011; Sun, 2012). While this has inevitably led to closer political and diplomatic ties with the region, these do not threaten US interests, and the US retains considerable influence in LAC (Trinkunas, 2016). During the Obama administration, the US government’s official position played down concerns about China’s growing relations with LAC, and even went so far as to welcome them as a good thing under the right circumstances (Ellis, 2014, p.207).19 On the Chinese side, there is recognition that Latin America is a US sphere of influence, and as a result the Chinese government has tried to avoid antagonizing the US by developing especially close political relations with governments in the region that are hostile towards the US. As Jiang Shixue (2008, p.40) comments, ‘China is well aware of the fact that the United States considers Latin America its backyard, and China has no intention of challenging US hegemony in the region.’ For China, its relationship with the US is more important than its relationship with any Latin American country, and its relations with LAC have been pragmatic rather than ideological. While these issues are a cause of concern in the US, from a Latin American point of view, China’s increased presence in the region is often viewed more positively. The relationship with China is often framed in terms of SouthSouth cooperation, in contrast to the unequal North-South relations with the developed world (Harris and Arias, 2016). Growing relations with China can provide greater policy space for Latin American governments and reduce their dependence on the US and international financial institutions (Cesarín, 2007; Le-Fort, 2006). 19 As the quote from Tillerson indicates, this position changed significantly under the Trump administration (Shixue, 2018).

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Since the region’s debt crisis in the 1980s, LAC countries have sought to avoid fiscal deficits In order to maintain their credit ratings, which put a limit of government expenditure. The availability of Chinese funds which are provided without imposing macroeconomic conditions on the recipient, has enabled some regimes in the region to increase their social expenditure, particularly where loans were granted directly to the government, as in the case of Venezuela and Ecuador.20 Although China has not attempted to export its own model of development, its economic success has shown that there are alternatives to the neoliberal model. This provided a background against which to challenge existing policies leading to a revival of more statist approaches including for example a re-evaluation of the case for industrial policies in the region (Fernández-Gilberto and Hogenboom, 2010).

11.3.2 Empirical Evidence The pattern of Chinese trade and investment in Latin America is consistent with China’s emphasis on national sovereignty and non-interference in the internal affairs of other countries, which means that it is willing to do business with a range of different regimes (see Chapter 9). The econometric model used in Chapter 9 showed that the only geopolitical factor with a significant impact on Chinese involvement in Latin America is whether a country recognizes the People’s Republic of China (PRC) or Taiwan. A country’s voting record in the UN General Assembly, which is often regarded as an indication of broad political alignment in international affairs, is not a significant determinant of economic relations.21 There is, therefore, little evidence to support the strongest version of the ‘China threat’ thesis, which assumes that China’s economic expansion to the region is motivated by geostrategic objectives. This does not rule out the second version of the ‘China threat’, which argues that closer economic links with the PRC have an effect on the political alignment of Latin American countries. This raises several questions. How much potential political leverage do these economic relations give China, particularly compared to the US, in the region? What evidence is there that 20 Kaplan (2016) compares the cases of Venezuela and Brazil. In Venezuela the Chavez and Maduro governments used Chinese loans to finance their social programmes which would not have been possible had they needed to raise funds on international capital markets. In Brazil, Chinese loans were less significant and not provided directly to the government, which continued to rely on the financial markets and consequently had much less autonomy to run fiscal deficits than Venezuela. 21 See Table 9.2. The only statistically significant relationship with a country’s votes in the UN was for Chinese exports to LAC and this was only significant at the 10 per cent level. Given that trade, particularly exports to LAC, are carried out mainly by commercial actors, it is highly unlikely that consideration of a country’s political stance internationally would have influenced decisions.

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China is using its economic clout to influence the foreign policies of LAC countries? Is there a convergence between the positions of China and LAC in international affairs? If so, does this reflect China’s influence, or does it rather reflect a convergence of interests which can be better explained by internal forces within the region?22 One indicator of potential leverage is the relative dependence of a country on China or the US in terms of trade, FDI, or finance. Where trade is concerned, the US is much more significant for the region as a whole than China is, both for imports and exports. However, as Table 11.2 shows, this is because of its close ties with Mexico, Central America, and the Caribbean, while in South America, China is slightly ahead of the US. However, even at the level of individual countries, China’s position is not overwhelmingly significant. Despite the recent increase in Chinese foreign investment, China’s share of total inward investment in Latin America remains very low (less than 10 per cent) making it a relatively minor player compared to the US which accounts for 25 per cent of FDI inflows (see Chapter 9). Chinese loans to Latin America are much greater than official lending by the US government. However, this is rather misleading, since most US lending to the region comes from the private sector. The bulk of Chinese lending to the region goes to two countries, Venezuela and Ecuador, which are regarded as high-risk by international financial markets and have, therefore, relied heavily on Chinese financing. Other countries in the region receive little funding from China relative to other sources. Although Sino-LAC economic relations have grown significantly in recent years, they are not on such a scale as to give China substantial political leverage in most countries in the region. Even in cases where the economic relationship gives China the potential to influence a country’s policies, this is not necessarily exercised. There is some evidence of trade being used to gain leverage, for example, when China imposed a ban on imports of soybeans from Argentina in retaliation for restrictions imposed on Chinese imports to Table 11.2. Shares of Latin American Trade with China and the US, 2015 (%) Exports to

Latin America & Caribbean South America Mexico, Central America, & Caribbean

Imports from

China

USA

China

USA

9.0 16.1 1.7

44.4 15.8 73.5

17.7 19.2 16.3

31.6 18.3 43.7

Source: Own elaboration from UNCTADStat.

22 The view that growing economic relations with China lead to LAC countries’ foreign policies becoming more pro-Chinese tends to play down LAC governments’ own agency.

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Argentina, but this was clearly economically rather than politically motivated. There is no evidence of similar measures being employed for diplomatic ends other than to persuade countries to break off their diplomatic relations with Taiwan. Several studies have used voting patterns at the UN General Assembly as an indicator of the extent to which LAC and Chinese foreign policies converge, with mixed results. Dominguez (2006) find no tendency for convergence, although the study only covers the period from the early 1990s to 2002 and, therefore, predates the major surge in economic relations. Struver (2014) does find evidence of an increased tendency for Latin American countries to vote with China, although this is explained by the behaviour of South American countries and does not apply in Central America and the Caribbean. Figure 11.1 compares the unweighted average of the percentage of LAC votes with China and with the US at the UN General Assembly for thirty-three LAC countries. Despite Latin America being regarded as the US’s backyard, the countries of the region cast their votes at the UN with China far more frequently than with the US. There is no evidence over the entire period during which Chinese economic presence in Latin America has expanded so significantly of a trend for countries to align their voting behaviour more closely with China and to vote less frequently with the US. There is such a tendency in the period up to 2007, but since then the trend has been in the opposite direction, with the percentage of votes cast with China lower in 2015 than in 2000. 1000% 900% 800% 700% 600% 500% 400% 300% 200% 100%

LAC with US

2015

2014

2012

2013

2010

2011

2009

2008

2007

2006

2005

2004

2003

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2002

2000

0%

LAC with China

Figure 11.1. Coincidence of voting between Latin America, China, and the US, 2000–15 Source: Voeten, Erik; Strezhnev, Anton; Bailey, Michael, 2009, “United Nations General Assembly Voting Data”, https://hdl.handle.net/1902.1/12379, Harvard Dataverse, V18, UNF:6: xkt0YWtoBCThQeTJWAuLfg==

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While this raises questions about the view that China’s growing presence in LAC is having a significant political impact, this needs to be analyzed further. Although, as seen earlier, there is no evidence that a country’s international political alignment influences the extent of its economic relations with China, it is relevant to ask whether economic dependence on China influences voting behaviour at the UN at the country level. The econometric analysis in the appendix to this chapter shows that none of the indicators of China’s involvement in LAC had a significant impact on whether a country voted on the same side as China at the UN. The factors that did influence voting behaviour were, not surprisingly, whether the country had diplomatic relations with China or Taiwan, and the country’s population, with smaller countries more likely to vote with China. This suggests that closer economic relations with China do not necessarily lead to a convergence in foreign policy.

11.3.3 The Brazilian Case Brazil is clearly the most important country in Latin America from China’s point of view. It was the first country in the region with which it established a strategic partnership in 1993. It is the largest economy in the region and China’s most significant trade partner. Chinese companies have also made important investments in Brazil. Brazil and China cooperate as members of the BRICS grouping of regional powers, which includes Brazil, Russia, India, China, and South Africa. Sino-Brazilian relations have gone through several phases since the strategic partnership was established in 1993. During the 1990s, while the cooperation on satellite development which began in the 1980s continued, there was no qualitative leap in political relations between the two countries, leading the Brazilian ambassador to China to claim at the end of the decade that the partnership was merely rhetorical.23 The government of Fernando Henrique Cardoso (1995–2002) prioritized relations with the US and the EU. This changed after Lula and the Workers’ Party came to power in Brazil in 2003 and adopted a strategy of diversifying the country’s foreign relations and promoting South-South cooperation. This led to developing relations with China (and other large emerging powers) becoming a key part of the government’s strategy (Cardoso, 2013; Zhou, 2012). Economic relations with China received a further boost with the global financial crisis in 2008, and the status of the political relationship was symbolically raised to a ‘strategic global partnership’ in 2012 under Lula’s successor, Dilma Rousseff. 23

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China’s extensive economic relations with Brazil have been driven by commercial and strategic economic considerations rather than political factors. Brazil is a major source of iron ore and soybeans for China and, as the seventhlargest economy in the world, is also a significant market for Chinese exporters and investors. There is no reason to attribute the growth of Sino-Brazilian economic relations to geostrategic motives (Maciel and Nedal, 2011, p.252). On the Brazilian side, commercial interests have been the main factor leading to closer economic ties with China. The growth of the Chinese market created profitable opportunities for Brazilian mining and agribusiness companies, while the growing competitiveness of Chinese manufacturing led to increasing imports from China, often by transnational corporations such as Samsung, Panasonic, and Dell. Although the change of government from Cardoso to Lula in 2003 led to a greater emphasis on political relations with China, bilateral trade and investment continued to be seen by the Brazilian government as the central aspect of the strategic partnership (Albuquerque, 2014, p.110). While the growing economic relations between China and Brazil were not driven by Chinese geopolitical objectives, have the closer links given China more leverage which could be used to influence Brazilian foreign policy? This depends in part on the relative significance of these relations. Although China became Brazil’s main trade partner in 2009, it still only accounts for less than a fifth of both Brazil’s exports and imports (Table A9.1). In terms of exports, China is as dependent on Brazil as a source of iron ore and soybeans as Brazil is dependent on China for a market. As was seen in Chapter 10, China’s contribution in terms of FDI in Brazil is marginal, and the share of Chinese loans in Brazil’s external debt are also very low Trinkunas (2016, Table 3). Thus although China has become an important trade partner for Brazil, it has not given it a great deal of leverage over Brazil’s external affairs. It is in any case a mistake to think that closer economic ties between China and Brazil will inevitably lead to a convergence in foreign policy (Blanchard and Serodio, n.d.). One reason for this is that, as seen in Chapter 10, the growth of economic relations creates losers as well as winners, and this can create hostility rather than cooperation. Brazil’s foreign policy cannot be interpreted as reflecting the dictates of China. Brazil is as unlikely to accept Chinese hegemony as US hegemony in Latin America. There is no evidence that China’s increased economic involvement in Brazil has led to significant change in Brazilian foreign policy. China and Brazil do share certain common interests, which they have sought to advance in international fora. They both advocate a move towards a multipolar world and reforms to the international system to give more weight to the interests of developing countries, with which both countries identify. They share common interests, which are articulated through the BRICS and within 301

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the G20 group of countries, which have become more prominent in global economic discussions since the 2008 global financial crisis. On the other hand, there are also some areas of tension between China and Brazil. In 2005 Brazil had hoped for Chinese support in its bid to obtain a permanent seat on the UN Security Council, but China voted against this. Trade relations between the two countries have also given rise to tension with Brazil applying anti-dumping measures against Chinese goods and, despite agreeing to grant China market economy status, never implementing it. While China and Brazil cooperate in international fora, they are also rivals in certain parts of the world. As shown in Chapter 10, Brazil has lost out to Chinese competition in other parts of Latin America. It also faces competition from China in some African countries, and on a visit to Africa in 2010, Lula criticized the employment practices of Chinese firms in the region (Blanchard and Serodio, n.d.). In these cases the Brazilian government sees China as a threat rather than a partner (Cardoso, 2013, pp.46–8). Given China’s relatively limited leverage over Brazil in terms of the significance of bilateral economic relations, it seems likely that changes in Brazilian foreign policy owe more to internal domestic factors than to any influence of growing relations with China. As Maciel and Nedal (2011, p.252) conclude, ‘While China’s economic presence in Brazil is clearly increasing, this should be interpreted neither as a consequence of close political ties nor as a development that invariably contributes to this end.’

