How good China could be for Africa?

These past few years have seen the Africa-China connection become an important element in Africa's economic growth (especially Sub-Saharan Africa). Aided by China's own rapid development and growing strategic interests in commodity markets, Africa has not only become an important trade partner for China, but also a key beneficiary of Chinese capital investment abroad.
Trade flows between Africa and China have grown rapidly and are broadly balanced, essentially involving an exchange of African raw materials for Chinese manufactured goods. While a few commodity-rich African economies run large trade surpluses with China (notably Angola and Zambia) the majority run trade deficits. China is Africa's second largest source of imports (behind Europe) and third largest export market (behind Europe and the US).

Economic ties between China and Africa are also characterised by China's increased role as a lender and investor to the region. The absence of "political strings" imposed by Western governments, such as governance and environmental conditions, combined with competitive terms make Chinese loans an attractive and cheap source of credit for African countries.

Significantly, Chinese loans outweigh levels of Chinese Foreign Direct Investment (FDI) in Sub-Saharan Africa (SSA), with the latter remaining far below those of traditional Western sources. The accumulated Chinese FDI stock in Sub-Saharan Africa up to 2010 is estimated at $11bn, equivalent to just 1.1% of SSA GDP.

Chinese lending and investment in Africa is highly diverse. Mining continues to attract most FDI to the region; banks lending targets infrastructure development through its trademark "package loans". The Chinese Development Bank aims to promote local market and business development in various sectors, including manufacturing, services and commodities.

China's financial involvement is not always fully transparent and debt management capacity of recipient countries is often weak. There is therefore a risk that some African countries (as we already know) could borrow too much on non-concessional terms, leading to an unsustainable debt burden. Meanwhile, mining investment usually has a low labour intensity, while China traditionally provides much of the labour and materials for the infrastructure projects it finances. As a result, improving local employment participation levels and capturing Chinese industrial knowledge remain long term challenges for Africa's involvement with China.

Chinese trade and financial links are, unfortunately, not without potential downside and do not offer a quick fix to improved living standards for Africa. However, they are providing an important contribution to filling Africa's substantial infrastructure gap and if the resources are used effectively could help set Africa on a faster development trajectory over time.

Patrice de Boeck is director for Business_Network Consulting | A consultancy focused on providing fresh and innovative approach to investment and development in Central Africa, through the provision of services covering Finance, Marketing, Strategy and Sports Sponsorship.