China's African retreat: How a once-celebrated relationship turned cold

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The vast sprawling machinery of South Africa's second-biggest steel factory is sitting idle these days. After decades of noise and dust and smoke, the factory quietly shut its doors this month, sending its last 1,800 workers home.

The once-busy highway outside the factory is now silent and empty, aside from a few prostitutes who patrol the road, raising their skirts desperately to the occasional passing motorist.

Evraz Highveld Steel and Vanadium, one of the world's 15 biggest steel makers less than a decade ago, has fallen victim to a flood of cheap Chinese steel imports and a slowdown in demand from the Chinese economy. The entire South African steel industry has plunged into a deep crisis, with an estimated 50,000 jobs in jeopardy, despite last-ditch government efforts to protect the industry by imposing tariffs on cheap Chinese imports.

It wasn't supposed to be this way. For years, South Africa has been aggressively courting China's support, seeing Beijing as its economic and political saviour. The ruling party, the African National Congress (ANC), thought it was a smart bet. China, after all, had rapidly surpassed all of South Africa's other trading associates, becoming the country's biggest partner by 2010, and the Chinese appetite for African resources seemed insatiable.

To reinforce these economic bonds, the ANC heaped praise on the Chinese political model. It sent delegations to Beijing to study the Chinese system. It drafted plans to emulate the "central party school" of the Chinese Communist Party. It even dutifully bowed to China's insistence that it block any visits by Beijing's most loathed nemesis, the Tibetan spiritual leader, the Dalai Lama.

In a policy document last year, the ANC made clear its decision to choose China as its leading ally. It proclaimed that the Chinese Communist Party "should be a guiding lodestar" for the ANC's development policies. "The rise of emerging economies led by China has heralded a new dawn of hope for further possibilities of a new world order," the ANC declared.

Yet what the South Africans – and the rest of Africa – are discovering instead today is a disillusioning reality. Their dependence on China hasn't protected them from economic crises. No matter how tight their Beijing connections, African countries cannot count on China to immunize them from the global economy. And when China sneezes, Africa catches a cold.

The contagion began in early 2015 and has continued this year. Africa's exports to China decreased 38 per cent last year, while overall Africa-China trade fell 18 per cent, dropping to its lowest level in four years. At the same time, Chinese investment in Africa declined 40 per cent. The state-owned newspaper China Daily described the drop in Chinese investment in Africa as a "collapse."

The dramatic downturn has exposed the superficiality of the "Africa Rising" clichés that had become fashionable a few years ago. Dampened by the China slowdown, sub-Saharan Africa's growth fell to 3.5 per cent last year, its slowest expansion since 2009.

This decline, in turn, is reducing the opportunities for Canadian companies that had jumped into the booming African economy in recent years. It was Chinese commodity demand that had helped to open up the African frontier for Canadian mining companies and energy sector suppliers, but those sectors are now in a steep slowdown.

Countries such as Zambia, Angola, the Republic of the Congo and Sierra Leone – resource-rich economies that are heavily dependent on China as the market for more than 40 per cent of their exports – have seen their growth projections tumble this year.

"This dependence is toxic for Africa," Mzukisi Qobo, a professor at the Pan African Institute of the University of Johannesburg, said in a recent commentary on Africa's relations with China.

He noted that China has begun to shift its economy away from heavy industry and infrastructure investment and toward a more consumer-led economy, in which it will have less need for African resources. "This should be a warning for Africa," Mr. Qobo said.

The shift in the Chinese economy will be a "particularly strong shock" for African countries that send a large share of their exports to China, the International Monetary Fund said.

A number of African countries, including Nigeria and Zambia, have been obliged to seek loans from the World Bank or the IMF as their revenues decline and deficits rise in the aftermath of the Chinese-influenced commodities crash.

Most have also seen their currencies and stock markets collapsing as they suffer big declines in exports to their biggest partner. The currencies of some of the most China-dependent economies, including South Africa, Angola and Zambia, have been among the worst performing in the world over the past year.

Despite being China's biggest trading partner on the African continent, South Africa has been unable to translate this into rapid economic growth. It is dependent on China to buy 37 per cent of its exports, but the Chinese market is faltering. This year, South Africa's growth is expected to fall below 1 per cent as its mines and steel factories suffer from the slumping Chinese demand.

Most of its key mining sectors – platinum, gold, coal and iron ore – have seen prices and revenue fall as a result of softening Chinese demand. Since 2012, the South African mining industry has lost 47,000 jobs, and the industry is planning to cut a further 32,000 in the near future. (Thousands of jobs have also been lost for similar reasons in Zambia's copper mines over the past year.)

"The global spillovers from China's reduced rate of growth, through its diminished imports and lower demand for commodities, have been much larger than we would have anticipated," Maury Obstfeld, chief economist of the IMF, said in a report last month.