11.3.4 The Venezuelan Case After Brazil, Venezuela is the Latin American country with which China has the deepest economic relations. China’s most significant involvement in Venezuela has been through the loans that it provides. Almost half of all Chinese lending to the region since 2005 has been to Venezuela (Gallagher and Myers, 2016). Since these loans tend to be tied to Chinese contractors, it is hardly surprising that Venezuela is also the top country in terms of the value of Chinese projects in the region. According to data from China’s Ministry of Commerce, it is also the most important destination for Chinese OFDI in Latin America, although it lags some way behind Brazil, according to other sources. Until the sharp drop in oil prices in 2014, it was the third-mostimportant source of Chinese imports from the region after Brazil and Chile. Venezuela provides a test case in the debate between those who emphasize the strategic threat that China’s increased involvement in Latin America poses to the US and those who believe that China’s expansion is driven by economic factors. For the former, China’s ties with Venezuela provide support for a country which, under Presidents Chavez and Maduro, was a focal point of anti-US rhetoric and activity in the region. In contrast, those who argue that 302

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economic factors are key emphasize China’s interest in diversifying its sources of oil and obtaining access to the Venezuelan market for its exporters and construction companies. Chinese involvement in Venezuela began in the mid-1990s before Hugo Chavez became president in 1999. In 1997 CNPC won a tender to exploit two existing Venezuelan oil fields with an investment of over $350 million, the largest investment by any Chinese company in Latin America at the time (Rios, 2013, p.54). When Chavez came to power, he sought to diversify Venezuela’s relations in order to reduce dependence on the US and actively encouraged relations with China, Russia, Iran, and other progressive governments in Latin America. In 2001 a ‘strategic partnership’ was formed between China and Venezuela when Chinese President Jiang Zemin visited Caracas. Economic relations with China grew significantly during the Chavez government. Venezuelan oil exports to China started to increase from 2003. Initially the growth of such exports was limited by supply constraints in Venezuela and the nature of the heavy crude oil that it produced, which China lacked refineries to process (Dominguez, 2006, pp.42–4). Nevertheless between 2001 and 2006, several joint ventures were established between CNPC and the Venezuelan state oil company PDVSA to extract, refine, and undertake oil exploration (Xu, 2017, pp70–1). Despite this, a study for the Washington-based think tank Inter-American Dialogue ranked Venezuela fifth out of six Latin American countries in terms of its significance for China in 2006, behind Brazil, Mexico, Chile, and Argentina (Dominguez, 2006, Table 11). In 2007 the Venezuelan government nationalized its oil industry, which led to US companies Exxon Mobil and ConocoPhillipps leaving the country. From mid-2005, Chavez sought financial support from China, and in 2007, the China Development Bank (CDB) made its first loan of $4 billion to Venezuela to what was known as the Fondo Pesado (Heavy Fund). This led to Sino-Venezuelan economic relations really taking off. The fund was supplemented by further CDB loans in 2009 and 2013; these loans were all commodity-backed with repayments requiring the supply of 330,000 barrels of oil a day (Rosales, 2016). In 2010 a second fund, the Gran Volumen (Large Volume) was created with a ten-year loan from CDB, half of which was denominated in Chinese RMB. The loans were used to fund infrastructure projects, housing developments, and imports of consumer goods from China. Subsequent loans from CDB and China Exim Bank meant that by 2016, China had lent Venezuela a total of over $60 billion (Gallagher and Myers, 2016). Venezuela’s interest in developing its links with China after Chavez came to power was primarily motivated by his political goals. He sought China’s support for his anti-imperialist stance against the US. He spoke of his admiration for Mao and the Chinese Revolution. He also saw closer links with China 303

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as a way of increasing Venezuela’s status and enhancing its claims to a leadership role in Latin America (Blanchard, 2016, p.38). In economic terms, he sought to reduce Venezuela’s dependence on the US market for its oil by increasing exports to China. This, though, could also be seen as primarily politically motivated, since the US is the natural market for Venezuelan exports in terms of both its geographical proximity and the existence of refineries able to process heavy Venezuelan crude oil. In a situation where the hostility of the US government and the financial markets’ disapproval of Venezuela’s populist economic policies led to very poor international credit ratings, borrowing from China was an attractive way for the government to fund its economic programme. As the situation deteriorated, particularly with the precipitous fall in oil prices in 2014, Venezuela became increasingly dependent on the Chinese policy banks as lenders of last resort. In contrast to Chavez’s ideological emphasis on the political affinity between his twenty-first century socialism and Chinese socialism, China’s interest in Venezuela has been largely economic.24 Its economic involvement has first of all helped to diversify its sources of oil supply and to reduce dependence on the Middle East. Since Venezuela has one of the largest reserves of oil in the world, it is important for China to have a foothold there. Second, the loan agreements have not only secured oil supplies but also created a major market for Chinese firms. Six Chinese companies obtained a total of over $11 billion in government contracts between 2008 and 2011. The State Grid Corporation is building power-transmission networks in Caracas, and the ZTE Corporation is building an offshore cable (Sanderson and Forsythe, 2012, p.136). Other Chinese companies benefitting from the loans included the China International Trust and Investment Corporation Group and Haier (see Chapter 9). While Chavez sought to enlist Chinese support for his anti-US campaign, the Chinese government tried to avoid being drawn into any conflict with the US and kept its distance.25 China not only regarded its relations with the US as more strategically important than its relations with Venezuela and did not wish to directly challenge the US in its backyard; it was also aware that any US measures against Venezuela could damage Chinese interests there (Corrales, 2010, p.118). Thus at a political level, China’s approach towards Venezuela

24 One indication of this is the fact that the Mixed High-Level Commission formed under the strategic partnership of 2001 was presided over by the two countries’ planning and development ministers (Struver, 2014, p.143). 25 While President Chavez visited China on six occasions during his fourteen years in office, there was only one visit by a Chinese President Jiang Zemin, to Venezuela during that period in 2001. A planned trip by President Hu Jinatao in 2010 was called off as a result of a major earthquake in Qinghai Province.

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has been cautious, seeking to avoid confrontation with the US while expanding its economic interests (Paz, 2011). As the Chinese Foreign Ministry has emphasized, ‘China and Venezuela maintain normal State to State relations. These relations are not based on ideology, are not directed at any third party and will not affect other countries’ (quoted in Romero, 2013 p.128). A second question is how much leverage China’s economic presence gives it over Venezuela, particularly compared to the US. Despite attempts to diversify its exports away from the US market it still account for two-fifths of Venezuela’s total exports, more than double the share that goes to China. As a destination for Venezuelan exports, China is on a par with India. Similarly, as a source of FDI, China’s share of the total stock, although growing, remains less than 10 per cent (Trinkunas, 2016, Table 2). Where Venezuela is highly dependent on China is in terms of loans, where it has been estimated that loans from China account for almost 60 per cent of the country’s total external debt (Trinkunas, 2016, Table 3). While it is clear that loans from China enabled the Venezuelan government to continue with its populist economic policies for longer than would have been possible had the country been dependent on international capital markets for external funding (Kaplan, 2016), it is not obvious that they have given China any advantage over Venezuela’s foreign policy and relations with the US. In fact the current crisis in Venezuela has shown the limited degree of influence that China has there. Up to now it has been largely absent from any discussions of how to resolve the crisis (Ferchen, 2017). China has maintained its policy of respect for national sovereignty and non-interference in the internal affairs of other countries, while at the same time its lending to Venezuela has slowed down. The Chinese government increasingly regards Venezuela as an unreliable partner, and President Maduro as more of a liability than an asset (Xu, 2017, p.75). The current crisis in Venezuela is likely to provide further evidence of the extent to which China’s interests in the country are primarily political or economic. Will it continue to support the Maduro government as a leftwing regime opposed to US hegemony in Latin America, or will it be more concerned to protect its economic interests in the country even if that means that the current administration is forced out and replaced with one more closely allied with the US which can restore economic stability?

11.3.5 Conclusion There is no evidence to support the strong view of the ‘China threat’, which sees the growth of China’s economic involvement as motivated by a desire to undermine the position of the US in the region. Both the overall picture and the history of individual countries where China has established particularly 305

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close relations are consistent with China’s claims that its relations are essentially economic and that it respects national sovereignty and does not impose political conditionality on other countries, apart from in relation to Taiwan. What is true is that growing economic links with China have created more options for LAC countries and reduced their dependence on the West and international financial institutions, providing them with more policy space to pursue alternative economic strategies. However, changes in economic policies and in the international relations of LAC are primarily the result of internal developments within the region and are not due to external influences from either the US or China. In the long term, it is clear that the shifting of economic power to new centres of accumulation will need to be reflected in changes in the way the global economy is governed. This should not be interpreted as a plot to undermine US hegemony, but rather as the inevitable result of a move towards a multipolar international system.

11.4 Environmental Impacts Another of the concerns that has been raised over LAC’s growing economic relations with China is the environmental impact. There are frequent claims in the media that Chinese trade and investment have contributed to environmental degradation in the region.26 How much evidence is there to support these claims? Are the examples of environmental damage cited to support them specific to relations with China, or part of a more general problem? Unfortunately, attention has only quite recently turned to the environmental impacts of Chinese relations with LAC. DialogoChina, an electronic newsletter focussing on Sino-Latin American environmental concerns was set up in 2015. Academic research on the issue is just getting off the ground, and one of the first collections of academic papers on the subject, by Ray et al., was only published in 2017. Much of the debate on the environmental impact of China on the region is based on anecdotal evidence. In order to summarize the existing state of knowledge about the impact of China on the environment in LAC, this section looks first at trade and then at Chinese FDI and loans to the region. The case of soybeans, which has consistently been amongst the top three products exported to China, is then examined in more detail, in particular, the extent to which it contributes to deforestation.

26

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See, for example, Garzón and Salazar-López, 2017 and Watts, 2015.

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10.4.1 Trade and the Environment Much of the argument about the environmental impacts of trade with China derives from the primarization of Latin American exports discussed in Chapter 10. Extractive industries tend by their very nature to have a substantial environmental impact. Mining can lead to a loss of large areas of land to open-cast mines and the pollution of land and water as a result of the use of toxic chemicals. It also creates a vast amount of waste and often puts pressure on local water supplies. The extraction and transport of oil can lead to major spillages with disastrous environmental effects. The expansion of agricultural exports can contribute to deforestation when it leads to an extension of the agricultural frontier into forested areas either directly or indirectly through the displacement of other forms of agriculture. There is evidence that China’s demand for commodities creates a considerable environmental footprint in LAC. Because of their concentration in primary commodities, Latin American exports to China create more carbon emissions and use more water per dollar exported than exports to the rest of the world (Ray, 2017). The difference is particularly marked in the case of water. However, one should not exaggerate the overall effects of trade with China. First, calculation of the net effect on LAC emissions and water usage needs to take into account LAC imports from China, as well as exports. In terms of greenhouse gases (GHGs), the former are more carbon intensive than exports to China, so that the net effect of trade with China reduces emissions in Latin America. This is not the case in water, with exports substantially more water intensive than imports, so that in 2013, LAC exported almost 120 billion cubic metres of embedded water to China (Ray, 2016, p.19). Second, the estimates of GHG emissions associated with exports to China represent a very small fraction of the total generated and used in all activities. The World Resources Institute estimates that in 2012 LAC produced a total of 4.6 gigatonnes of CO2 equivalent, in contrast to the 115 kilotons produced by its exports to China (Ray et al., 2017, Fig. 1.8; Ray, 2016, p.18). Again, the contribution of exports to China to the region’s water footprint is more significant.27 Although these aggregate comparisons show that LAC exports to China have a greater environmental impact in the region than its exports to the rest of the world, this is entirely due to the makeup of the basket of goods that are exported to China. A second question is whether the same products exported to different markets would be more environmentally damaging

27 The water intensity of exports to China is more than ten-times greater than the water intensity of the region’s total economic activity (Ray et al., 2017, Fig. 1.6).

