China Invests In Africa--But For What Returns?

African nations like Sierra Leone and Namibia might not seem like they would be the first place investors looked to put their money. But they are exactly where China has been investing heavily over the past couple of years. And that raises the question--why is the world’s most populous nation pouring money into the world’s poorest continent? CNBC's Bertha Coombs reported on Africa as the "new China play" on “Morning Call.”

While most industrialized nations have long shied away from Africa – offering, at the most, aid instead of capital, China has been courting the continent. And Africans have embraced the Chinese. On a recent African tour, Chinese President Hu Jintao offered the government of Namibia $1 billion in concessional loans over the next 3 years as well as a $720 million credit line. Beijing has offered over $5 billion in total to African nations over the next 3 years – but the Chinese’s generosity has already been widespread. According to Stephen Morrison of the Center for Strategic and International Studies, China has given over $9 billion spread out among 8 countries last year alone – that’s 3 times the scale of the World Bank’s lending.

But China isn’t exactly pouring money into Africa to help its nations’ fledgling or struggling governments (although gaining any political support they can is certainly on the minds of the Chinese). China's investment strategy has one main goal, Coombs reports: to secure some of Africa’s plentiful natural resources, especially oil.

25% of Angola’s oil exports and 60% of Sudan’s go directly to China. Western sanctions against Sudan for its human rights violations have been no obstacle to the Chinese (remember that China is not a member of the G8--see below), and have instead given the country a monopoly on Sudanese oil, which the Sudanese militias profiting.

The global commodities boom that was due, in large part, to China’s huge growth rate and demand, has analogously helped African nations that are rich in natural resources. Hurley Doddy of EMP Africa says investors should look at Africa the way Eastern Europe was seen in the late 1990’s. Many of the nations are post-conflict and ready to grow. There is better governance and more peace and stability throughout the continent. And since stability leads to growth, Doddy says look for a lot of these once war-ridden countries to flourish.

The proof may be in the markets. According to the Dow Jones Africa Index, African stock markets went up almost 20% in 2006 due in large part to the increase in Chinese investments. However, Africa isn’t such an easy play for individual investors. It still leads the World Bank’s Corruption Index every year and the genocide in Darfur does not appear to be easing. With all that risk – and no short-term rewards, would it even be worth it?

Well--the best way to piggyback on the Chinese strategy is to invest in South Africa, says Donald Elefson of the Excelsior Emerging Markets Fund. South Africa is a bigger and more mature nation than its sub-Saharan neighbors and has a stronger economy with much less risk, he says. One way to get into South Africa is through the iShares South Africa E.T.F (chart below), which was up more than 24% in 2006.

A geopolitical question remains: if China’s investments continue on the pace they have, aid and debt relief from the UN and Western nations will carry far less weight for the African governments they currently help. Could it get to a point where Africa has to choose between accepting aid from the West and capital investments from the East?

If so, which would they choose?

FYI: The G8 is an international forum for the governments of Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. Together, the eight countries represent about 65 percent of the world economy. The group's activities include year-round conferences and policy research, culminating with an annual summit meeting attended by the heads of government of the member states. The European Commission is also represented at the meetings.