Layoffs and currency collapses are an unexpected twist in the long history of the China-Africa alliance. Over the past half century, China's seduction of Africa has been patient and relentless. In the Maoist era, China used its Communist credentials to support Africa's socialist governments, constructing projects such as the famed Tazara railway in Zambia and Tanzania in the early 1970s. But its pursuit of Africa really began to accelerate in the capitalist era, when it recognized the long-term strategic value of Africa's natural resources for the Chinese industrial boom.

Analysts such as the author Howard French have pinpointed 1996 as the year when China's current Africa strategy was born. In that year, China's then-president Jiang Zemin visited six African countries and announced the creation of the Forum on China-Africa Cooperation, which became the main engine for China's political and economic partnership with African countries.

In that same year, Mr. Jiang announced his "go out" policy for Chinese businesses. He encouraged China's investors and business executives to leave their homeland and go overseas in search of markets and resources. It was a historic moment, the first time China had explicitly told its capitalists to look for overseas business.

From the beginning, Africa was central to this "go out" strategy. Chinese leaders made Africa one of their top priorities. A new tradition emerged: China's foreign minister would make Africa his first destination every year. Even the smallest and most obscure African countries were rewarded with visits from China's top leaders. In early 2013, in his first foreign trip as China's new president, Xi Jinping visited four countries – and three of them were in Africa.

China's trade with Africa grew spectacularly, from just $10-billion (U.S.) in 2000 to about $200-billion by 2012. Chinese companies invested heavily in African mines and oil fields, from Zambia and Namibia to Congo and Sudan. But the trade was imbalanced: Africa mostly exported its raw materials to China, while China largely exported its manufactured goods, machinery, textiles and electronics.

While its trade with Africa soared exponentially, China was also boosting its financial support for Africa, providing loans and aid at a rapidly escalating rate. China announced $5-billion in funding for Africa in 2006, then doubled it to $10-billion in 2009, and doubled it again to $20-billion in 2012. To cap it off, China tripled its Africa financing to $60-billion in December.

Many African leaders, seeing this dramatic increase in China's presence in Africa, soon saw Beijing as a potential replacement for their slower-growing American or European trading partners. Leaders such as Robert Mugabe of Zimbabwe devised a "Look East" strategy to exploit the Chinese appetite for resources.

The economic links were solidified by a stronger political relationship. China sent military engineers and other troops to serve in peacekeeping forces in South Sudan, Mali, Darfur and the Democratic Republic of the Congo. China also pledged $100-million in military aid to the African Union to help create an African Standby Force to respond to emergencies across the continent. And it promised to provide training for thousands of African peacekeepers.

At the same time, China boosted its "soft power" across Africa by investing heavily in television channels and newspapers, while also financing the creation of more than 40 Confucius Institutes across Africa to promote the Chinese culture and language.

South Africa, one of the biggest and most developed economies on the continent, has become a particular focus of China's diplomatic and political efforts. In 2010, China and its partners invited South Africa to become the newest (and smallest) member of the BRICS alliance (along with Russia, India and Brazil). Five years later, China declared that South Africa had been upgraded to the status of "Strategic Comprehensive Partner" of China.

South Africa has explicitly stated that it wants its China relationship to be a deliberate counterweight to Western influence. When the United States threatened to cut off its trade preferences for South Africa last year in a trade dispute, the ANC said it would simply look to China to replace the American trade.

"We cannot allow [ourselves] to be bullied, that's why many countries are looking at South-South relations and looking East, because you can't use the size of your economy to squeeze small economies," ANC spokesman Zizi Kodwa said last month, in remarks that were widely published in the Chinese state media.

The ANC's obsession with China recently reached epic proportions. One cabinet minister even claimed that the Great Wall of China was built in just 10 months because of the Chinese "work ethic." (In fact, the Great Wall was built over centuries.)

Another senior ANC official lauded China for having "opposition parties" that are far superior to the "rowdy" and "noisy" opposition parties of South Africa. He seemed unaware that China does not allow opposition parties to exist.

Zimbabwe's Mr. Mugabe has been even more effusive. When the Chinese President visited Zimbabwe in December, Mr. Mugabe praised Mr. Xi as a "God-sent person" and declared that Zimbabweans were "overjoyed" by his visit. Shortly afterward, Zimbabwe announced that it would adopt the Chinese currency as one of its several official currencies.

But while African politicians touted China as the saviour to liberate their economies, the reality is different. China's trade with Africa has hit a plateau and fallen backward, failing to reach the great heights that some had predicted. After reaching $200-billion in 2012, China-Africa trade was projected to climb to $385-billion by last year. Instead it rose only marginally to $220-billion by 2014 and then declined sharply to $170-billion in 2015.

