China – South Africa Relations: Strategic Partnership or Neo-Colonial? Part 1

SA China

This is the first of a three part series looking at Chinese – South African political and economic relations. In July 2012 the Chinese capital hosted the Forum for Chinese – African Cooperation (FOCAC V) for the third time, the event is held every three years alternating between Beijing and an African capital. Beijing was adorned in billboards with African images and its politicians welcomed dozens of African leaders and their entourages who made the trip to shake hands with President Hu Jintao and to seal deals that would strengthen the powerful ties between the continent and China. Among the handshakes and photo opportunities the forum saw the announcement of USD20 billion in Chinese loans and aid for Africa, part of the country’s continuing effort to promote good relations with the continent. Once again the Forum had a tone of excitement, significance and promise, certainly compared to the Africa –EU summits which have been so riven with divisions and the spectre of colonialism. However there were signs that some African leaders were not as happy as before, that certain resentments have built up between African and Chinese leadership, where before there had been a sense of camaraderie and good will, now there were more questions being asked. Cynical observers of the China Africa relationship had been predicting this for some time, feeling that all the criticisms they had raised had been ignored by African leaders. In the past criticisms had been voiced from opposition leaders like Michael Sata of Zambia (who appeared to have a change of heart and became pro-Chinese once he was elected President) or from African and European intellectuals, which could be written off as resentment or anti-Chinese sentiment. But this time criticisms were from a speech by the President of Africa’s most powerful and wealthy country: South Africa. “Africa’s commitment to China’s development has been demonstrated by supply of raw materials, other products and technology transfer. This trade pattern is unsustainable in the long term. Africa’s past economic experience with Europe dictates a need to be cautious when entering into partnerships with other economies”. Speech by RSA President Zuma, FOCAC V July 2012 Beijing. The speech was a sign that South Africa was going to try and change its trading relationship with China. Zuma’s description of the pattern as unsustainable is a reference to the movement of raw materials in the direction of China; South Africa’s great mineral wealth, the precious metals, like platinum and gold as well as the bulkier coal and iron ore which are shipped mainly via Southern Africa’s biggest port Durban to the factories, workshops and power stations that feed Chinese manufacturing. In return South Africa purchases low cost consumer goods ranging from textiles to electrical goods, as well much of the heavy machinery that is used to remove the minerals and metal ores from the earth. This could be viewed as a reflection of the two countries natural Riccardian advantages, but what if these imports suppress South Africa’s own manufacturing base and its ability to produce “value added goods” which can do so much to promote economic growth, and crucially for South Africa, employment opportunities. The critique that China is “using” Africa as a market for cheap goods and a shop for commodities has reached the top of African politics.

An Uneasy Relationship

The recent political relationship between the two countries has been uneasy, only recently has seen a strong bond developing. While most other African countries had long recognised the People’s Republic of China as the one China at the expense of Taiwan, South Africa continued to maintain relations with its long time Apartheid era ally long after the end of that regime. Nelson Mandela tried a bold diplomatic manoeuvre in attempting to recognise both countries, but that was simply never going to be an option for the Beijing leadership. Eventually the Pretoria Government, despite a last ditch attempt by Taiwan to change their mind, went over to Beijing. Since then trade has flourished between the two countries rising tenfold over the decade to reach a total value of USD16.9 billion in 2011.

Many elements in the South African ruling ANC-COASC-SACP coalition are avid admirers of the Chinese economic model, taking delegations of government ministers and officials to learn from the Chinese experience. The socialist leaning elements of the ANC are particularly keen on the state’s powerful guiding hand in the Chinese economy. The Chinese recognise South Africa as a key ally in Africa and one of the most important bi-lateral relationships along with Angola and Sudan. China has further embedded the relationship, physically investing in South Africa. South Africa has reciprocated with investment in China. The presence of physical assets in the country adds another dimension to the relationship, indicating a level of trust and commitment, but also creating the risk of expropriation.

Jinchuan Group

Jinchuan Group, a company headquartered in the far north-western Chinese province of Gansu, is the country’s largest producer of red copper and nickel. In 2011 Jinchuan took a 51 per cent stake in Wesizwe Group, a South African platinum mining company. What should have been a straight forward deal was nearly destroyed by the intervention of a shadowy US controlled group called Musa Capital. As part owners of Wesizwe Group they tried to embezzle USD70 million from the company as well as attempting a messy takeover to cover up the loss before Jinchuan Group could complete their deal, in the confusion also finding time to fire the CEO Michael Solomon. The owners of Musa Capital eventually ended up in court, as well as defrauding their own company they were also accused of swindling a Sowetan tribe that owned R700 million Rand worth of Wesizwe’s shares. Musa Capital had set up a series of companies to aid them in stealing the funds, but their scheme fell apart and Jinchuan eventually took their stake in the company ousting Musa Capital and reinstating the CEO.

Jinchuan Group then enlisted the help of another Chinese organisation, the China Development Fund (CADFund). CADFund was set up by the Chinese Development Bank with USD1 billion of seed finance to support Chinese projects across the African continent. Although CADFund has been criticised for poor investment decisions by generally pro-Chinese commentators like Debroah Brautigham, this time their equity stake of USD650 million for the Frischgewaagd-Ledig mining project near Sun City was a major fillip for Jinchuan.

The battle for the firm was worthwhile. The deal was brokered by Martyn Davis CEO of Frontier Advisory who described it:

“This is a very significant strategic play because it gives China its first direct access to platinum”.

This might not seem like a big deal, until you consider the structure of the world platinum market, where the vast majority of transactions for the precious metal are done on a long term contractual basis, and only 10% or so of the metal is available on the open market. The purchase of Wesizwe gave the Chinese a presence in the market dominated by the South African “big three” Anglo Platinum, Impala Platinum and Lonmin. The Frischgewaagd-Legig project should produce around 415,000 ounces of the rare metal a year, which will double Jinchuan’s current production levels. Platinum is a totemic metal, think of the order in importance or value of credit cards or records sales. Platinum is highest in the hierarchy above bronze, silver and gold. Valued because of its unreactivity and therefore a vital component in catalytic convertors, laboratory equipment and watch making, South Africa holds 80% of the world’s supply, giving it and the companies that control production a near monopoly.

Chinese Resource Grabs

So when commentators talk about Chinese resource “grabs” or control, this is a classic case, a Chinese company purchasing and financing a mine and then exporting an essential metal for its industrial sector. The fact that platinum is controlled by a few companies and not a freely traded fungible commodity such as crude oil validates the theory that China is trying to “control” commodities. However the contrary argument can also be made, that the Chinese are trying to break the monopoly of control enjoyed by South African companies. But if you look at the entire spectrum of Chinese investments across the African continent, there is a clear pattern of ownership and control over companies extracting natural resources.

Part 2 can be found here, and part 3 here.



Categories: China - Africa, China Goes Global, Company Case Studies, Geo-Economics, Kula Ring Trade Blog

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  1. China – South Africa Relations: Is China responsible for a decline in South African Manufacturing? sector | Frontier Market Strategy
  2. China – South Africa Relations: Part 3 Rebalancing and Competition across Africa | Frontier Market Strategy

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