Dear Minewatchers,
Alastair was recently asked, at a presentation at Oxford, why China appeared to have a ‘special’ relationship with Zambia, and why China would expend diplomatic efforts on Zambia. He asked me the same question, and I wanted to share with fellow Minewatchers my thoughts on this. Of course, the received wisdom suggests that, over the long run, China’s demand for resources is certainly a key element of China’s Africa strategy, together with access to markets and the forging of diplomatic relations. However looking specifically at the case of Zambia, what evidence is there a) that Zambia plays a key role in Beijing’s resources strategy; and b) that this constitutes a ‘special’ relationship that goes beyond diplomatic relationships with ‘traditional’ foreign powers.
Re the role of Chinese investment in China’s resource strategy, the first thing to look at would of course be whether NFCA exports its copper directly to China. However the way the copper markets typically work is that producers sell their copper “at mine-gate”, meaning that they contract (often on a yearly basis) with copper traders like Republic House, Trafigura, Glencore and others (the exception is KCM which markets some of its finished copper directly to end-user consumers – whether this is a legacy of AA’s operation or a practice that came with Vedanta I’m not clear about). These traders are often based in Switzerland, explaining the UNCTAD stats. The copper traders then sell it on en route to consumers across the world. To my knowledge there is no way of seeing how much of Zambian copper ends up in China.
NFCA has been a bit different – without their own smelter they were initially (since production of copper concentrates began in 2005) exporting pretty much all their ore to South Africa (to the processing facilities of Palabora Mining, majority owned by Rio Tinto). I don’t have the stats here but the Palabora annual reports includes the amount of copper concentrates bought from NFCA and I think the majority of the UNCTAD stats on Zambian concentrates exported to SA is from NFCA. I asked NFCA Deputy CEO Gao about direct supplies to China and he said transaction costs in getting the copper to China are high and that “I would much rather sell the copper and deliver the profit”. However, off-the-record interviews with NFCA staff working in finance and exports/imports suggest that direct sales to China have been increasing, and that by the end of 2007 maybe a third of the final product was going to China. The chief accountant told me that all produce had initially gone to SA because NFCA “wanted to test the market” (note that during the time I was in Zambia talking to ppl, the Chambishi Copper Smelter had not yet come online – to serve NFCA, Lumwana and others – and I don’t know if the marketing of CCS finished copper would be via copper traders or direct).
It thus remains unclear just what role NFCA plays in China’s resource strategy. I think it is safe to say that there is no element of the Angola-model (loans-for-resources) at work in Zambia. However my evidence supports an interpretation of investments such as NFCA as a form of *hedge* in China’s resource security. A long-term consultant for Chinese MOFCOM in Beijing told me (in reference to Chinese oil investments) that global commodity markets are generally well-functioning, suggesting that if resource prices spike due to some severe supply disruptions, then Chinese companies (like NFCA) can sell their copper at higher margins and “deliver the profit” (which could then – in theory – be used to subsidise Chinese copper marketed to domestic industries). However, he argued that although resource security is not a problem under normal circumstance, he could envisage a situation where disruption to global supply (of e.g. oil) becomes such that the markets simply cannot physically supply enough of the resource, and in this case China could then instruct overseas companies to supply directly.
Now, I think that the Chinese leadership is keen on letting market forces run their course in business-as-usual circumstances, being well aware that exposing their industries to market forces is the only way for them to become internationally competitive. I agree with Nina that there is probably little political influence over the day-to-day activities of overseas Chinese SOEs (and institutional reforms decentralizing approval process of overseas investment support this). However, I think that Beijing retains the right to intervene in extreme situations. This is made possible by the control that Chinese political leadership still exercises over its SOEs, mainly through its ability to easily replace managers, control funding etc. Here we should note that there is a difference between SOEs and SOEs: the larger central-level SOEs (there’s about 150-odd “national champions” that have been specifically selected for incentives for going abroad) are considered minister-level SOEs, in the sense that their top bosses have the rank of minister in the political hierarchy. These SOEs do not have western-style boards of directors, but are governed by so called ‘party groups’ comprising senior CCP cadres (up to 9 of them, and always an odd-number) who appoint (senior) managers of the SOE. As discussed on the MWZ blog, it is pretty clear that Beijing foreign policy does not permeate the activities of all and sundry Chinese in Africa, but for the central-government SOEs (such as CNMC, parent of NFCA) I would think this influence is certainly there.
