The article I plan to use for this analysis was published on page A7 of the Wall Street Journal on May 6th, 2014. The headline read “Beijing Plans to Expand Credit Line for Africa”. I selected this article because it has a variety of macroeconomic implications, both for China and for the international community.
Chinese Premier Li Kaqiang announced that China was increasing an existing credit line to several African countries by $10 billion, for a total line of credit of $30 billion. While no specific countries or projects were mentioned, Li mentioned the importance of infrastructure and the willingness of China to assist African countries with developing their overall infrastructure. Premier Li also announced China would add $2 billion to the China-Africa development fund, increasing its capitalization to $5 billion.
The first question is where did China get $35 million to invest in Africa? The second question is why would they invest that money in a developing continent like Africa? What kind of return does China hope to get out of their investment?
China’s economy has been growing at near double digits now for almost 20 years. By comparison, the US GDP has been growing between 1 – 2% for the last 7 or 8 years. China’s GDP growth is projected to ‘slow down’ to perhaps 6 or7% in 2014. For most developed countries, a growth rate of that magnitude would cause inflation worries, but not for China. The growth has been fueled by strong export levels. China was able to offer the developed world incredibly inexpensive production and manufacturing facilities. The cost of Labor was incredibly inexpensive, compared to the high cost of labor in developed countries with unions. As a result, companies around the world began outsourcing their manufacturing needs to Chinese companies, and decreasing manufacturing in their own countries.
The net effect has been an incredible transfer of wealth from companies around the world to China. Instead of spending their money within their own countries in the form of wages, utilities, taxes, developing infrastructure, etc., they spent their money with Chinese companies. China has been accumulating a massive balance of trade surplus now for almost 20 years. Just in November of 2013 alone China ran a trade surplus of $33.8 billion. Financial estimates indicate that China has amassed a fortune of $3.66 trillion in foreign exchange reserves.
In the early stages of their growth, China invested much of this money into infrastructure and support for the growth of even more companies devoted to manufacturing exports. Over time, however, the growth of infrastructure began to slow – there were fewer and fewer large scale infrastructure projects to undertake. Private companies had amassed their own fortunes and were able to finance their own growth and development. And the overall pace of economic growth began to slow, by Chinese standards, decreasing the need for more investment spending.
In democratic countries like the US, Canada and England, it’s the private companies that amass the fortunes. Sure, tax revenues may increase as the GDP grows, but the real wealth is retained in the private sector. Even in Socialistic countries like France and Greece, the governments do not amass a fortune. They facilitate the transfer of wealth from the producers to the non-producers. In autocratic countries like China or Saudi Arabia, however, it’s the government that amasses the wealth. While China is experimenting with a move to more of a free market economy, they are still primarily autocratic, and the government continues to amass a fortune.
So the question facing China becomes what to do with their accumulated wealth? In a typical financial portfolio, you look for the best return on investment. Individuals might take their money and invest in mutual funds, or stocks. They might take a safe route and buy long term CDs or bonds. Governments don’t have those options. A common investment approach is to buy treasury bills issued by strong developed countries. It provides a safe place to store your wealth and provides a guaranteed return. The US treasury estimates that China already owns more than $1.2 trillion in US issues bills, notes and bonds. China has indicated a reluctance to dramatically increase its ownership of more US debt. It’s just not smart to put all your eggs in one basket. It’s also reasonable to assume that China has also invested in debt instruments issued by other financially sound countries.
In looking at their investment options, China has decided to invest in Africa. That’s the reason for issuing a $30 billion line of credit. Africa has a wealth of natural resources that China needs. They already are the second largest oil supplier to China, after Saudi Arabia. There are additional natural gas deposits that have not been tapped. Africa is also home to the largest undeveloped deposits of rare earth minerals like apatite, brockite, or cerite. There are approximately 20 of these types of rare minerals. They have unique properties that are essential in a wide variety of applications like metallurgy, nanotechnology or medical research. By investing in Africa, China is guaranteeing itself access to these types of limited natural resources.
Countries that have these types of natural resources don’t have the infrastructure to mine or transport them. By using the line of credit offered by China, the countries can contract with companies to develop and operate mines, build railroads for transport, establish ports and terminals for ocean going vessels and airports. In short, they can use the line of credit to create the infrastructure that will help them transition from an underdeveloped country to a developing country. And because the line of credit is from China, it would only make good business sense to award all those construction contracts to Chinese contractors. As these newly developing countries develop needs for consumer goods, the logical supplier becomes their long term benefactor, China. This ensures yet another market for Chinese manufactured export goods.
"China trade surplus hits 5-year high." MarketWatch. N.p., n.d. Web. 6 May 2014. <http://www.marketwatch.com/story/china-trade-surplus-hits-5-year-high-2013-12-08>.
"Beijing plans to expand credit line for Africa." The Wall Street Journal. Dow Jones & Company, n.d. Web. 6 May 2014. <http://online.wsj.com/news/articles/SB10001424052702304831304579543453415451312?mg=reno64-wsj>.