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when the destination is China. As discussed in Chapter 8, it is only under rather specific conditions that the destination is likely to have an impact on environmental performance. The fact that the main exports from Latin America are undifferentiated commodities such as oil, iron ore, and copper means that consumers are unlikely to be aware of their environmental impacts, so producers have no incentive to apply different environmental standards when exporting to different markets. One exception, discussed in Section 11.4.3, is the export of soybeans from the region.

11.4.2 Chinese Firms and the Environment While in general the destination of exports does not affect the impact of production on the environment, a more plausible case can be made that firm ownership is a significant factor. As seen in Chapter 8, there are a number of reasons why Chinese firms abroad may have scant regard for the environmental impacts of their operations. Until recently, in China itself, growth was regarded as the priority and little attention was given to the damage to the environment that might result. This was even truer of the overseas operation of Chinese firms under the Go Global strategy. Very little attention was paid within China to the effects of the operations of Chinese companies abroad. As a result even Chinese sources recognized that Chinese firms lagged behind their Western counterparts in terms of adopting an environmental approach to their foreign investments (CCICED, 2011, p.112). It is also claimed that the environmental conditions attached to loans from the Chinese policy banks are less stringent than those of other lenders (Gallagher, 2013). The concentration of Chinese OFDI in Latin American oil and gas and mining has given rise to concern, since these are sectors which have a substantial environmental impact. There are several examples of Chinese extractive companies contributing to environmental degradation in LAC, such as Shougang’s Marcona mine in Peru and the Cerro Maimom mine in the Dominican Republic (Ellis, 2014, p.165). Some of the conflicts with local communities discussed earlier in this chapter were triggered by the environmental impact of Chinese investment. International controversy was created when the Correa government in Ecuador decided to reverse its decision to protect the environmentally sensitive Yasuni National Park and to allow Chinese companies to begin oil extraction. Chinese firms are by no means alone in having negative environmental impacts in LAC.28 It is often implied, however, that for the reasons mentioned 28

For examples of the negative environmental impacts of non-Chinese investors, see The Democracy Center et al. (2014) on European TNCs, and Gordon and Webber (2016) on Canadian mining companies.

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earlier, Chinese firms perform worse than their Western counterparts do. Unfortunately, there is a dearth of detailed research that systematically compares Chinese and other firms in the region. One exception is Shougang in Peru, where there have been several studies comparing its environmental performance with that of other mining companies (Irwin and Gallagher, 2013; Kotschwar et al., 2012; Sanborn and Chonn, 2017). Although the Chinese mining company has been fined by the Peruvian environmental authorities on a number of occasions, and has a poor record in terms of complying with environmental standards and implementing the recommendations of environmental audits, it is not the worst performer in the sector. It has also been suggested that a later Chinese entrant to the Peruvian mining industry, Chinalco, has learnt from the mistakes made by Shougang and is showing signs of better environmental performance (Kotschwar et al., 2012; Sanborn and Chonn, 2017). Although these studies are all of one country (Peru) and one sector (mining), they raise questions about the claims that are often made about the environmental impact of Chinese firms. First, they illustrate the diversity of performance amongst Chinese companies, which cannot all be tarred with the same brush.29 They also show that Western and locally owned companies are often no better than their Chinese counterparts. More comparative research is needed before any definitive conclusions can be drawn about the environmental performance of Chinese companies in the region.30 Another key area of concern at present is the likely environmental impacts of major new or proposed infrastructure projects in LAC. The interoceanic canal, which the Hong Kong–based HKND Group has been granted the rights to develop in Nicaragua, has led to major criticism on environmental grounds. It threatens to destroy 400,000 hectares of rainforest and wetlands and to bring about major ecological changes to Lake Nicaragua as a result of the dredging required to create a deep-water channel (Meyer and Huete-Pérez, 2014). Another major project which is in the offing is a rail link between Brazil’s Atlantic coast and the Pacific in Peru. While it remains to be seen whether these will eventually be built, if they are, they will have major environmental impacts. There is concern that the environmental impact assessments carried out for such projects are not adequate. In the case of the

29 A study of Chinese firms in Mexico also concludes that their environmental behaviour is quite heterogeneous (Schatan and Piloyan, 2017, p.336). 30 It has also been suggested that because of a weak environment ministry and overlapping responsibilities, weak enforcement, and an emphasis on attracting inward investment, lower environmental standards have been applied by Chinese firms in Peru than in Brazil or Chile, which have stronger institutions (Blackmore et al., 2013, p.24). It would be useful to have studies which compare the environmental performance of Chinese companies in the different countries where they operate.

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Nicaraguan canal, the project was approved before the environmental and social impact assessment was publicly available (Amnesty International, 2017). China is also increasing its involvement in dam building in LAC. The country where it has been most active is Ecuador, where as many as eight dams were under construction or at various stages of planning in 2014 (Ellis, 2014, pp.115–16). Chinese companies are also involved in hydroelectric projects in Argentina, Brazil, Costa Rica, Belize, Bolivia, Honduras, Surinam, and Venezuela. Many of these have substantial environmental impacts which have caused major conflicts. In Honduras, opposition by activists led to Sinohydro withdrawing from the Agua Zarca Dam project in 2013. In Argentina, in 2016, the Supreme Court ordered suspension of the construction of the Nestor Kirchner and Jorge Cepernic Dams on the Santa Cruz River that were being built by a consortium which included the China Gezhouba Group, at the request of NGOs that claimed that environmental impact assessments had not been properly carried out.31 Many of these infrastructure projects are largely funded by the Chinese policy banks, so their lending policies are an important determinant of the extent to which environmental impacts are considered. As discussed in Chapter 8, the China Exim Bank has published its ‘Guidelines on Environmental and Social Impact Assessment of Loan Projects’, and the CDB has its ‘Guidelines on Environmental Protection Project Development Review’. These require recipients of loans to adhere to the environmental laws and regulations of the countries in which they operate. They are less comprehensive than those of multilateral lenders such as the World Bank, the InterAmerican Development Bank, and Western national development banks and export credit agencies, which apply an international set of standards and procedures (Yuan and Gallagher, 2015, pp.32–3). Some commentators regard the environmental safeguards required by the multilateral development banks as overly stringent, making it very difficult to fund major infrastructure projects in developing countries, while the Chinese approach is more pragmatic (Dollar, 2016, pp.65–71). Environmental activists, on the other hand, are concerned that less demanding environmental safeguards for Chinese-financed projects will contribute to a race to the bottom in environmental standards.

11.4.3 The Case of Soybeans Some of the most significant environmental concerns in South America are associated with the expansion of soybean production. The region accounts for 31

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half of global soy production, and the area under cultivation has more than tripled since the mid-1990s (FAOStat). Argentina and Brazil account for the bulk of production, but soybeans are also grown in Paraguay, Uruguay, and Bolivia. The expansion of soybean cultivation has been driven by growing global demand as a result of population growth and increasing incomes, which have led to changing diets with higher levels of meat consumption, which in turn increases demand for feedstuffs. Between 2001 and 2014, soybean production doubled in both Brazil and Argentina, with most of the increase coming from an expansion of the area cultivated (FAOStat). Much of this growth involved planting genetically modified (GM) soybeans. In Argentina the commercial use of Monsanto’s Roundup Ready soybeans was approved in 1996, and the use of genetically modified organisms (GMOs) spread rapidly so that within seven years, over 90 per cent of Argentinean soybeans were GM (Leguizamon, 2014). In Brazil GM crops were not legalized until 2005, although from 1997, imported GM soybeans from Argentina were planted illegally in southern Brazil (Garrett et al., 2013, p.3). Now all of Argentina’s and almost 90 per cent of Brazil’s soybean areas are planted with GM varieties (European Commission, 2016, Table 14). THE ENVIRONMENTAL IMPACT OF SOYBEANS

The most controversial aspect of the growth of soy production has been deforestation. In Brazil it has been a major cause of forest loss in both the Amazon rainforest and the Cerrado. The state of Mato Grosso accounts for about 30 per cent of Brazilian soybean output (Fearnside and Figueiredo, 2017, p.230), and it has been estimated that almost two-thirds of the deforestation there has been caused by the expansion of soybean cultivation (Lathulliere et al., 2014, p.7). In 2006, following pressure from NGOs led by Greenpeace, the Soy Moratorium was agreed, under which the member firms and exporters of the Brazilian Vegetable Oil Industries Association (ABIOVE) and National Grain Exporters Association (ANEC) made a commitment not to buy soybeans from areas deforested after 24 July 2006. This has led to a substantial reduction in deforestation rates in the Amazon (Union of Concerned Scientists, 2016). However, although the expansion of soybean production into forested areas has been reduced, soybeans have expanded into areas which had already been deforested and converted to pasture, which has contributed to deforestation elsewhere because ranching activity gets displaced to other states such as Para, causing deforestation there (Fearnside and Figueiredo, 2017, p.238). It has also led to the growth of soybean cultivation in the Cerrado, which is not covered by the Moratorium and where the level of deforestation has overtaken that in the Amazon since 2010 (Union of Concerned Scientists, 2016, Figure 2), and 311

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to the growth of soybean production in Bolivia and Paraguay, which have fewer restrictions than Brazil. Discussion of the link between soybean production and deforestation in Latin America has concentrated on Brazil, but there is also evidence that it has contributed to deforestation in Argentina. Although over 80 per cent of soybean cultivation in Argentina takes place in the pampas, where expansion is not directly linked to deforestation, the growth of soybean production in the Dry Chaco of Northern Argentina has directly contributed to deforestation, particularly since 2002 (Gasparri et al., 2013). As in Brazil, there is evidence that conversion of pasture for soybean production in the pampas and elsewhere has an indirect effect on deforestation through the displacement of ranching to the Gran Chaco regions in Argentina, Paraguay, and Bolivia (Fehlenberg et al., 2017). Deforestation has been the most significant environmental impact of the growth of soybean production, but it is not the only one. Wetlands have been degraded as a result of the growth of soy and the displacement of cattle in the Argentinean province of Cordoba and the Parana Delta (OSAS, 2015). Soy monocropping can lead to nutrient depletion and damage soil structure. Although, at first, the introduction of GM crops led to a reduction in the need for herbicides and pesticides their use has increased over time, and as land becomes more concentrated and farms larger, fumigation is often carried out by plane so that the spread of toxins becomes more widespread (Leguizamon, 2014, p.6). In addition to the direct and indirect effects of the growth of soybean production on the environment, there are impacts associated with the expansion of transport infrastructure to deal with increased export volumes (Branford, 2017; Fearnside and Figueiredo, 2017). In Brazil, for instance, the extension of soy cultivation has led to the development of new transport routes. One of the major infrastructure projects announced in 2003 was the paving of the BR-163 highway north from Mato Grosso to the Tapajos River, and the new port of Miritituba, from where soybeans can be shipped by barge to the Atlantic. The opening up of this route led to deforestation on either side of the road. Several major new road, rail, and waterway projects in the region are also planned to create new routes for soy exports. These include the proposed railway from Brazil to the Pacific coast in Peru, the Ferrogrão (Grain Railway) from Mato Grosso to the port of Miritituba, and a proposal to transform the Juruena, Teles Pires, and Tapajos Rivers into an industrial waterway, and these are likely to cause further environmental degradation in the region (Branford and Torres, 2017). CHINA AND THE LATIN AMERICAN SOY VALUE CHAIN

A large part of the increased global demand for soybeans has come from China. As seen in Chapter 3, China accounted for almost 30 per cent of 312

