China, Africa, and Oil

Author:Stephanie Hanson, Associate Director and Coordinating Editor June 6, 2008

Council on Foreign Relations Report

Introduction

As global demand for energy continues to rise, major players like the United States, European Union (EU), and Japan are facing a new competitor in the race to secure long-term energy supplies: China. As its economy booms, China is intent on getting the resources needed to sustain its rapid growth, and is taking its quest to lock down sources of oil and other necessary raw materials across the globe. As part of this effort, China has turned to Africa, an oil-producing source whose risks and challenges have often caused it to be overlooked economically. Some reports describe a race between China and the United States to secure the continent's oil supplies. Others note that while Chinese interests in Africa have surged, Western states still make the vast majority of investments in Africa and remain highly influential.
China's Demand for Energy

China's booming economy, which has averaged annual 9 percent growth for the last two decades, requires massive levels of energy to sustain its growth. Though China relies on coal for most of its energy needs, it is the second-largest consumer of oil in the world behind the United States. Once the largest oil exporter in Asia, China became a net importer of oil in 1993. The International Energy Agency projects China's net oil imports will jump to 13.1 million barrels per day by 2030 from 3.5 million barrels per day in 2006. China currently imports about half its oil supplies from the Middle East, and that percentage is projected to grow in coming decades. Yet the extent of the country's energy demand has also compelled China to push into new markets, and particularly Africa. Africa holds a fraction of the world's proven oil reserves9 percent compared to the Middle East's nearly 62 percentbut industry analysts believe it could hold significant undiscovered reserves. As a result, China is seeking to increase its oil imports from the continent. It now receives about one-third of its oil imports from Africa, 9 percent of the continent's total exports in 2006 (by contrast, the United States purchased 33 percent of that year's exports from Africa). China's biggest suppliers in Africa as of 2006 were Angola, the Republic of Congo, Equatorial Guinea, and Sudan. It has also sought supplies from Chad, Nigeria, Algeria, and Gabon.
Sino-African Trade

Eighty-five percent of Africa's exports to China come from five oil-rich countries (Angola, Equatorial Guinea, Nigeria, the Republic of Congo, and Sudan), according to the World Bank. But Chinese interest in Africa extends beyond oil. China now ranks as the continent's second-highest trading partner, behind the United States, and ahead of France and Britain. From 2002 to 2003, trade between China and Africa doubled to $18.5 billion; by 2007, it had reached $73 billion. Much of the growth was due to increased Chinese imports of oil from Sudan and other African nations, but Chinese firms also import a significant amount of non-oil commodities such as timber, copper, and diamonds. China recently began to import some Africanmanufactured value-added goods, such as processed foods and household consumer goods. Experts say Chinese companies see Africa as both an excellent market for their low-cost consumer goods, and a burgeoning economic opportunity as more countries privatize their industries and open their economies to foreign investment. Some textile manufacturers, for example, are reportedly investing in African factories as a way to get around U.S. and European quotas on Chinese textiles. China's foreign direct investment (FDI) in Africa, however, is still only 3 percent of China's total FDI, according to a 2007 UN report. While China is often characterized as a monolithic actor in Africa, experts say Chinese trade with Africa has diversified beyond state-directed enterprises in recent years. "Chinese trade with Africa has become, in many ways, 'normalized,'" writes Ian Taylor, an academic who specializes in Sino-Africa ties. "The concept of a 'China Inc.,' complete with master plan, either at home or abroad is intrinsically flawed."
The Chinese Approach to Securing Africa's Oil

Because Nigeria and Angola, the continent's largest oil producers, have decades-long relationships with Western oil companies, China has developed a two-pronged strategy toward energy investments. First, it has pursued exploration and production deals in smaller, low-visibility countries such as Gabon, Equatorial Guinea, and the Republic of Congo. Second, it has gone after the largest oil producers by offering integrated packages of aid. In Angola, which exported roughly 465,000 barrels of oil per day to China in the first six months of 2007, Beijing secured a major stake in future oil production in 2004 with a $2 billion package of loans and aid that includes funds for Chinese companies to build railroads, schools, roads, hospitals, bridges, and offices; lay a fiber-optic network; and train Angolan telecommunications workers. Elizabeth C. Economy, CFR's senior fellow and director for Asia studies, says China is following a very traditional path established by Europe, Japan, and the United States: offering poor countries comprehensive and exploitative trade deals combined with aid. The Chinese counter that they are giving African governments what they want: no-strings-attached investment and infrastructure. Such aid deals have not always been successful, however. In Nigeria, Chinese state-owned CNPC's $2 billion investment in an oil refinery has fallen through, and in Angola, news reports suggest that work on the country's railroads has either halted or encountered serious delays. Analysts say China's most successful African energy investment has been in Sudan, which now sends 60 percent of its oil output to China. Overall, China has not made the inroads into Africa's oil reserves that some media coverage has suggested; the energy consultancy Wood Mackenzie estimates Chinese companies hold under 2 percent of Africa's known oil reserves. Erica S. Downs of the Brookings Institution writes that "most of the African assets held by China's NOCs [national oil companies] are of a size and quality of little interest to international oil companies (IOCs). In fact, many of these assets were relinquished by the IOCs."
Shifts in Chinese Foreign Policy

