China’s Reaction to Political Risk in Africa 

Yaping Wang, 17 March 2011 

Since China first put forward its “going out” strategy in the 80s, its foreign direct investment in Africa has risen from nearly zero to 9.33 billion US dollars by the end of 2009. (“China-Africa economic and trade cooperation” white paper, December 2010). During this expansion process, several instances of political and social unrest on the African continent have caused losses to the Chinese investments; Libya is the latest example. 

Since the revolt in Libya began on February 15, 2011, Chinese companies suspended their operations one after another; the Chinese government launched its largest-ever overseas evacuation operation. According to the announcement made by the Information Office of China’s Ministry of Commerce on February 24, “As of the 23rd, 27 Chinese construction sites and camps were attacked and looted.”

This month’s Carnegie China Insight interviewed three experts on the political risks of China investing in Africa. The three experts are Dr. Deborah Brautigam, Professor at the American University, author of The Dragon's Gift: The Real Story of China in Africa; Dr. Harry G. Broadman, Senior Vice President of Albright Stonebridge Group and Chief Economist of Albright Capital Management LLC, and author of Africa’s Silk Road: China and India’s New Economic Frontier; and Dr. David H. Shinn, Adjunct Professor at the George Washington University and former ambassador to Ethiopia and Burkina Faso.

Losses in terms of “quantity” and “quality” 

On the “quantity” of the losses, Professor Shinn estimated, “While it is impossible to put a price tag on Chinese losses in Libya, they have been significant by Libyan standards but insignificant by Chinese standards.” Dr. Broadman mentioned, “Actually, the Chinese government is currently in the process of both assisting the enterprises to estimate their losses and establishing a procedure for filing compensation claims.” As for the “quality” of the losses, the sources of losses include but are not limited to, disrupted employment of the workers, abandonment and looting of the construction sites, disruption of operations, disruption of trade between China and Libya and evacuation costs of the Chinese expatriates. 

Before the uprising, there were 75 Chinese enterprises with investments in Libya, operating 50 joint projects and employing more than 36,000 workers. (Ministry of Commerce website) “While the amount of Chinese foreign direct investment abroad in any country is rarely known with any precision, it is known that in Libya, where in the past several years Chinese FDI commitments have totaled on the order of $9 -$13 billion, the vast majority of this investment was not in the oil sector per se, but in construction.”(Broadman) “By one account, China was involved in construction projects valued at $14 billion.” (Shinn) “China does not have much investment in Libya compared with Western countries.” (Bräutigam) As the unrest spread, Chinese companies suspended their operations and many construction sites were looted and abandoned. Professor Bräutigam pointed out, the final account of “losses for the Chinese will also depend on their insurance and on the force majeure clauses in these construction contracts.”

In addition, trade was disrupted during the riots (bilateral trade between China and Libya amounted to $6.6 billion in 2010). As for evacuation costs, as of March 4, China has evacuated 35,860 Chinese citizens. Chinese Foreign Ministry announced, during the period of February 22-March 5, the Chinese government has sent 91 charter flights, 12 military vehicles, 5 ships, and 1 frigate; they also rent 35 foreign charter, 11 foreign cruise and more than 100 buses.

Damage Control 

While the damage has been done, “saying very little about the political situation in Libya and waiting for the situation to clarify” is the damage control strategy adopted by the Chinese government, commented Professor Shinn. He pointed out that “China is almost certainly reaching out quietly to both the Gadhafi forces and the rebels in Libya in order to ensure that its interests are protected in the future no matter who comes out on top.” Dr. Broadman noted, “I'm not sure much can be done to minimize these costs--if in fact they are realized.  If the incumbent Libyan regime remains in power after all, I suppose it is conceivable some of the Chinese may decide to return to Libya.” In the same vein Professor Shinn argued, “If Gadhafi survives, China will be well placed to pick up where it left off, albeit with financial losses due to looting and disruption of its workers. If Gadhafi falls, the new Libyan leadership might well decide to punish China by moving some of these contracts to companies from countries that were more outspoken in their criticism of Gadhafi. At the same time, China has been surprisingly resilient in similar situations by switching allegiance once a new regime is in power.” 

Lesson: Political Risk? 

“Chinese companies are not very experienced at political risk analysis,” Professor Bräutigam opines, “but I don't think these uprisings will stop Chinese engineering firms from bidding on multi-billion dollar projects in oil-rich authoritarian countries.” Professor Shinn thinks that “What happened in Libya probably could not have been predicted. While events there may lead to more strict risk assessment by the Chinese before they engage in problematic areas in Africa, I doubt that it will change significantly China’s willingness to pursue potentially profitable business ventures. China has been more willing to engage in politically risky areas than western companies for the past decade or so. While the gap may narrow as a result of the experience in Libya, I believe China will continue to take more risks.” 

Dr. Broadman seems to be more optimistic about how the Libya case can change the Chinese: “On the heels of the earlier kidnappings in Nigeria and deaths in Ethiopia, the events in Libya will, if nothing else, foment the strongest debate yet in Beijing about how to balance the foreign policy objectives of the Government and the commercial objective of the state-owned enterprises and their financiers. The outcome, I believe, will be much more serious consideration of factoring in political risk into investment decisions.”

“Non-Interference” Eroded?

“China’s public position will remain strongly in support of its policy of non-interference in the

affairs of other countries. What it does behind the scenes will not always be in accord with that public position. In the case of Darfur, for example, China quietly played a key role in pressuring the government of Sudan to accept a joint UN-African Union peacekeeping mission, a step that Sudan did not want to take,” Professor Shinn commented.

He continued, “The situation in Libya is testing further China’s position on non-interference. China usually opposes the idea of sanctions. Its support of a UN Security Council resolution that puts a travel ban and asset freeze on Gadhafi, his inner circle, and members of the Libyan leader’s family, and imposes an arms embargo suggests there is further erosion in China’s non-interference policy. On the other hand, China does not seem prepared to go along with a UN resolution that would permit a NATO no-fly zone over Libya. In the view of China, this would violate Libya’s sovereignty.” 

Professor Bräutigam believes that “Over time, Beijing has rethought its policy of non-intervention in the internal affairs of other countries several times by redefining what is meant by ‘intervention’. In the case of the UN sanctions, this is a good sign, but I think it is a reflection of Beijing’s concern with its domestic audience -- always the most important audience for China's rules. In this case, thousands of Chinese citizens were put at risk in Libya. It would have raised more issues at home if it looked as though China was protecting Libya.”

Dr. Broadman argued, “There's little question in my mind that China has taken an irreversible step in its support for the sanctions, reflecting the fact that it wants to be seen in a greater light on the world stage.  But I would not interpret this one decision--at least at this juncture--as a signal of a fundamental reversal of China's policy of "non-interference”.”

Advice to Beijing

In terms of future investments in Africa, Professor Shinn suggested that “Chinese companies use more due diligence. When they do go into relatively risky areas, they need to have the full backing and support of the host government and develop their own in-house expertise about the risks in that particular situation. Accepting the word of the host government is not enough. Over the long term, China needs to develop more detailed information about Africa and to be sure that information is shared with Chinese companies that are seeking contracts or investing in Africa.”