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world consumption and over 60 per cent of world imports of soybeans in 2015 (Table 3.1). This has been reflected in the growth of soybean exports from Brazil and Argentina. Between 2001 and 2016, total soybean exports from Brazil more than tripled in volume, and this was virtually entirely accounted for by increased exports to China. In the case of Argentina, soybean exports peaked in 2010 at double their 2001 level, and again the increase in exports was entirely due to sales to China (ITC data). China’s role in the LAC soybean value chain is primarily as a market. Despite much talk of Chinese ‘land grabs’, there is relatively little direct involvement in production (Oliveira, 2018). There are a few examples of Chinese companies buying or leasing land to produce soybeans in the region, the most notable being those made by the Zhejiang Fudi Agriculture Group with the Agricultural Bureau of Heilongjiang Province in Tocantins, Brazil, and the Pengxin Agricultural Group Co. in Santa Cruz, Bolivia. Other planned acquisitions by Heilongjiang Beidahuang in Rio Negro, Argentina;, the Chongqing Grain Group in the Chaco and Cordoba in Argentina and Bahia in Brazil; and by the Shanghai Pengxin International Group in Brazil, all either fell through or were stalled (Jie and Myers, 2017, Tables 5.1 and 5.2). The ability of Chinese firms to purchase land was restricted by a reinterpretation of the Brazilian land legislation in 2010 and new legislation in Argentina in 2011. These have both been seen as a response to fear of acquisitions by Chinese firms (Jie and Myers, 2017, pp.107–9). In the past, exports of soybeans from Brazil and Argentina were largely controlled by the major transnational grain traders, ADM, Bunge, Cargill, and Dreyfus (known as ABCD). China’s involvement has increased recently as a result of the purchase by the China National Cereals, Oils and Foodstuffs Corporation (COFCO) of the Dutch company Nidera and the agribusiness arm of the Hong-Kong-based trading group Noble (Haro-Sly, 2017, p.7; Oliveira and Schneider, 2016, p.7). Both of these firms have significant operations in Argentina and Brazil. In Argentina they rank seventh and eighth in terms of crushing capacity, and their combined capacity would put them in fifth place (Oviedo, 2015, pp.124–5). In Brazil, COFCO and other Asian traders from Japan, South Korea, and Singapore have overtaken the ABCD in terms of their share of grain exports (Bonato, 2016). Chinese firms are also involved in the soy value chain as suppliers of key inputs. Chinese companies supply 40 per cent of the world’s output and 35 per cent of exports of glyphosate, the main herbicide applied to soybeans. Glyphosate is one of the top products exported from China to Argentina (Haro-Sly, 2017, p.6). Chinese firms are also becoming involved in the agricultural machinery sector in Argentina (Xinhua, 2016). As noted earlier, the growth of soybean exports has also increased the need for new transport infrastructure. Chinese involvement in transport projects 313

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in Brazil is likely to increase in future with the creation of the $20-billion China-Brazil Infrastructure Fund in 2017. There is interest by Chinese firms in both the planned railway from Brazil to Peru and the Ferrogrão from Mato Grosso to Miritituba Port. In Argentina, China financed the refurbishment of the Belgrano-Cargas Railway, which links the soybean-producing areas of the country to the port of Buenos Aires. ENVIRONMENTAL IMPACTS OF CHINESE TRADE AND INVESTMENT

While there is little doubt that the growth of soybean production in Latin America has contributed to deforestation and other forms of environmental degradation, does the fact that much of the production goes to China lead to greater environmental damage than exporting to other markets? Has the fact that, whereas in the mid-1990s three-quarters of Brazilian and Argentinean exports went to the European Union, two decades later three-quarters of Brazilian and over 80 per cent of Argentinean soybean exports were to China, had any impact? In fact soy is an exception to the point made at the start of this section: that it does not make any difference whether a product is going to be sold to Chinese or to other buyers, since consumers are not sensitive to the way in which primary commodities are produced. There are two major issues which differentiate national markets for soy. One is the attitude towards GMOs. European and Japanese consumers are reluctant to consume products which contain GMOs, with surveys showing that more than 70 per cent prefer foods that do not contain genetically modified materials. As a result food that comes directly from GM crops has to be labelled, and although imports are not banned, they are subject to strict approval processes.32 The European Commission has estimated that around 10 per cent of total imports of soybeans and soybean meal to the EU in 2012 were non-GM (European Commission, 2016, Table 15). In contrast, although domestic production of soy in China is GMO-free,33 imports of GMO soybeans are allowed. Until recently Chinese consumers were not overly concerned about the use of GMOs in food, but this has started to change with reports that demand is switching from soy oil to GM-free sunflower, peanut, or sesame oil, and a recent survey reporting that more than half of Chinese consumers regarded GMOs as undesirable (Patton, 2017). The second difference arises from concerns over deforestation and the sustainability of soy production, which has led to environmental certification for soybeans. There are two main standards for environmentally responsible 32 Labelling requirements only apply to products that include GM ingredients. Meat products from animals which have been fed GM soy do not have to be labelled. 33 Some GMO crops are planted illegally, but there are no data on the extent of this (Kruppa, 2015, Table 1).

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production: ProTerra, and the Round Table on Responsible Soy (RTRS). Both were set up in 2006, with ProTerra certification requiring soybeans to be GMfree, while RTRS does not. They both require that producers do not convert native forests or other high-conservation-value areas for the production of soybeans. In 2015 ProTerra and RTRS together certified over six million tonnes of soybeans (ITC, 2017). The demand for environmentally responsible soya is concentrated in Europe, but even if all of the certified beans produced worldwide were sold in Europe, this would only account for about a sixth of total EU imports of soybeans and soybean meal.34 Whereas many food producers in Europe have committed to using sustainably produced soy, those in China have not. Again, there are some signs that this may be changing. In 2016 more than ten large companies which account for a quarter of China’s imports of soybeans indicated their support for greening their supply chains, but without committing themselves to verifiable action (Vartparonian, 2016). If the same proportion of China’s imports of soybeans were certified as in the EU, this would have represented additional sales of 14 million tonnes of certified soybeans in 2016. CONCLUSION

There is now considerable evidence that the growth of soybean production has caused environmental damage in Latin America, particularly through deforestation, as both a direct and an indirect consequence of more land being devoted to soybeans. It is clear that this growth has been prompted by demand from China, although up to now, the direct involvement of Chinese companies has been relatively limited. There is also some evidence that the switch of the market to China has had an impact on the nature of demand, with less emphasis on non-GM or certified soybeans than is the case for traditional export markets in Europe, although this may be beginning to change. However, the extent to which expanded soybean production causes environmental damage in Latin America is not simply a result of demand-side factors. It also depends on the degree to which laws and regulations to prevent deforestation and other negative environmental effects are established and enforced. In Brazil the deforestation caused by soybean production in Mato Grosso was significantly lower in 2006–10 than in 2001–5, despite the rapid growth of exports to China. This was partly the result of better policies to control deforestation and enforcement that is more effective (Lathulliere, 2014).35 34 In 2014 the EU imported over 36 million tonnes of soybeans either as beans or embodied in soybean meal (European Commission, 2016, Annex Table 1). 35 These included the Action Plan for the Prevention and Control of Deforestation in the Legal Amazon launched in 2004, and further novel measures adopted in 2008. One policy which was regarded as highly effective was a decision by the Central Bank in 2008 to prevent those with pending fines for illegal deforestation from receiving any agricultural loans (Fearnside, 2017).

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The role of domestic politics in the relationship between soybean cultivation and deforestation is underlined by recent developments in Brazil, where the growth of agribusiness led to an increase in the political influence of the ruralistas in Brazilian politics even before they played a key role in the removal of Workers’ Party President Dilma Rousseff in 2016. Deforestation began to increase again from 2012, when the Forest Code was revised to make it easier to clear forests legally and illegal clearing before 2008 was pardoned. Rousseff ’s replacement, Michel Temer, appointed Blairo Maggi, Brazil’s largest soybean producer, as Minister of Agriculture. These developments are leading to an acceleration of deforestation in the Brazilian Amazon (Fearnside, 2017). In Argentina, too, agribusiness has significant political influence. Following the economic crisis of 2001–2, the government introduced high taxes (retenciones) on exports of soy in 2002. These taxes became an important source of revenue which gave the government a direct interest in the continued expansion of agricultural production. Environmental problems were not a high priority for the Kirchner governments, and export taxes helped fund the administration’s social programmes. Although a new forest protection law was introduced in 2007, it has not succeeded in reducing the level of deforestation caused by the growth of soybean production in the Northern Dry Chaco area (Gasparri et al., 2013). The change of government with the election of President Macri in 2015 is not likely to improve the situation, since it has been reported that at least thirty members of the administration have links to agribusiness and the agrochemical industry, and Macri is committed to reducing the tax on soybeans (Haro-Sly, 2017, p.7).

11.4.4 Conclusion There are several ways in which its growing economic relationship with China has affected the environment in LAC, usually for the worse. The growth of commodity exports and the primarization of the region’s economies have had negative impacts as extractive industries such as oil, mining, forestry, and agriculture (particularly soybean production), contribute to pollution, deforestation, and other forms of environmental degradation. Although this shift in the composition of exports is to a significant extent a result of growing demand from China, exports to China are not necessarily more damaging than exporting the same products to other markets. There are exceptions, however, as illustrated by the case of soybeans, where differences in consumer demand in different markets may mean that exports to China are produced to lower standards than those to Northern markets.36 There are some signs that 36 A similar situation exists in the case of timber where, as pointed out in Chapter 8, there are international certification schemes and government legislation in place in the EU and the

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this is changing as Chinese consumers become more concerned about environmental issues. The same considerations apply to Chinese investment and finance in LAC. Again there is a tendency for FDI to be concentrated in extractive industries, in particular oil and mining, and for Chinese finance to involve large-scale infrastructure projects, all of which tend to have significant environmental impacts. There is also evidence that although Chinese companies and banks are improving their environmental standards, overall they still lag some way behind their Western counterparts. Such a conclusion is based mainly on comparisons of environmental policies and standards rather than on any detailed comparison of environmental impacts, and this is an area where more research is required. Although growing relations with China may have exacerbated the environmental crisis in LAC, they have not been the major cause. The extractivist model of capital accumulation in the region long predates the appearance of China on the scene. While external demands contribute to increased environmental pressures, the way in which these are tackled is an internal problem. Some countries in the region have, at particular times, been able to moderate these negative environmental outcomes through regulation and civil society action.

Appendix to Chapter 11 Econometric Analysis of the Impact of Economic Relations with China on UN Voting In order to test the impact of economic relations with China on countries’ voting patterns in the UN General Assembly, an econometric model was developed with the percentage of countries’ votes that coincided with China’s vote as the dependent variable. To identify what type of relationship with China, if any, was significant in affecting voting behaviour, the variables used to indicate the strength of economic relations with China were the share of China in total trade, the share in the stock of FDI, the value of Chinese economic cooperation projects per head of population, and the ratio of Chinese loans to GDP for each country. The lack of comparable data on all projects and all lending to LAC countries meant that China’s share could not be used to measure the last two variables, so these were normalized by a country’s population and its GDP respectively. US requiring importers to show that wood has been legally produced. In 2017 the US Trade Representative, under the terms of the US-Peru free trade agreement (FTA), blocked imports of timber from a Peruvian company that had sourced timber illegally. Unlike the US-Peru FTA, China’s FTA with Peru does not contain any mention of controlling trade in illegal timber, and exports of timber to China are subject to fewer restrictions than exports to the US or the EU (Putzel, 2009).

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How China is Reshaping the Global Economy Table A11.1. Determinants of Voting Coincidence with China Trade (1) Log LAC GDP p.c. Log LAC population Recognition of Taiwan Control of corruption Voice & accountability China’s trade share China’s FDI share Chinese projects p.c. China’s loan share Random/fixed effects Observations R-squared

0.14 0.96*** 3.1*** 0.004 0.04 0.002 — — — RE 462 0.36

FDI (2) 0.52 0.63* 2.7** 0.09** 0.10* — 0.00004 — — RE 376 0.39

Projects (3) 0.12 0.92*** 3.1*** 0.003 0.05 — — 0.009 — RE 462 0.36

Loans (4) 0.27 0.78** 2.2* 0.008 0.03 — — — 0.06 RE 317 0.42

*, **, and *** significant at 10%, 5%, and 1% level

Several other variables were added as controls, to ensure that differences between countries other than relations with China were controlled for. These included the level of per capita income, the size of the population, whether the country had diplomatic relations with Taiwan, and its control of corruption and degree of democracy. The last two were measured by the WGI indicators, Control of Corruption, and Voice and Accountability. Panel data regressions were used. Since we are interested in the impact of relations with China on political outcomes, the China variables were lagged by one year. The control variables were contemporaneous with the dependent variables. Year fixed effects were included, since the subject matter of UN votes varies from year to year and this might influence the pattern of voting. The results of the Hausman test indicated that it was appropriate to use random effects rather than country fixed effects in all cases. Table A11.1 sets out the results for votes with China. The only variables which are consistently significant are population size and relations with Taiwan. Both are negative, indicating that smaller countries are more likely to vote with China as, not surprisingly, are countries which have diplomatic relations with the PRC rather than Taiwan. None of the indicators of economic relations with China has a statistically significant effect.

