Ten years ago, in 2009, China surpassed the US as the largest trading partner of Africa. This relationship has only gone from strength to strength as China’s Belt and Road Initiative (BRI) has progressed. These developments make investing in China and Africa more attractive to corporates across the world. What do treasurers need to know before they engage?
It’s common knowledge that China is one of the largest economies in the world, with The World Bank ranking it as the worlds’ second largest by nominal GDP. Similarly Africa has the fastest growing population in the world, with some estimates stating that by the end of the century one in three of the world’s population will be African. The continent also has six of the world’s ten fastest growing economies.
The relationship between the two is a long one. It can be dated back to 10th Century BC, but most notably began in the 1950s as China and African countries sympathised with one another during political tensions and began establishing diplomatic ties as a result.
Modernising systems
With so many countries across the continent, Geoffrey Gursel, Director, Sales Head Sub-Saharan Africa, Citi Treasury and Trade Solutions, states that the most important thing to do as either a Chinese corporate or someone new entering the continent, is ask yourself “how aligned is your bank and your treasury, specifically, with the regulatory vision of the country, and the related payment and interoperability visions that they have in place?”
For example, he says local and regional Africa-based treasurers should be asking “why the Democratic Republic of Congo is aiming for more clearing house automation”, “how is South Africa preparing its readiness for payment modernisation and Fintech inclusivity?” They should then be looking at how banks are aligned to these changes in order to help the market, fellow corporates and the end-consumer become more financially sophisticated.
In Nigeria, for example, says Gursel, just ten years ago it used to take weeks for a cheque to clear across various parts of the country. Now with the Nigerian Inter-Bank Settlement System (NIBSS), instant credit is seen. Kenya has also launched its Kenya Interbank Transactional Switch (KITS), which allows for real-time interbank clearing of funds. And in 2020, Zambia is releasing its back-end ‘national financial switch’, which will allow card and mobile payment interoperability to settle transactions in real-time, providing different access to various new wallets as the end consumers’ demands become more sophisticated.
With such rapid digital and inclusive development it’s important to ensure that companies are in the best place to keep up with them, and for Gursel that means “ensuring there is a comprehensive understanding of where the country is going, which can be directly tied to the treasury function”.
Foreign investment
Tony Tong, Regional China Desk Head, Citi, notes that the key areas for investments in countries such as Nigeria and Kenya are construction, oil, and gas. As part of the BRI, the Chinese government, banks and companies are investing and providing funding in these industries. Tong specifies in Nigeria, for example, where the enormous Mambilla hydropower project has been in development since 1982. The Nigerian government granted three Chinese companies the project development contract, and Chinese Export Import (Exim) Bank is funding 85% of it.
“For Chinese banks,” says Tong, “the BRI has gone beyond simply providing funding for received infrastructure projects.” Instead, he states, “in the process of redefining the projects, many banks are really stepping back and looking at what sort of contributions they want to make in Africa.” This could be infrastructure, natural resources, or agriculture, to name a few.
Tong notes that the rate of imports to China from Africa is increasing as the Chinese public demand grows for products such as coffee and rice, and bilateral trade cooperation deepens. Ethiopia alone is expected to export a record four million 60kg bags of coffee in 2019/20 and production is expected to rise 1.4% from the previous season. According to the Ethiopian Coffee Exporters Association, China’s import of Ethiopian coffee shows an annual growth of around 16%.
Challenging times
Gursel notes that one of the biggest challenges with regards to the BRI, “comes down to keeping up with the amount of regulatory change and development”. With so many Chinese multi-nationals having huge amounts of capital pouring into Africa, it’s a complicated process to ensure that they’re all aligned with and aware of the changing regulations within certain countries.
Tong notes that some African countries, such as Kenya, have almost hit the debt ceiling, and thus are limited with how much they can borrow from Chinese banks. Instead they are thinking more about public-private partnership (PPP) infrastructures to obtain project financing from either Chinese or international banks and companies.
In all countries, he adds, infrastructure and power projects “depend on the government’s capabilities; how they want to structure the debt, how they want to raise the funds.”
Gursel takes a pragmatic line. “Getting liquidity into and out of multiple African markets can be complex. Coupling that with the need, for example, to ensure your resident and non-resident accounts locally are aligned, your allowances of access cash utilisation are approved, and that you are maximising regional monetary zone benefits, demonstrates that it really is a tricky landscape, and one in which your banks must be advisors, especially to facilitate easy-landings for large BRI-flows.”
With Chinese multi-nationals having such a high demand and having to enter these countries quickly, the bottom line for their treasurers is to ensure they have trusted sources of advice already on the ground to help them.
