Silk Road or Dragon Path? The Impact of Chinese Investment in Zambia

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Introduction

There is no doubt that China is investing big in Africa. Top of China’s investment list is construction – the sector accounts for three-quarters of recent private Chinese investment on the continent. The bulk of China’s outward Foreign Direct Investment (FDI) is spent on service provision, which increased by an annual average of 150 percent from USD40 million in 1994 to USD821 million in 2007 alone. And thanks to privatisation, liberal economic policies, government efforts and increased investment in the mining sector – in turn due to recovery  on commodity prices driven by demand from China and India – China’s investment in Africa only looks set to grow.

That this money is gladly received for development projects has been in Zambia, as in much of Africa, somewhat controversial. For the most part this is due to claims that human and  environmental concerns are overlooked in the implementation of Chinese funded projects – as recently outlined in a Human Rights Watch report entitled “‘You’ll Be Fired If You Refuse’: Labour Abuses in Zambia’s Chinese State-owned Copper Mines.” The report pointed to serious safety blunders, with some workers complaining of handling acid and inhaling noxious fumes and dust for days on end. They were threatened with dismissal if they refused to work in dangerous conditions, the report said.

In Zambia, since coming to power in September 2011, the Patriotic Front government has made its view clear on Chinese investment: It is welcomed, as long as the law is upheld. When he was elected, President Michael Sata held a lunch for Chinese business people in Zambia. He said that previous governments had not done enough to make clear what obligations Chinese investors should meet. “When you give the Chinese a project without specifications, don’t blame the Chinese,” he reportedly said, “Blame yourself.”

At that same lunch, China’s ambassador to Zambia, Zhou Yuxiao, promised that China could give Zambia loans and grants for farming, health, education and other projects. He added that total trade between the two countries was USD2.8 billion in 2010 and that China’s total trade investment in Zambia now stands at around USD5 billion. Chinese FDI to Zambia exceeded USD1 billion as of December 2010, creating jobs and spurring development.

Facts and Figures

Investment from the Chinese has penetrated almost every sector of the economy: textiles; infrastructure; construction; manufacturing; agriculture, and of course mining – both extractive and processing. By far the largest investments have been in the mining sector. It is important to note that the mining sector is still dominated by British and American transnational companies rather than Chinese companies. So why does China receive so much attention in its investment interests?

The model of Chinese investment

Historically, Western FDI came to Zambia from privately owned corporations focused on profit maximization. At first, Chinese investment in Zambia was carried out largely by state-owned enterprises or joint ventures. From 1990 onwards, wholly owned enterprises established via mergers and acquisitions, directed at development markets in particular, replaced jointly owned ones.

In Zambia, Chinese investments are primarily resource seeking and to a small extent market seeking – and once businesses are fully operational, firms may use Zambia’s central location to sell to surrounding countries. For example, the China Henan International Cooperation GroupCo Ltd, a market-oriented road construction firm, gained a dominant role in the road construction market in Zambia by winning all major road construction contracts between 2004 and 2005 through low bid prices.

Chinese owned firms have long-term rather than short-term profit driven motives – as indicated by their acquisition of Zambia’s Chambishi and Luanshya mines in the wake of the financial crisis. And China’s FDI is traditionally also driven by broader objectives – like better access to minerals or closer collaboration with private and public enterprises and government bodies.

Increasingly though, Chinese FDI is marked with aid, mostly in infrastructure development. In Zambia, while projects such as construction of the National Malaria Centre and The Central Statistical Offices were aid-funded, these were constructed using Chinese companies, supported by Chinese state institutions.

The positives and negatives

It is true that China’s demand for raw materials may undo Africa’s efforts at economic diversification. African countries could be left devoid of raw materials, facing limited opportunities for sustained development. The increased flow of cheap goods and services also presents another challenge arising from the influx of Chinese investment interest.

As well as the TAZARA railway project, the other major infrastructure project built in the late 1970s by the Chinese government was the Mulungushi textile factory. Also facilitated by an interest-free loan from the Chinese Government, it ran well for a while. Then, years of limited investment in machinery took its toll, leading to constant breakdowns.

In a bid to help the Zambian Government keep the textile factory afloat, the Chinese offered to run it as a joint facility. The Qingdao Textile Corporation then acquired a 66 per cent stake in the firm. There was a temporary respite and locally employed small scale farmers revived their cotton farming activities. But the company soon ran into trouble again – this time it could not compete with imported fabric from low cost production countries – such as China.

Unable to cover its operating costs, the factory was closed in 2007. Most cotton was from then on exported in raw form, further forcing Zambia to rely on primary products. The negative effects of the Chinese imports further enhanced resentment of Chinese firms. There is a danger that resource seeking investment could perpetuate the raw material dependency of the country.

Chinese investment has undoubtedly encouraged financial inflows in Zambia, improved capacity utilization, increased outputs and generated employment opportunities. The growth of copper production has been impressive, and has in turn led to corresponding improvements in exports and earnings. To the extent that such developments facilitate attainment of the broader development agenda, the investments are invaluable.

Historically, Zambia and China have enjoyed good relations. For instance, China lent assistance in building the Zambia-Tanzania railway to by-pass trade routes opposed to black majority rule when neighbouring countries were under white minority rule. Other donors refused. Zambia in turn co-sponsored the United National General Assembly resolution in 1971 to restore China’s seat on the Security Council.

Today, the Zambia-China relationship has come to focus more on business and trade than ideology. In 2006, the Forum on China-Africa Cooperation published “China’s African policy,” which includes the Chinese government’s support for “competent Chinese enterprises to cooperate with African nations in various ways on… the principle of mutual benefit and common development, to develop and exploit rationally their resources, with a view to helping African countries to translate their advantages in resources to competitive strength, and realize sustainable development.”

It might be financially beneficial in the short term. The bottom line is, is it sustainable in the long term?

This information was provided by Musa Dudhia & Co.  The contents of this article are intended to be of general use only and should not be relied upon without seeking specific advice on any matter.  For more information on this article please contact the author listed below or info@musadudhia.co.zm

Arshad Dudhia                                                    

aadudhia@musadudhia.co.zm

+260 211 253822

Founded in 1958, Musa Dudhia & Co. is one of the most established law firms in Zambia and thrives on the diversity of its partners’ expertise. Musa Dudhia & Co. is consistently ranked as the leading law firm in Zambia by international legal directories such as Chambers Global and PLC Which Lawyer. For more information on Musa Dudhia & Co. visit www.africalegalnetwork.com.