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12 A Comparative Perspective on China’s involvement in Sub-Saharan Africa and Latin America and the Caribbean

12.1 Introduction Despite the large and rapidly expanding literature on China’s economic relations with both Sub-Saharan Africa (SSA) and Latin America and the Caribbean (LAC), virtually nothing has been written of an explicitly comparative nature.1 Studies of the international implications of China’s rise tend either to be about the global economic consequences or to focus on the impact on a specific region or country. In the case of the latter, most of the studies by Western scholars have come from area-studies specialists who have expertise in a particular region, rather than Sinologists who might be more likely to take a comparative approach. African and Latin American scholars are primarily interested in the impact of China on their own countries or region, and generally have not looked to make comparisons further afield. Chinese academic studies on China’s impact on Africa and Latin America also tend to come mainly from area studies research centres such as the Institute of Latin American Studies and the Institute of West Asian and African Studies at the Chinese Academy of Social Sciences. This has been an obstacle to in-depth comparative studies of the two regions. This chapter brings together the findings of the previous two parts of the book to provide a systematic comparison of China’s economic involvement in SSA and LAC and its impact. It shows that while Chinese interests in the two regions are broadly similar as are many of the features of its engagement,

1

Amongst the few studies that attempt a broad comparison of China’s relations with Africa and Latin America are Brautigam (2017); Leiteritz and Coral (2017); Narins (2016); and Zhang (2016). Shen (2015) presents an interesting comparison of Chinese views of Africa and Latin America.

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the impacts vary because of significant differences between the economic, political, and institutional structures of SSA and LAC.

12.2 The Development of Relations with China China established relations with SSA much earlier than with LAC. In the Maoist period, national liberation movements in SSA were seen as part of the anti-imperialist struggle, and were supported by the Chinese government. Many of these countries, which became independent in the early 1960s, established diplomatic relations with Beijing soon afterwards. Chinese Premier Zhou Enlai made the first trip by a Chinese leader to Africa in late 1963 and early 1964, visiting six SSA countries. This laid the basis for cooperation between China and several newly independent African countries, and led to a number of subsequent Chinese projects in the region during the 1970s, including the Tanzam Railway, the Jin Kang hydropower project in Guinea, and the Bouenza hydropower station in the Republic of Congo (He, 2014, p.4). A majority of SSA countries supported China’s admission to the United Nations (UN) in 1971, and the region accounted for twenty-one of the seventy-six votes in favour. In contrast, the only country in LAC which recognized China in this period was Cuba, after its socialist revolution. When the UN General Assembly voted to admit the People’s Republic of China (PRC) in 1971, only seven LAC countries voted for the motion, and eleven voted against it. More LAC countries established diplomatic relations in the 1970s following the PRC’s admission to the UN, but others did not do so until the 1980s after the US had recognized Beijing in 1979. Even today, there are nine LAC countries which recognize Taiwan and do not have diplomatic relations with the PRC. It was during the 1990s that China began to pursue a more active policy towards Latin America. Yang Shangkun was the first Chinese president to visit the region in 1990. His successor, Jiang Zemin, visited the region twice, in 1993 and 1997. During this period forty LAC Presidents and Prime Ministers made state visits to China. In 1993, China established its first strategic partnership in the region with Brazil. Significant Chinese engagement with Latin America dates from well after the start of the political and economic changes that began in China in the late 1970s. This contrasts with the much earlier development of relations with SSA in the 1960s. As a result, Chinese documents and statements about the region are much less freighted with the language of anti-imperialism and common struggle than those about SSA (Strauss, 2012). Whereas during the Cold War the Chinese government saw SSA and LAC very differently, with the former being of much greater strategic significance, 322

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since the end of the Cold War and the prioritization of economic growth within China, the official view of the two regions has tended to converge. They are both seen as part of the developing world and are regarded as less important for China than relations with its immediate neighbours in Asia or with the big powers, particularly the US (Sun, Y., 2014, p.13; Zhang, 2016, p.96). Official Chinese statements stress the principles of non-interference in internal affairs and respect for national sovereignty in China’s relations with both regions. Economic relations are discussed in terms of South-South cooperation and mutual benefit. The complementarity of their economies with that of China is highlighted. These similarities were reflected in the Chinese policy papers on Africa issued in 2006 and on LAC two years later (PRC, 2006; PRC, 2008). The two papers are similar in length and structure, and focus on similar areas of potential cooperation (Zhang, 2016). Two further policy papers on Africa (PRC, 2015) and LAC (PRC, 2016) show continuing similarities, although the Africa paper is rather more fully elaborated. Key economic areas of cooperation identified in both papers include energy and resources, infrastructure, manufacturing, finance, and agriculture.

12.3 Key Chinese Actors in Sub-Saharan Africa (SSA) and Latin America and the Caribbean (LAC) As was seen in Chapters 6 and 9, the main actors involved in China’s economic relations with SSA and LAC are largely the same. At the central government level, the Ministry of Foreign Commerce (MOFCOM) and the Ministry of Foreign Affairs are the main actors, with MOFCOM being the more important in terms of economic relations. State-owned enterprises (SOEs) play a major role in terms of both Chinese foreign direct investment (FDI) and engineering and construction contracts in both regions, while the government policy banks are the main providers of credit. Some large provincial and municipal SOEs are also involved in FDI and contracts in both regions, as are large private firms such as Huawei and ZTE. Two differences in terms of the actors involved in SSA and LAC are worth noting. First, although the policy banks dominate lending to both regions, it is the Exim Bank that is the most important Chinese lender to SSA, whereas the China Development Bank is the main source of Chinese loans to LAC. Chinese aid is channelled through the Exim Bank, which partly explains why it is more important in SSA than LAC, since the latter receives much less aid from China. In recent years there has been an increase in the share of loans to LAC provided by the Exim Bank. 323

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Although exact figures are hard to come by, SSA has seen the involvement of more private Chinese investors, many of which are fairly small scale. In contrast to LAC, where studies of Chinese FDI have focussed on SOEs, there have been several studies of private Chinese investment in SSA (Gu, 2009, 2011; Shen, 2013). In the construction sector, for example, there are a number of firms in SSA which were set up by former employees of SOEs who stayed on in the region. There are also numerous Chinese entrepreneurs who view SSA as an opportunity to set up a new business. Although there are Chinese businesses involved in LAC, particularly in the retail trade, the scale of private Chinese firms is not comparable to their involvement in SSA.

12.4 Chinese Interests in Economic Engagement in SSA and LAC As seen in Chapters 6 and 9, China’s economic involvement in both regions can be analyzed in terms of strategic diplomatic, strategic economic, and commercial interests. As emphasized in those chapters, a number of different actors are involved in China’s economic expansion in SSA and LAC, and China’s activities cannot be seen as the result of a single coherent strategy of ‘China Inc’. Nevertheless, there are certain common characteristics in terms of the objectives pursued in the two regions. In both cases, a key diplomatic objective has been to gain recognition of Beijing as the sole legitimate representative of China under the One China Policy. This strategy was actively pursued until 2008, when the election of President Ma in Taiwan led to an informal truce with China until 2016. After establishing diplomatic relations with Malawi and Costa Rica in 2007, there were no further changes in diplomatic recognition until 2016, when the Gambia and Saõ Tome and Principe established relations with the PRC, followed by Panama in 2017 and Burkina Faso, the Dominican Republic and El Salvador in 2018. There is now only one SSA country (Swaziland) which still has diplomatic relations with Taiwan, while nine LAC countries still do so at the time of writing. This means that the Taiwan factor is now a much more significant issue in China’s relations with LAC than with SSA. China has applied the same overall policy of non-interference in the internal affairs of other countries and respect for national sovereignty in both SSA and LAC. Despite claims to the contrary, there is little evidence that it is using its economic presence in the two regions to achieve specific political goals in terms of supporting either authoritarian regimes in SSA or left-wing governments in LAC. On the contrary, China has developed economic links with a range of countries covering a variety of different political regimes. These economic relations have, however, contributed to the growth 324

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of Chinese ‘soft power’ in both regions, although they have also led to tension on occasion. Although political factors dominated Sino-African relations during the Maoist period, after 1979, economic factors came to the fore. In Latin America, since relations had been so limited before 1979, economic factors have always dominated the relationship. The most important strategic economic objective for China in both regions is to secure supplies of raw materials. The most significant of these is oil, and both regions have played a role in reducing China’s dependence on the Middle East for its supply, although SSA is more important in this respect than LAC. Both regions are also strategically important as sources of key minerals such as iron ore and copper. LAC is an important factor in food security in China through the region’s exports of soybeans, which help feed China’s growing livestock population. In contrast, SSA has not been an important source of agricultural products for China; nor, contrary to popular misconceptions, have there been extensive Chinese ‘land grabs’ in Africa (Brautigam, 2015). A second strategic economic objective has been to expand the market for Chinese exports. This has been more important in LAC than in SSA because of the size of the market there. As seen in Chapter 9, China has expended considerable effort to get LAC countries to grant it market economy status, as defined by the World Trade Organization (WTO), although several still have not done so. In SSA China has faced fewer problems in obtaining access to local markets, apart from in South Africa.2 In both SSA and LAC, loans have played an important role in expanding the market for Chinese products. Both regions have also been a testing ground for China’s Go Global policy, encouraging the international expansion of Chinese companies. Chinese construction and engineering firms have been particularly active in SSA. The commercial interests of Chinese firms have also played a significant role in the growth of economic relations with the two regions. Chinese traders have played an important part in the growth of exports to SSA and LAC. The earliest investments made by Chinese firms in both regions occurred in the 1990s, before resource security became a strategic economic issue for the Chinese government. Although later investments have been promoted by the Chinese state, the firms concerned, even when they are SOEs, are partly motivated by commercial considerations, particularly in the ways that their

2 While LAC is a more important market for China than SSA in terms of its size, Chinese exporters have met more resistance there than in SSA. LAC countries, particularly Argentina, Brazil, and Mexico, have been much more active against imports from China than SSA countries. Since China joined the WTO, countries from LAC have opened 183 anti-dumping and safeguard actions against China, compared to only 12 in SSA, all but 1 of which were by South Africa.

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subsidiaries operate. The expansion of construction companies overseas is also partly a result of increased competition and excess capacity in China, which limits their growth at home. Smaller companies are expanding abroad too, particularly in SSA, where there is a perception that there are more opportunities and less competition than in China. The similarities between Chinese interests in SSA and LAC are reflected in the growth and structure of their economic relations with China. First, both regions have seen a rapid expansion of economic relations with China. As Chapters 6 and 9 showed, bilateral trade with China, Chinese FDI and contracts, and loans have grown massively in both regions since the turn of the century. Second, natural resource extraction plays a central role in the economic relationship. Primary products and resource-based manufactures make up the bulk of China’s imports from SSA and LAC. Energy (including oil and gas) and metals (mainly mining) accounted for around four-fifths of Chinese FDI in both SSA and LAC between 2006 and 2016, according to the China Global Investment Tracker database. China has also made numerous loans to countries in both regions, which are repaid through sales of commodities, particularly oil. Third, SSA and LAC imports from China are almost entirely manufactured products, so that although the relationship is often described as South-South cooperation, in practice, the pattern of trade is the traditional North-South or centre-periphery type, with SSA and LAC exporting primary products to China in return for imports of manufactured goods. Finally, exports to China are dominated by a handful of products. In both regions, the dependence of countries on exports of oil, copper, and iron ore to China has increased in recent years.3

12.5 Key Differences between SSA and LAC Although Chinese interests in economic relations with SSA and LAC and the actors involved are broadly similar, there are important economic, political, and institutional differences between the two regions, which affect the impacts of these relations. It is also important to bear in mind that, as emphasized throughout this book, significant differences exist between countries within each region, and broad regional comparisons may not reflect their individual situations.

