Thursday, March 26, 2009

China scales back Africa investments, Africa becoming weary of Chinese loans backed by mineral wealth

Lydia Polgreen of the New York Times wrote a very informative piece yesterday about how the global economic crisis is affecting China's appetite for risk taking in Africa.

One year ago commodities where at record setting prices and China was growing in the double digits. It was desperate to secure resource wealth to fuel its growing economy and Africa seemed like a logical place to venture.

Unlike their western counterparts, Chinese companies did not think twice about entering some deals that would otherwise make their American, Canadian or European competitors cringe.

Lydia Polgreen writes that once upon a time, “French colonists once called Guinea a geological scandal, so rich are its deposits of valuable minerals. Despite years of mining and billions in profits, Guinea remains one of the poorest and least developed countries in Africa.”

This is of course, the exact reason China looked to places like Africa and South America to feed their commodity demand.

Guinean and Chinese workers at the construction site, working on
building a $50 million, 50,000-seat stadium in Conakry, Guinea

Despite the global slowdown, China still continues to explore potential investments but this time around China is being a bit more cautious. Philippe de Pontet, an analysis from Eurasia Group explains “We have seen in the recent past Chinese companies wade into countries nobody else would, that may be changing.”

For instance, in Guinea Chinese ambassador Huo Zhengde said in an interview that the “political situation is not very stable and the international markets are not favorable.” Referring to the fact a junta had recently seized power after the death of the country's longtime president in December.

In response, China backed away from a promised investment of $1 billion for the construction of a hydroelectric dam in Guinea.

Instead of investing in projects that will empower African countries with the infrastructure to put in place a more solid foundation for long-term growth, China is backing away and looking for bargains in the commodity sector in more stable places such as Zambia and Liberia.

Polgreen reports “trade between Africa and China grew to more than $100 billion by 2008, from less than $10 million in the 1980s. African leaders spoke openly about China’s offer of an alternative to the edicts of Western-dominated institutions like the International Monetary Fund and the World Bank.”

In the wake of the current global economic crisis change will come in many different shapes and sizes, I just wonder if the hope that China would emerge as a new epicenter of economic power and foreign direct investment for emerging markets is legitimate considering the current situation.

Click here to read the NYT piece