To conclude on the role of Zambia in China’s resource strategy, I think there definitely is a strategic element behind these investments, in particular due to the proximity of the Chambishi SEZ to Katanga in DRC. If the Chinese investment into Katanga’s state-owned mines (Gecamines) goes through as part of the $9bn loans-for-resources deal, companies set up in Chambishi are likely to be used to service these mines. The investment pattern around Chambishi already exhibits this pattern of networked businesses providing control throughout the value chain (Chambishi Foundry producing thing mill balls that goes into NFCA’s crusher/concentrator, Sino-Acid producing the acid for NFCA’s leach plant etc., although they all sell to third parties as well). Whether the PRC strategy is effectively implemented or not is another story, given what appears to be a gap between long-term strategic interests and short-term profit objectives of managers on the ground. As I understand it, Chinese managers suffer from insecure ‘internal property rights’ (they are easily replaceable in unaccountable ways, where funding is politically controlled and can be withdrawn if a manager steps out of the ‘party line’). It is therefore ironic, in my view, that this situation is likely to make these managers *more* short-sighted and to promote behaviour (e.g. cut costs on maintenance etc.) that actually undermine the long-term interests of Beijing foreign policy makers that constitute the ultimate shareholders of NFCA!
Turning then to the question of whether or not China has a ‘special’ relationship with Zambia, we know two things for sure, first that everybody seems to think so, and secondly that there is preciously little hard evidence that this is the case! How might such a relationship manifest itself? In trying to sketch this relationship, one thing that jumps out at me is that there appears to be a good ‘fit’ between how the Chinese are used to doing things and how the Zambian leadership prefers to do things. The Chinese like to negotiate and present economic deals within low-transparency contexts that are political as well as informal, as do Zambians (plenty of ‘courtesy calls’ at which projects are announced with scarce detail). So a key feature of this relationship is its general opacity. This implies that that Chinese dealings are seen with much suspicion, and the truth is probably that there may be some preferential treatment going on, but only at the margins. Supportive of the view that GRZ could not – even if it wanted to – ride roughshod over governance rules and norms in its treatment of Chinese interests is the fact that western donors are still providing about a fifth of the country’s budget! Some examples of favours that are granted might include how Mwanawasa gave the go-ahead for BGRIMM to be re-established before impact assessments had been completed. As an official at ECZ notes “of course when the President makes a statement like that, it constrains how we work”. What else might Chinese interests gain from cultivating a ‘special relationship’? Perhaps a willingness of Zambian leadership to expedite Chinese projects, give quick approvals etc. (e.g. Chambishi SEZ where they started clearing the bush as soon as the project had been name-dropped at FOCAC). As noted above, I don’t think there is much political influence in the day-to-day operations of companies like NFCA post-entry, but I do think that the Chinese government plays a role in brokering the entry of Chinese investors.
Then there is the question of what the GRZ leadership might gain from this relationship, i.e. what incentives might there be to offer the Chinese preferential treatment? I have evidence of senior politicians receiving gifts (TVs etc.) imported by NFCA, and there have been some suggestions that the Chinese have provided party funding for MMD (here unfortunately I have no evidence, if anyone does I’d be pleased to hear it). More obviously the Zambian leadership gets access to funding for visible and popular projects that would not have passed western donors’ pro-poorness hurdles (e.g. Ndola stadium).
In general I think the welcoming of Chinese investment also reflects the attitude of the late Mwanawasa that foreign investment was essential for Zambian economic development. As we know the impacts of FDI on growth and development are highly context-specific and by no means automatic, however a WB person I spoke to suggested that Mwanawasa’s non-economist background may have contributed towards an poor understanding (and consequently uncritical stance) towards the development potential of FDI.
To sum up, I think this relationship does not completely mirror other diplomatic relationships, it appears more informal, with greater involvement of politicians rather than technocrats, but probably not exceedingly ‘special’ in its outcomes (i.e. ongoing and systematic preferential treatment of Chinese). Both parties prefer the same low-accountability ways of engagement, but this need not (necessarily) imply significant departures from the legal/established systems, or that special ‘favours’ are granted. Rather it may simply reflect high transaction costs of accountability: even if you do not have anything to hide, having to explain yourself to critical voices is costly and takes time and effort!
I would be delighted to hear what other people think about this, and if it fits with your own experiences. All comments are most welcome.
Dan Haglund
University of Bath
d.haglund@bath.ac.uk
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