3 See Casanova et al. (2015) on Latin America and Casanova and García-Herrero (2016) on Africa.

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12.5.1 SSA and LAC’s Insertion in the Global Economy It is impossible to understand the differences between SSA and LAC without considering the position they occupy in the global economy. Since colonial times SSA’s role has been as a source of natural resources, initially of minerals, such as gold, diamonds, copper and iron ore, and later of oil. It has also been a source of tropical agricultural products such as tea, coffee, and cotton. There was relatively little migration to the region during the colonial period except to a few countries in Southern Africa and East Africa. After gaining their independence, governments did attempt to promote diversification of the economic structure through import substituting industrialization (ISI), and they tried to gain greater control over their natural resources, in some cases through the nationalization of foreign companies. Although there was a spurt of economic growth in the 1960s, these measures did not succeed in bringing about structural change or sustainable growth. In the 1980s they were largely abandoned as a result of the Structural Adjustment Policies imposed by the World Bank and the International Monetary Fund. These included reversing the protectionist policies adopted in the 1960s and 1970s to promote local manufacturing and reducing state intervention in the economy, through privatization of SOEs and other liberalization measures. As a result the process of industrialization was halted while manufacturing was still only a small part of overall economic activity and was technologically backward.4 Throughout the period since independence, SSA’s position in the global economy has been marginal. The region has never accounted for more than about 1 per cent of global manufacturing (Rodrik, 2016a, Table 1). Flows of FDI to the region have been largely confined to the extractive industries, and investors have shown little interest in the manufacturing sector and the small, fragmented domestic markets. Other types of financial flows have also been very limited, and, in fact, overall SSA has been a net exporter of capital, with capital flight following liberalization contributing to the outflow (Sundaram et. al., 2011). The main sources of capital inflows on which SSA have relied are foreign aid and migrant remittances. With aid increasingly seen as a form of social safety net, there has been very little capital accumulation in the region. Most of the Latin American economies gained their independence a century and a half earlier than the majority of SSA countries.5 Although they continued to be primarily exporters of natural resources throughout the nineteenth century, a number of countries expanded their exports to include temperate agricultural products, as well as minerals and oil. There were Tregenna (2015) describes this as ‘pre-industrialization de-industrialization’. But not the Caribbean countries, which, like most SSA countries, did not gain independence until the 1960s. 4 5

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significant flows of immigrants, particularly to Brazil and the Southern Cone countries. Some of the countries of the region began to industrialize in the first half of the twentieth century, a process that intensified with the collapse of the markets for their traditional primary product exports during the Great Depression. After World War II, governments used ISI strategies to encourage local manufacturing and attract inward investment. Although initially manufacturing was for the domestic market, from the 1960s some countries began to encourage manufacturers to export. The region also became an important destination for international financial capital especially during the 1970s, when some of the surpluses from the OPEC countries were recycled there. The accumulation of debt led to a financial crisis when Mexico defaulted in 1982. This led to the ‘lost decade’ of the 1980s and the emergence of the Washington Consensus advocating trade liberalization and privatization. Two patterns of accumulation emerged in the region. Countries which had previously been important centres of industrial accumulation, such as Argentina, Brazil, Chile, and Uruguay, underwent what has been characterized as ‘premature deindustrialization’. This involved a transition from a trajectory that relied on the growth of manufacturing to one that was more typical of primary commodity exporters (Palma, 2005) as a result of the adoption of neo-liberal economic policies.6 A different pattern emerged in Mexico and in a number of Central American and Caribbean countries, which became important export platforms assembling labour-intensive products, mainly for the US market.7 In contrast to the first group of economies, these countries saw the share of manufacturing in total employment increase in the 1980s and 1990s. Integration with the US economy was reinforced by the North American Free Trade Agreement and the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), which came into effect in 1994 and 2009, respectively. The historical and contemporary differences between the positions of SSA and LAC in the global economy have led to contrasting economic situations. Income levels are on average significantly higher in LAC than in SSA. LAC countries also tend to be more industrialized and technologically advanced than those in SSA.8 Only South Africa has a level of industrial development 6 Palma (2008) points out that South Africa also displays some of the characteristics of this form of deindustrialization. He contrasts this with the other SSA countries, where deindustrialization in the 1980s and 1990s was associated with a fall in per capita income, which he describes as ‘deindustrialization in reverse’. 7 Palma (2005) refers to this as the ‘maquila industrialization process’. He specifically mentions Mexico, Costa Rica, the Dominican Republic, El Salvador, and Honduras as examples. One could add Guatemala, Nicaragua, and Haiti as further examples. 8 Manufacturing value added per capita was more than twenty-times higher in LAC than in SSA in 2010 (Taylor, 2016, Table 1).

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comparable to those of the more developed Latin American economies. Some Latin American business groups took advantage of pro-market policies to acquire state-owned companies when they were privatized and to expand globally, becoming transnational corporations themselves—the so-called Translatinas. These companies are in a position to compete or collaborate with Chinese companies, both in Latin America and in some African countries, as is happening for example in construction. In SSA, again it is only in South Africa that similar developments have taken place.

12.5.2 Differences in the Regional Political and Institutional Contexts Geopolitically, the two regions are situated rather differently. From the 1960s to the 1980s, China competed for influence in SSA with the US, the USSR, and the former European colonial powers. In LAC, in contrast, the US was the dominant external power, and under the Monroe Doctrine, it sought to exclude any other foreign countries. Despite the existence of some Maoist guerrilla groups in LAC, China was not able to establish a presence there. Indeed it was not until after 1979 that many countries established diplomatic relations with the PRC. Even after becoming a significant economic actor in LAC, the Chinese government has recognized that the region is a US sphere of influence, and it has been restrained in terms of developing very close relations with countries that the US regards as hostile. In SSA, China’s efforts to secure influence have not been constrained by concern about the reaction in the US or in Western Europe in the same way. The two regions also differ significantly in terms of their domestic political and institutional contexts. First, with the peace process in Colombia, there are no longer any major violent political conflicts in LAC. This contrasts with the situation in SSA, where there is a much higher level of political instability and violence. Second, most LAC countries have had democratic governments since the ending of the military dictatorships in the 1980s. Undemocratic authoritarian regimes are much more prevalent in SSA. This is also reflected in a more active civil society in LAC than in most SSA countries. Third, although there are many weaknesses in state capacity in LAC, the regulatory capability of the state tends to be greater and more effective than that in SSA. Finally, although there is extensive corruption in LAC, as illustrated by the Lava Jato (car wash) corruption scandal in Brazil, control of corruption and the rule of law tend to be stronger in the region than in SSA.9 9 These generalizations are supported by the World Bank’s World Governance Indicators for SSA and LAC. On average, these have consistently been lower in SSA than in LAC since they were first recorded in 1996. These are, of course, averages, and there are countries in SSA which perform better than some of those in LAC, as there is considerable variation in both regions.

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Finally, public attitudes towards China also differ substantially between the two regions. There is evidence that China is seen much more favourably in SSA than in LAC (Guo, 2017). In the latter, the average proportion of respondents indicating that they had a ‘very favourable’ or ‘somewhat favourable’ view of China in the nine countries covered by the Pew Global Attitudes survey in 2014 was just over 50 per cent, and only in Venezuela (67 per cent) did this exceed 60 per cent. In contrast, for the nine African countries covered by the same survey in 2015, the average was just over 70 per cent, with only South Africa (52 per cent) scoring less than 60 per cent (Pew Research Center, 2017).10

12.6 Comparing the Impact of China in SSA and in LAC Although the drivers of the growing economic relations between China and SSA and China and LAC are broadly similar, the different contexts in which they play out mean that the economic, social, political, and environmental impacts vary both between regions and amongst individual countries (Table 12.1). Before comparing the impact of relations with China on the two regions, it should be noted that China is economically more significant for SSA than it is for LAC. This is not so marked in terms of trade, where China accounted for one in every six dollars of trade in SSA, compared with one in seven in LAC.11 SSA is significantly more dependent than LAC on China in other respects. In terms of FDI, although accurate statistics on Chinese outward foreign direct investment are hard to come by, it is likely that SSA has received at least as much as LAC. However, LAC is a much more important destination for global FDI, and the total stock of inward investment in LAC is four times that in SSA (UNCTAD, 2017, Annex Table 2). SSA is also more dependent on Chinese infrastructure projects and finance than Latin America is, although, again, there are considerable differences across individual countries.

10 It is possible that these differences reflect a more favourable view of China’s economic impact on SSA countries than on LAC countries. 11 There are considerable differences in dependence on trade with China at the country level in both regions, and individual SSA countries are more dependent on China than LAC countries. In LAC the country with the highest share of trade with China is Chile, where China accounts for a quarter of its total trade. In SSA there are eleven countries where trade with China makes up more than a quarter of the total, and more than a third of Angola, Eritrea, and Sudan’s trade is with China.

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A Comparative Perspective Table 12.1. Summary of China’s Major Impacts on SSA and LAC SSA Economic impacts Benefitting fuel and mineral exporters Growth of commodity exports Limited to a few garment exporting Competition in countries export markets Mainly displacing imports from other Competition countries from imports from China Infrastructure Significant boost Social impacts Employment

Some job creation by Chinese companies but concerns exist over use of Chinese workers

Wages and working conditions

Weak trade unions and enforcement of labour rights by government permitting low wages and poor conditions

Local communities

Little effective opposition to effects of extractive industries and dams

Political impacts ‘One China Accepted by all but one country policy’ Type of regime No evidence that China has promoted corruption or authoritarianism Policy space Increased resources not necessarily used to promote development

Environmental impacts Environmental Weak environmental regulation allowing degradation firms to cause substantial degradation Wind and solar China playing a significant role power

LAC

Benefitting fuel, mineral, and temperate agricultural exporters Particularly affected are Mexico, DRCAFTA, and more industrialized South American countries Significant impacts on some industries in more industrialized countries Limited up to 2015 but may increase in future Job losses in manufacturing as a result of Chinese competition; limited employment creation from exports Stronger trade unions and regulation in the more industrialized countries, providing more protection for workers Conflicts where civil society is mobilized on extractive issues Nine countries still recognize Taiwan No evidence that China has promoted anti-US regimes Increased policy space for progressive governments to pursue alternative economic strategies Mobilization around environmental issues to counter worst aspects Up to now, limited involvement apart from in Chile

12.6.1 Economic Impacts In the short and medium terms, both SSA and LAC benefitted directly from the growth of exports to China and indirectly from the impact of Chinese demand on prices during the commodity boom. These contributed to the acceleration in economic growth that both regions experienced during the first decade of the twenty-first century. Within each region, some countries benefitted much more than others did, with oil and mineral exporters gaining most because these products accounted for a large share of exports to China and were the products which saw the largest price increases. Exporters of temperate agricultural products from Latin America also benefitted from 331

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increased meat consumption and demand for feedstuffs in China, whereas countries that continued to rely on exports of tropical agricultural products did not gain significantly. The worst-affected countries were those that had inserted themselves into the global economy as exporters of labour-intensive manufactures and faced direct competition from Chinese products in their export markets. SSA also benefitted from the major increase in infrastructure built by the Chinese in the region. Since poor infrastructure has been a considerable barrier to economic development in SSA and the region has found it difficult to obtain sufficient funds from other sources for a major infrastructure programme, the role played by China in recent years has—notwithstanding complaints about the quality of some Chinese projects—made an important contribution to boosting growth. In LAC, as seen in Chapter 10, Chinese involvement in infrastructure has been limited, although there are now signs of significant increases in prospect. Although there have been positive economic impacts of Chinese growth, other impacts are less beneficial to both SSA and LAC. Because of its higher level of industrialization, LAC has felt the impacts of Chinese competition more strongly. In SSA much of the increase in imports of manufactured goods from China has been at the expense of imports from other countries. Apart from a few African countries which have developed exports of clothing and textiles, and South Africa, which already had a substantial manufacturing sector before Chinese imports began to grow, the impact on industrial development has been to make it more difficult to get production started, rather than displacing existing producers and causing job losses. In LAC, and particularly in its more industrialized countries including Argentina, Brazil, Colombia, and Mexico, increased Chinese penetration of the domestic market has had a significant effect on local manufacturers and workers, leading to a continuation of the process of deindustrialization that began with the economic liberalization of the 1980s. In countries which had seen manufacturing employment rise as a result of the adoption of the maquila model of industrialization, Chinese competition in export markets led to a reversal of the trend. In the Andean countries (Bolivia, Ecuador, Peru, and Venezuela), there has been intensification of the so-called (neo)-extractivist model of development, in response to increased demand from China. The lower level of technological development in SSA has meant that the region stands to gain more from technology transfer from China than LAC. Local firms in SSA have also been able to benefit from importing cheaper Chinese equipment which is more suitable for the conditions in which they operate. There is less evidence of this happening in LAC. Technology transfer has tended to be at the more sophisticated end of the spectrum, for example, through government collaborations to develop and launch satellites. 332

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In neither region have manufacturers been able to link with global value chains in which Chinese firms are involved and increase exports to China or to use Chinese inputs to export to third countries. Although the relocation of manufacturing to SSA as wages rise in China has been predicted by some, it seems unlikely that this will become significant (see Chapter 7). Similarly, despite hopes expressed in Latin America, there is little sign of China using countries in the region as platforms for export.