China's involvement in Africa over the past two decades has certainly been beneficial to the continent. Chinese companies, for example, have helped Africa by building much-needed roads, railways and other infrastructure projects. Yet even at its peak in 2013 and 2014, Chinese investment in Africa amounted to only 3 per cent of the country's foreign investment worldwide.

For countries such as Angola and Zimbabwe, the "Look East" strategy has provided wealth to the elites who control the export of oil and diamonds, but it has failed to help the ordinary citizens of their countries, who remain as poor as ever.

In South Africa, the government has bragged of its BRICS membership and its China relationship, but its economy has continued to stagnate and its China bet is still an unproven gamble. Its mining and industrial sectors, heavily damaged by China, have continued to decline this year.

"In exchange for its membership in the BRICS, South Africa appears to have given China a licence to de-industrialize the country," Jakkie Cilliers, head of the African futures and innovation section at the Pretoria-based Institute for Security Studies, wrote in a commentary this week.

"The South African government misses no opportunity to 'buy Chinese,' importing anything from scarfs and caps for the African National Congress to cheap consumer goods, which should be made in South Africa," he said.

"Thus far, efforts to address the economic imbalances between China and South Africa … by beneficiating raw materials and increasing manufacturing appears to have had limited impact."

Consider the case of Kumba Iron Ore, the biggest iron ore producer in Africa and one of the biggest in the world. From 2006 to 2013, its market value had increased more than fivefold, reaching $11-billion, largely on the back of China's fast-growing demand. Last year, Kumba was still dependent on China for 63 per cent of its export sales, but collapsing prices and declining Chinese demand have led to plunging profits.

Today, the iron ore company is trying to cut nearly 4,000 jobs at its South African mines. Its owner, Anglo American, had reaped $5.6-billion in dividends from Kumba in the past, but now it has announced that it will consider selling the company.

China, too, could feel soured by its South African ventures. In 2008, the Industrial and Commercial Bank of China spent $5.5-billion to acquire 20 per cent of Standard Bank, one of the largest banks in South Africa. Today, because of South Africa's slowing economy and collapsing currency, the Chinese stake in Standard Bank is worth less than half of its original investment in dollar terms.

One economist in Johannesburg, Adrian Saville of Citadel Wealth Management, says South Africa should be focusing more on its opportunities in the rest of Africa, rather than in China, since it has better connections and competitive advantages within the continent. "I would question whether a China strategy should be at the top of our agenda," he said in an interview. "Forget about the Chinese obsession, where's our African obsession?"

Another economist, Thabi Leoka of Argon Asset Management, said South Africa has failed to identify ways to benefit from its China relationship. "We actually don't have a China policy," she said. "I think our relationship with China is very skewed, and it gives China a large advantage, and we need to be careful that we're not taken advantage of."

One example of the skewed relationship is the Evraz Highveld steel factory. Once the pride of South Africa, its sales have dropped drastically because of the Chinese slowdown and the cheap Chinese steel that continues to pour into South Africa.

At its peak, Highveld Steel employed as many as 8,000 workers and produced a specialized large structural steel that wasn't made by any other factory in Africa. It manufactured steel for shopping malls, airports and bridges across the continent. It even provided steel for soccer stadiums for the 2010 World Cup.

"It was one of the glories of South Africa," said Marius Croucamp, deputy general secretary of the Solidarity trade union, which represents 400 of the factory's workers.

"It's a national asset, a symbol of our manufacturing industry. It says a lot about South Africa if it can't sustain this factory. This has gone from a crisis to a disaster. The giant of South African structural steel is gone, and that's a big loss."

His union is now providing food parcels to many of the workers and their family members to help them survive. Some laid-off workers say they survive on a diet of cabbage and pap, a cheap local staple made from ground corn.

"We can't pay our bills, and then the shops blacklist us," says Chriseldah Shabangu, who had worked at the factory for a decade before the shutdown. "We are struggling. In the shops, there's too much meat, because people can't afford it. The meat is just hanging there, changing colour."

Last year, after Highveld Steel suspended production and went under a business rescue plan, its owners reached a deal to sell it to a Chinese company to keep it afloat. But the deal fell through this month and the factory ordered all of its workers to leave.

The tariffs against Chinese imports were a failure. "It was like bringing in a doctor when there is already a funeral under way," said Eric Linda, regional secretary of the National Union of Metalworkers of South Africa, which represents three-quarters of the workers.

He said the ANC has made a strategic error by giving priority to its Chinese partnership. "They're taking our natural resources and creating jobs in China, not in South Africa," he said. "The relationship benefits China, not us. In fact, we are being economically colonized by China."

Cornelius van Leeuwen, an official of the Solidarity union who worked for 15 years at Highveld Steel, remembers the buzz of the factory at its peak. "There was always dust and the humming sound of the plant behind you," he says.

"Now it's sad. We drove through the factory grounds and there wasn't a single person working there."