Some experts suggest that the need to secure natural resourceswhether oil, metal, or timberis the driving component of Chinese foreign policy toward Africa. China's manufacturing sector has created enormous demand for aluminum, copper, nickel, iron ore, and oil. As this trend was under way in 2005, David Zweig and Bi Jianhai wrote in Foreign Affairs that China "has been able to adapt its foreign policy to its domestic development strategy" to an unprecedented level by encouraging state-controlled companies to seek out exploration and supply contracts with countries that produce oil, gas, and other resources. At the same time, Beijing aggressively courts the governments of those countries with diplomacy, trade deals, debt forgiveness, and aid packages. Yet others, including some analysts and U.S. policymakers, caution against conflating China's foreign policy goals with the actions of its energy firms. In June 2008 congressional testimony, the deputy assistant secretaries of state for East Asia and Africa noted that "there are often exaggerated charges that Chinese firms activities or investment decisions are coordinated by the Chinese government as some sort of strategic gambit in the high-stakes game of global energy security. In reality, Chinese firms compete for profitable projects not only with more technologically and politically savvy international firms, but also with each other." Some experts suggest that China is struggling to address tensions that have arisen between government agencies and Chinese companies over the country's strategic interests in Africa. China's national oil companies are, in some cases, politically stronger than the government agencies charged with regulating them. In a 2007 Washington Quarterly article, Bates Gill and James Reilly refer to this conflict as a "classic principal-agent dilemma" (PDF) noting that China's oversight agenciesincluding the Ministry of Foreign Affairs and the Ministry of Commercedo not have authority over Chinese corporations overseas.
Noninterference?

The Chinese approach to foreign relations is officially termed "noninterference in domestic affairs." Chinese leaders say human rights are relative, and each country should be allowed their own definition of them and timetable for reaching them. CFRs Economy says that unlike the United States, China does not mix business with politics. In fact, China has argued that attempts by foreign nations to discuss democracy and human rights violate the rights of a sovereign country. Some China experts say Beijing's approach is not significantly different from how any other country pursues its interests. "The United States is highly selective about who we're moral about," says David C. Kang, a

professor of government at Dartmouth College. "We support Pakistan, Egypt, Saudi Arabiahuge humanrights violatorsbecause we have other strategic interests. China's not unique in cutting deals with bad governments and providing them arms." But China's foreign policy appears to be evolving as it realizes the need to protect its economic interests. For instance, it has altered its policy of blocking UN Security Council resolutions authorizing peacekeepers for Darfur and placed modest pressure on Khartoum to allow a UN peacekeeping deployment. "Beijing's recent handling of the situation in Sudan shows that it is learning the limitations of noninterference, however much that principle remains part of its official rhetoric," write Stephanie Kleine-Ahlbrandt and Andrew Small in Foreign Affairs. "China has found noninterference increasingly unhelpful as it learns the perils of tacitly entrusting its business interests to repressive governments," they write. But China also continues to sell arms to Sudan, among other African countries. The Congressional Research Service reports that China views these sales as a means of "enhancing its status as an international political power, and increasing its ability to obtain access to significant natural resources, especially oil" (PDF). In the period from 2003 to 2006, China's arms sales to Africa made up 15.4 percent ($500 million) of all conventional arms transfers to the continent. Notable weapons sales include those to Sudan, Equatorial Guinea, Ethiopia, Eritrea, Burundi, Tanzania, and Zimbabwe. Beijing has also sent Chinese military trainers to help their African counterparts. Arms sales and military relationships help China gain important African allies in the United Nationsincluding Sudan, Zimbabwe, and Nigeriafor its political goals, including preventing Taiwanese independence and diverting attention from its own human rights record.
Assessing the Benefits of Sino-African Ties

Africa registered 5.8 percent economic growth in 2007, its highest level ever, in part because of Chinese investment. Experts say the roads, bridges, and dams built by Chinese firms are low cost, good quality, and completed in a fraction of the time such projects usually take in Africa. China also contributes peacekeepers to UN missions across Africa, including Liberia and Darfur. It has cancelled $10 billion in bilateral debt from African countries, sends doctors to treat Africans across the continent, and hosts thousands of African workers and students in Chinese universities and training centers. Critics say these projects are meant to build goodwill for later investment opportunities or stockpile international support for contentious political issues. Princeton Lyman, CFR's adjunct senior fellow for Africa studies, says China's interest in Africa has both positive and negative effects. "It's good for the continent because it brings in a new actor who's willing to invest, but it's bad for Africa if it turns countries away from the hard work of political and economic reform," he says. Concerns about China's role in Africa have been voiced by a range of actorsfrom human rights groups to international observers to Africans themselves. Many Africans are concerned over how China operates in Africa, accusing Chinese companies of underbidding local firms and not hiring Africans. Chinese infrastructure deals often stipulate that up to 70 percent of the labor must be Chinese, according to CFR's Economy. International observers say the way China does businessparticularly its willingness to pay bribes, as documented by Transparency International, and attach no conditions to aid moneyundermines local efforts to increase good governance and international efforts at macroeconomic reform by institutions like the World Bank and the International Monetary Fund. But Economy notes that China's policy toward Africa is a flexible one. "Its broad and deep diplomatic and economic engagement ensures that even as it falls short in meeting African expectations and needs, it is constantly reassessing and adapting its policies," she told a Senate subcommittee in June 2008. The same can't be said of Africa's policy toward China. In fact, experts say that the African Union's lack of a coherent, official China policy weakens the continent's ability to negotiate with China. Taylor argues that the individual countries benefiting from China do not want the African Union involved in their dealings, and thus have resisted multilateral dealings. Overall, experts say, China's involvement could jump-start change on the continent, but only if African governments become more assertive partners in their dealings with China. World Bank economist Harry G. Broadman writes that Chinese firms can help African countries tap into global value chains, giving them a "chance to increase the volume, diversity, and worth of their exports." But African governments must enact a series of reformsof basic market institutions, investment regulations, infrastructure, and tariffsto realize

these benefits, he argues. "This is Africa's internal problem," says Kang of Dartmouth. "How do you build infrastructure without outside investment? And how do you have a stable government with no resources?" A 2006 CFR Task Force report on Africa urged U.S. officials to maintain support for reforms and transparency despite the rise in competition with China for Africa's resources.