12.6.2 Social Impacts One of the most controversial issues regarding the social impacts of China in SSA has been the large number of Chinese workers in the region, and particularly their extensive use in construction projects. Although the extent of the problem is often exaggerated, and there is evidence that firms tend to use more local workers over time, it is more of a problem in SSA than in LAC. There are examples in LAC where significant numbers of Chinese workers have been brought in, but the numbers involved are far lower than in SSA. This is partly because, as seen earlier, the inroads made by Chinese construction companies into LAC are not as great as in SSA, but it also reflects the stricter work-permit controls applied in the larger LAC countries. For example, a request by State Grid to bring in 11,000 Chinese workers was rejected by the Brazilian government. Chinese workers have been more extensively used in LAC in the smaller Caribbean countries (Ellis, 2014, pp.148–9). While in SSA concern over employment has mainly focussed on Chinese workers taking jobs that could potentially be filled by Africans, in particular, unskilled jobs in construction, in LAC, the focus is much more on imported Chinese goods displacing local manufacturing employment. This has led to workers demonstrating against plant closures as a result of Chinese competition in several Latin American countries, including Argentina, Brazil, and Colombia (see Chapter 11). It has also been a factor contributing to the actions taken by several Latin American countries against Chinese imports at the WTO. In both SSA and LAC, concerns have been raised over wages and working conditions at Chinese firms. While there is some evidence of low wages and poor working conditions in Chinese firms in both regions, it is not clear that this is mainly due to Chinese ownership or to contextual factors such as the concentration of investment in extractive industries which tend to have a poor health and safety record, or in low-cost labour-intensive manufacturing industries. The extent to which the local workforce is organized in trade unions and the degree to which the host government enforces labour legislation in different countries are important factors in determining how firms behave. Generally speaking, trade unions are stronger and governments better 333

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able to enforce legislation in LAC than in SSA, although there is considerable variation between countries in both regions. The impacts of Chinese firms on local communities, particularly in the extractive industries, have received more attention in LAC than in SSA. This does not necessarily reflect a substantive difference in the ways that firms operate in the two regions, or in the significance of their impact. It is more likely to be a reflection of the fact that civil society is more active around extractive issues in LAC, leading to more intense conflict, which affects all firms, not just the Chinese.

12.6.3 Political Impacts As pointed out in Chapter 11, discussion of the political impacts of growing economic links with China has taken rather different forms in SSA and LAC. Although there is an underlying concern that China is displacing Western influence in both regions, this is presented in different ways. In SSA the focus is on governance with claims that China is undermining democracy by supporting authoritarian rulers, and has promoted corruption, undermined the rule of law and contributed to political instability and conflict. In LAC, on the other hand, the concerns are more directly geopolitical, with the focus more on the implications of China for US hegemony in the region and whether or not China is using its economic power to support anti-US regimes in the region. These differences partly reflect the different contexts, with LAC having much more firmly embedded democratic systems and less political instability and conflict compared with SSA. Despite the claims that are often made in the media about the political impacts of China’s economic power, the evidence is not convincing. In both SSA and LAC, China has established economic links with regimes of different political stripes. It is also by no means clear that these economic relations give China a great deal of political influence. Some African countries, such as Angola and Ethiopia, have close links with China, but even these have substantial agency in terms of how the relationship develops. In Latin America, the countries which are the most financially dependent on China have still not been overly influenced by Chinese policy. On the positive side, the political significance of the rise of China for both regions is that it gives them a bit more room to manoeuvre with regard to the developed world. China presents an alternative to the neo-liberal view of the policies that should be pursued by developing country governments, and this has created more ‘policy space’ both by showing that more statist approaches can lead to high rates of growth and by loosening the constraints imposed on countries by the international financial institutions and international capital markets. 334

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While the growing role of China has created more policy space for governments in both regions,12 the use made of this policy space depends on local political structures and the nature of the government in power. There are examples in LAC, such as Brazil and Venezuela, where governments have been able to introduce measures to redistribute income and use state resources to reduce poverty. In SSA, however, some of the most-often-quoted examples of increased policy space, such as Angola and the Democratic Republic of the Congo, have led to policies that enrich the political elite rather than transforming the local economy.

12.6.4 Environmental Impacts There are rather similar concerns regarding the environmental impacts of China’s economic links in both SSA and LAC. This is not surprising, given that Chinese involvement concentrates on extractive industries which inevitably tend to have a considerable environmental impact, and that the Chinese government prioritized growth at home and gave little attention to environmental impacts. The Chinese market for most of the products exported from SSA and LAC is driven by price, and it pays scant attention to the conditions under which products are produced. There is little demand for internationally recognized certified products such as the Forest Stewardship Council for timber or the Round Table on Responsible Soy Association (RTRS) for soybeans. It is not surprising then that Chinese firms lag behind their international competitors in terms of their adoption of environmental standards or that the Chinese policy banks do not practice the same level of environmental scrutiny of the projects that they fund as other lenders such as the World Bank or the Inter-American Development Bank. Since Chinese firms abroad tend to follow local environmental standards rather than the higher international ones, and since they have little incentive to raise their standards above those that they are required to meet, it is not surprising that the factors which tend to lead to differences in performance are mainly to do with local standards and the degree to which they are enforced. In so far as Chinese firms adopt higher standards in LAC than in SSA, this is likely to be because of higher capabilities on the part of host states and a higher level of civil society mobilization around environmental issues. On the positive side, Chinese firms have played a role in the development of solar and wind power, where they are now international leaders. Chinese

12

Recently some authors have questioned the extent to which China’s involvement in Africa has eroded the bargaining power of traditional aid donors and increased policy space in the region. See Kragelund (2015) and Swedlund (2017).

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involvement in the sector has been more significant in SSA than in LAC up to now.

12.7 Conclusion Although the objectives of Chinese actors in SSA and LAC are very similar, the contexts in which they operate give rise to different outcomes in some respects. These reflect the different ways in which the two regions are inserted in the global economy, specific geopolitical circumstances, and internal political and institutional structures in SSA and LAC, as well as differences in their historical relationship with China. In drawing out the similarities and contrasts between the two regions, it is important not to lose sight of the heterogeneity that exists between the countries within each region. South Africa, for example, has more in common with many Latin American countries in terms of its relations with China and the impact that these have had than with the pattern described for SSA, whereas some of the smaller, poorer Central American and Caribbean countries have some features that resemble the SSA pattern more closely than that found in South America.

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13 Conclusion

13.1 Introduction China’s rapid economic growth and increased openness has been one of the most significant features of globalization in recent years. Because of China’s sheer size in terms of its population and output, its economic transformation since the late 1970s has had a major impact both on the world economy as a whole and on particular regions and countries. This study has focussed specifically on the implications of Chinese economic growth for two regions, SubSaharan Africa (SSA) and Latin America and the Caribbean (LAC), where it has had a significant impact both directly and indirectly. Part I of the book focussed on the major economic changes that have taken place in China since the beginning of its economic reform in 1979, and China’s growing role in the global economy. These changes involved a major shift away from a centrally planned economy at home, and a much greater degree of integration with the global economy (Chapter 1). This led to the emergence of China as a major centre of global industrial production and driver of world commodity markets (Chapters 2 and 3). Although, initially, Chinese integration with the global economy was largely through trade and inward investment, since the start of the millennium, it has also seen the international expansion of Chinese firms as a result of China’s Go Global policy and its increased significance in international financial markets (Chapters 4 and 5). The emergence of China as a global economic powerhouse has given rise to controversy in both SSA and LAC. A major purpose of this book has been to set out the scale and nature of China’s impact on the two regions, to provide a more accurate picture of a rapidly changing reality and to dispel some of the misleading or exaggerated claims that have been made. Part II of the book discussed the case of SSA, the developing region where China’s involvement has attracted most attention in Europe. Chapter 6 documented the growth of Chinese economic involvement in SSA and the

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drivers behind it. This was followed by an analysis of the direct and indirect economic impacts, focussing particularly on the effects on commodity exports, China’s role in infrastructure development, and the effects on African manufacturing (Chapter 7). The discussion was then broadened to consider some of the claims that have been made regarding the social, political, and environmental impacts of China’s increased presence in the region (Chapter 8). Part III provided a parallel analysis of Chinese involvement in LAC, which has been a particular focus of attention in the US. Chapter 9 analyzed China’s growing economic presence in the region and the factors that lie behind it. Chapter 10 looked at the economic impacts, especially the debates that have arisen in the region concerning the primarization of exports and deindustrialization. Chapter 11 turned to the broader impacts of China’s growing economic involvement in terms of social, political, and environmental outcomes. Chapter 12 provided a comparison of the relationship between China and SSA and China and LAC, which summarized the main findings regarding China’s impact on the two regions. By way of conclusion, this chapter focusses on their likely future relations with China. This involves addressing two key issues. The first is what is likely to happen in the Chinese economy in future, and the implications of these changes for SSA and LAC countries. The second is the identification of the key problems that have arisen in relations between China and LAC and China and SSA, and ways in which these can be addressed in the future.

13.2 China Looking Forward The focus of this book has been on the implications for SSA and LAC of China’s growth since the start of the twenty-first century. This was a period of rapid growth of the Chinese economy and increased globalization. By the middle of the second decade of the century, the continuation of both has been called into question, and it cannot be assumed that the trends analyzed here will continue in the future. China’s own growth has slowed to around 6 or 7 per cent a year. At the same time, the global financial crisis has raised questions about the benefits of unfettered globalization, while political changes in the US and the UK, two countries which have been in the forefront of globalization in the past, have created doubt about their commitment to further globalization in the future. Paradoxically, it was President Xi Jinping of China who was the most vocal advocate of globalization at the World Economic Forum in Davos in 2017. 338

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Conclusion

13.2.1 The ‘New Normal’ in China The changes in the Chinese economy which characterize the ‘new normal’ have significant implications for SSA and LAC. Three aspects are particularly important in terms of the impact on developing countries: China’s slowdown in economic growth, the rebalancing of the economy leading to structural change, and technological upgrading as China moves up the value chain (Schellekens, 2013). Economic growth in China has slowed from over 10 per cent per annum to between 6 and 8 per cent since 2012, and although China’s thirteenth Five Year Plan (2016–20) aims for growth of 6.5 per cent, a further fall is possible. Despite the slowdown in growth, China continues to be the most dynamic centre of global accumulation. The Chinese economy now accounts for a much bigger share of the global economy than it did at the start of the century, and even at lower levels of growth, it continues to require increased imports of natural resources and agricultural products. Chinese imports of commodities such as petroleum, iron ore, copper, and soybeans have continued to grow in volume, and it is only because of falling prices that the value of exports from SSA and LAC has dropped. If there were to be a serious economic crisis in China, as some claim is likely to happen because of growing indebtedness and a property bubble, this would have major repercussions for both SSA and LAC, which are now dependent on the health of the Chinese economy, both directly as a result of the growth of trade and capital flows, and indirectly through China’s impact on commodity prices. The adjustments to the ‘new normal’ have involved a greater emphasis on domestic consumption in China and less reliance on extremely high levels of investment and exports. This, together with more emphasis on the quality of economic growth in terms, for example, of the environment, rather than growth at all costs, is changing the conditions that SSA and LAC face. The income elasticity of Chinese demand for minerals and metals is likely to decline as the structure of the economy moves away from heavy industry towards light consumer goods and services. This will reduce the growth in demand for some of the key commodities that China imports from SSA and LAC. A move towards renewable energy could also reduce its demand for oil and gas, although in the immediate future this is likely to be offset by growth in the number of vehicles on the road raising petrol consumption.1 On the

1

In the longer term, China’s efforts to promote electric vehicles may sever the link between the number of vehicles in circulation and petroleum imports. The government has set a target for 40 per cent of cars to be electric by 2030.

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other hand, higher consumption levels in China will increase the demand for meat, which could increase meat imports and will certainly expand imports of feedstuffs. There may also be opportunities for exports of more sophisticated food and beverages such as wine and luxury fruit. The third aspect of China’s ‘new normal’ that is likely to affect SSA and LAC is technological upgrading, as Chinese producers move up the value chain. This is the result partly of deliberate government policy and partly of rising wages in coastal areas. This has meant that China is becoming competitive in an ever-wider range of more technologically sophisticated products. It is no longer the case that Chinese exports are predominantly low-technology, labour-intensive products so that manufacturers of high-technology products elsewhere are unaffected by Chinese competition. As seen earlier, in recent years China has exported products of an increasingly sophisticated nature, which, particularly in the more industrialized LAC countries, has led to increased competition for local producers and exporters, a trend that is likely to continue in future. Some optimists believe that this movement up the value chain will create new opportunities for SSA and LAC to enter into more labour-intensive activities which China is vacating. It is true that rising wages in the coastal areas of China are leading to shifting patterns of accumulation. Up to now these shifts have mainly been to inland areas and neighbouring countries such as Vietnam and Cambodia. Despite the claims that have been made regarding ‘flying geese’ in Africa, as seen in Chapter 7, there is no real evidence that such a shift in global manufacturing capacity is under way. In LAC, where wages are now similar to or lower than in the East of China, there may be some reversal of the trend of losing market shares to China in the North American market. However, rapid productivity growth in China and its well-established supply networks and efficient logistics are likely to keep the bulk of production there. Just as China’s accession to the World Trade Organization and the commodity boom affected different countries in the Global South differently, the effects of the ‘new normal’ are also likely to be heterogeneous. In SSA, mineral exporters and countries which are more heavily reliant on exports to China are likely to be most affected by a growth slowdown in China, while agricultural exporters and those with more diversified exports are likely to fare better (Igbinoba and Hoaeb, 2016). Similarly, in LAC there are likely to be considerable differences between groups of countries in terms of the impact of a slowdown in growth and a reduction in China’s rate of investment. Mineral exporters such as Chile and Peru are the most vulnerable, followed by fuel exporters. Exporters of manufactures such as Mexico, the Dominican Republic, and Costa Rica are least affected (OECD, 2016, Ch. 5). 340

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13.2.2 The One Belt One Road Initiative In September 2013, during a visit to Kazakhstan, President Xi Jinping proposed the development of a new Silk Road Economic Belt linking China, Central Asia, Southeast Asia, South Asia, Russia, and Europe by land. Later in the same year, in Indonesia, he announced a plan for a twenty-first-Century Maritime Silk Road, a sea route linking China with Southeast Asia, South Asia, the South Pacific, the Middle East, and East Africa. In 2014 these separate initiatives were brought together and began to be referred to as the ‘One Belt, One Road’ (OBOR) initiative, which became a centrepiece of Chinese foreign policy. In 2017, at its nineteenth National Congress, the Communist Party of China amended its constitution to include a pledge to pursue the initiative, thus cementing its significance. The OBOR involves ambitious plans to build new infrastructure such as railways and roads, port facilities, and energy pipelines. Potentially more than sixty countries are involved. Substantial amounts of funding are being made available to finance OBOR projects: $100 billion is being provided by the Asian Infrastructure Investment Bank, and $40 billion by the Silk Road Fund (Yu, 2017, p.2). It has also been reported that the China Development Bank and Exim Bank have between them provided $110 billion in loans for projects in OBOR countries since 2013, and that the four Chinese commercial banks have provided a further $150 billion over the same period (Stevens, 2017, p.3). The OBOR is linked to China’s change in economic strategy towards more emphasis on the growth of consumption and away from such heavy reliance on public investment in infrastructure. With excess capacity growing in a number of industries within China, the large-scale infrastructure projects planned under the OBOR will provide new markets for Chinese producers of steel, cement, aluminium, railway equipment, and construction companies. As far as Chinese companies are concerned, it is also an extension of the Go Global strategy, providing them with opportunities to further their internationalization. The OBOR would also help to rebalance the Chinese economy away from the coastal areas, where much of the development of the previous three decades has been concentrated, and boost the western part of the country, which has lagged behind (Ferdinand, 2016; Yu, 2017). OBOR could also provide China with better and more secure access to supplies of oil and gas, although this appears to be becoming less significant than in the past as Chinese economic growth slows down and becomes less reliant on heavy industry (Downs, quoted in Swaine, 2015). There is a danger that the focus on the OBOR initiative will marginalize SSA and LAC as far as China’s international economic links are concerned. 341

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The only SSA countries which are specifically included in the OBOR are Ethiopia, Kenya, and Djibouti, which are on the Maritime Silk Road.2 In 2015 the former World Bank Chief Economist Justin Lin (2015) called for the OBOR initiative to be extended to ‘One Belt, One Road, One Continent’ so that Africa was also included, but this has not happened. The only African leaders to take part in the first OBOR Summit in Beijing in 2017 were the Kenyan President and the Ethiopian Prime Minister. LAC is even more marginal to the OBOR initiative. Although some Chinese commentators have referred to a new Silk Road across the Pacific, reviving the idea of the Silk Road that linked China with Mexico in the sixteenth century, it has not been mentioned in official statements (BeauchampMustafaga, 2015). It remains to be seen how far this will lead to SSA and LAC countries becoming relatively less economically important to China. This will depend in part on how successful the OBOR initiative turns out to be, and how much of China’s outward foreign direct investment (OFDI) and lending is directed towards supporting it. In 2015, there was a significant increase in Chinese investment in the OBOR countries, which fell back in 2016, so the trend is unclear. As Stevens (2017, p.8), writing for the Standard Bank, comments: OBOR is likely to divert attention of Chinese corporates away from African markets towards a region that has been given priority over all others. Similarly, policy banks and commercial banks are likely to focus on OBOR projects.

Since LAC is still more distant from the OBOR routes, this is even more likely to be the case in the region. On the other hand, although the OBOR may marginalize SSA and LAC in terms of their bilateral relations with China, there may be positive indirect impacts if it helps maintain growth in China and the overall level of global economic activity. The impact that this could have on commodity prices might offset any negative effects from the diversion of OFDI and Chinese bank loans.

13.3 Problems in Sino-African and Sino-Latin American Economic Relations As long as China avoids a major economic crisis and continues to grow and expand its share of global economic activity, its impact on SSA and LAC will continue to increase despite the changes in its domestic and international economic strategies discussed in the previous section. Does this mean that the 2

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Egypt in North Africa is also included since the Road passes through the Suez Canal.

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problems facing the two regions that have been identified in this book will intensify in future or are there indications that they can be resolved? Some of the economic asymmetries that have been discussed are an inevitable consequence of the size of the Chinese economy. It will remain the case that China is more important economically to SSA and LAC than the countries of the two regions are to China. This asymmetry is also the case when taking each region as a whole, so that even if African or Latin American countries were to present a common regional stance vis-a-vis China they would still be in an unequal position. Despite the existence of regional fora for discussions with China (the Forum on China–Africa Cooperation (FOCAC), and the Community of Latin American and Caribbean States (CELAC)-China Forum), regional cooperation is very limited and China’s relations with the countries of both regions remain primarily bilateral. Other economic asymmetries could potentially be changed either by government policies or by market-driven changes in economic relations. These include the centre-periphery characteristics of trade with China, the concentration of exports to China in a very small number of products, and the negative impacts on industrialization. These problems have gained increasing recognition on the Chinese side as well as amongst critics in SSA, LAC, and the West. The first part of the section of China’s second policy paper on Africa that deals with economic and trade cooperation is titled ‘Helping boost Africa’s industrialization’ (PRC, 2015, Part III.3(1)). Particular reference is made to Chinese support for the development of special economic zones, industrial parks, and science and technology parks, and the transfer of industries and technologies.3 This is in sharp contrast to the first policy paper on Africa in 2006, which makes no mention of supporting industrialization in the region (PRC, 2006). The 2015 policy paper also states that China will encourage the diversification of African exports to Chinese markets and continue granting duty-free entry for most products from the least-developed countries with which it has diplomatic relations. It also envisages support for African countries to ‘increase the added value of their primary products, create more jobs, [and] generate more foreign-exchange income’ (PRC, 2015). Although support for industrialization does not receive such prominence in the 2016 policy paper on LAC, investment in specific industries, including autos, new energy equipment, motorcycles, and chemicals, and upgrading the level of industrialization in the region are specifically mentioned (PRC, 2016); the paper also mentions the downstream expansion of cooperation in energy and resources to improve the amount of value added locally. Chinese

3

This is also mentioned in the section on infrastructure development, Part III.3 (3) of PRC (2015).

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commentators have also emphasized the need to diversify LAC’s exports to China and to expand Chinese investment in manufacturing to support the upgrading of the region’s industrial structure (Su, 2017: Zhang, 2017) Whether or not such statements are reflected in major changes on the ground remains to be seen. As was argued in Chapter 7, there are grounds for scepticism concerning the expectation that there will be a significant transfer of industrial capacity from China to SSA. It is also the case that duty-free access to the Chinese market has not led to any notable diversification in SSA exports. In LAC, too, countries which have signed free trade agreements with China have not realized the increased diversification of exports that they had hoped for. There may be some increase in raw-material processing in SSA or LAC, particularly where this involves highly polluting activities which are subject to increased environmental regulation in China, although the excess capacity in China in industries such as steel and aluminium will tend to discourage investment in downstream production in the countries that supply the raw materials. Overall, despite the good intentions expressed in official Chinese statements, the nature of economic relations between China and SSA and China and LAC are unlikely to change radically in the near future. They reflect the way in which China and the two regions are integrated into the global economy. They may change at the margins as incomes rise in China and as demand, particularly for agricultural products, increases, but exports to China are likely to remain largely of primary products. Chinese foreign direct investment (FDI) may diversify somewhat away from the current concentration on natural resources, but this is likely to be mainly an extension of China’s export strategy where it becomes profitable to set up local assembly operations as the market expands. There may be grounds for more optimism in the case of some of the negative social and environmental impacts associated with the growing presence of China: China itself is changing, and environmental concerns particularly are becoming more prominent. While initially, at least, this is leading to changes at home, in the future, such concerns may extend to greater awareness of the environmental impacts of production abroad and of the impacts of FDI by Chinese firms. This could lead to more demand for environmental certification for products sold in China. Also, as Chinese firms become more globalized, their practices in terms of corporate social and environmental responsibility will come under more scrutiny, and this could lead to a narrowing of the gap between them and the standards adopted by companies from the North. China is also likely to be an important player in the development of renewable energy in both SSA and LAC in the future, thus contributing to the reduction of global carbon emissions.

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Perhaps the most significant change for SSA and LAC that is likely to come about in the future is due to China’s rise is in terms of global governance. China’s presentation of itself as a developing country has meant that it has articulated demands for greater representation by developing countries in global institutions such as the International Monetary Fund and the United Nations. This could lead to changes in the global rules of the game that allow more policy space for developing countries to pursue alternative economic strategies which are more developmentally oriented than those of the recent past.

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Statistical Databases

AidData. AidData’s Chinese Official Finance to Africa Dataset, 2000–12, Version 1.1.1. Available from: http://aiddata.org/data/aiddatas-chinese-official-finance-to-africadataset-version-1-1-1 CARI Loans Database. Johns Hopkins University, School of Advanced International Studies, China Africa Research Initiative, Chinese Loans to Africa. Available from: http://www.sais-cari.org/data-chinese-loans-and-aid-to-africa/ China Global Investment Tracker. American Enterprise Institute and the Heritage Foundation, China Global Investment Tracker. Available from: http://www.aei. org/china-global-investment-tracker/ China-Latin America Finance Database. Inter-American Dialogue, China-Latin America Finance Database. Available from: https://www.thedialogue.org/map_list/ FAOStat. Food and Agriculture Organization of the United Nations, Food and Agriculture Data. Available from: http://www.fao.org/faostat/en/#data GEM. World Bank, Global Economic Monitor Data Bank. Available from: http:// databank.worldbank.org/data/reports.aspx?source=global-economic-monitor-(gem)& Type=TABLE&preview=on International Energy Agency. World Energy Statistics database. Available from: https://www.iea.org/statistics/ ITC. International Trade Centre. International Trade Statistics 2001-2017. Available from: http://www.intracen.org/itc/market-info-tools/trade-statistics/ NBS. National Bureau of Statistics of China, National Data. Available from: http://data. stats.gov.cn/english/ OECD STAN. Organization for Economic Cooperation and Development, Database for Structural Analysis (ISIC Rev.4). Available from: https://stats.oecd.org/Index.aspx? DataSetCode=STANI4 UNCTADStat. United Nations Conference on Trade and Development Data Center. Available from: http://unctadstat.unctad.org/wds/ReportFolders/reportFolders.aspx? sCS_ChosenLang=en UNIDO. United Nations Industrial Development Organization, Statistics Data Portal. Available from: https://stat.unido.org/ WITS. World Bank, World Integrated Trade Solution. Available from https://wits.wor ldbank.org/

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Statistical Databases World Development Indicators. World Bank, World Development Indicators Data Bank. Available from: http://databank.worldbank.org/data/reports.aspx?source=worlddevelopment-indicators WTO. World Trade Organization, Statistics Database. Available from: http://stat.wto. org/Home/WSDBHome.aspx?Language=

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