The Chinese are coming to Africa...

The increasing importance of Chinese investment in sub-Saharan Africa

Many of its people are not happy about it, as our briefing reports, but business is booming in Africa thanks mostly to the Chinese. Trade between the two surpassed $120 billion in 2010, and in the past two years China has given more loans to poor, mainly African countries than the World Bank. The Heritage Foundation, an American think-tank, estimates that between 2005 and 2010 about 14% of China’s investment abroad found its way to sub-Saharan Africa. This has brought increased employment and prosperity to the region, but also allegations of damage to local businesses, corruption and the hoarding of natural resources.

Source: The Economist

Bank: China’s Africa Investment to Jump 70% by 2015.

Think China’s pumping a lot of investment into Africa? You ain’t seen nothing yet.

According to a forecast statement from South Africa’s Standard Bank, Africa’s largest bank, investment from China into Africa is likely to hit $50 billion by 2015, up 70% from 2009.

Outward investment by Chinese businesses has only started to ramp up in recent years, with capital generally flowing into the world’s second largest economy as a much faster clip than it flows out. In January the Ministry of Commerce said total overseas investment by Chinese companies in nonfinancial sectors was $59 billion last year–barely larger than Standard Bank’s 2015 forecast for Africa alone.

Meanwhile the bank forecasts China-Africa bilateral trade to double in four years to $300 billion from $150 billion last year. In the past 15 years, China-Africa trade has doubled every three years, the bank said in the statement .

It also predicts that Africa’s gross domestic product, or the total value of good and services produced in a region, is likely to double to about $3 trillion in 2015 from $1.5 trillion now.

“Trade and investment routes into Africa are being recalibrated as economic momentum shifts to the East,” said George Fang, Head of Mining and Metals, China. “Through trade and direct investment, China is broadening its resources supply base with Africa as one of its key partners.”

Mr. Fang’s enthusiasm is understandable. China’s banks have only a handful of branches between them throughout Africa. Moreover, Standard Bank is in a unique position to take advantage, with Industrial & Commercial Bank Ltd. holding a 20% stake in it. Standard Bank’s investment banking operations are already benefiting from that relationship, and it looks like they may even benefit a tad more down the road.

Source: WSJ

China is South Africa's Largest Trade Partner... by far

A breakdown of foreign trade last year shows China was South Africa’s biggest trading partner with total trade between the countries worth R143.3 billion.

The second biggest global economy, China bought R59.3bn worth of South Africa’s goods, of which more than R52bn were in the sectors that include base metals, coal and iron ore.

The data are from the SA Revenue Service.

South Africa’s imports from China were valued at R84bn, of which R37bn went on machinery and appliances. This left South Africa with a R23.7bn trade deficit, bigger than the previous year’s gap of R23.1bn.

The deficit has proved politically controversial, as has China’s focus on resources. A year ago a Chinese official signed a trade agreement saying China would attempt to increase its imports of “beneficiated, high-value products from South Africa”.

There are hopes that South Africa’s entry to the exclusive Bric club of Brazil, Russia, India and China at its heads of state meeting in Beijing next month could boost trade with these major emerging markets.

But there are challenges. Trudi Hartzenberg, the executive director of the Trade Law Centre of Southern Africa, said the Bric countries had similar priorities in terms of industrial development and were competing for space in the same global markets. Examples are the clothing and automotive industries.

She said there might be opportunities for South Africa in some niche markets in the clothing sector; and possible demand for processed agricultural goods, like canned fruit and fruit juice in China. But it seemed likely demand for South Africa’s products would remain concentrated on resources.

Demand from India was mainly mineral products worth R14.8bn out of total exports worth R21.7bn. South Africa imported R6.2bn of the same category of goods out of a total of R20.8bn. Total trade between the countries amounted to R42.5bn.

Trade with Brazil was worth only R15.1bn and with Russia R2.9bn.

After China, the traditional partners – Germany, the US, Japan and the UK – led in South Africa’s trade stakes. Motor vehicles and automotive equipment figured in exports, while imports were dominated by machinery and equipment.

Trade with Germany, South Africa’s second-largest trading partner, is relatively diversified. Of total exports to that country worth R42.7bn, the biggest category – R9.8bn – includes vehicles and transport equipment.

The National Association of Automobile Manufacturers of SA (Naamsa) expects export numbers to rise this year.

In January exports of vehicles rose 11.5 percent year on year and Naamsa said exports “were expected to improve substantially from February onwards in light of a revival in demand in foreign markets”.

Imports from Germany were worth R66.1bn, leaving South Africa R23.4bn in deficit. Once again, the biggest import was R16.7bn in machinery and equipment.

Trade between the US and South Africa amounted to R93.5bn: R51.7bn in exports, and R41.8bn in imports – leaving South Africa R9.9bn in surplus. The main export item was R15bn worth of precious metals and stones followed by R14.3bn in motor vehicles and transport equipment. Top of the import bill was machinery and equipment valued at R14bn.

The biggest trading surplus came from Japan – R15.9bn (exports: R46.9bn; imports R31bn). The major export was R24.2bn in precious metals and stones; the top import was R8.8bn in motor vehicles and transport equipment.

In the case of the UK, R13.5bn of precious metals and stones was the biggest export and machinery and equipment was the top import at R5.5bn. - Business Report

Visualizing the Corruption Perceptions Index

Source: Transparency International

South Africa and China sign $435m Solar Manufacturing Deal

South Africa has signed a deal with Chinese company Yingli Solar to build a $435 million manufacturing plant with a local partner, a senior government official said on Wednesday.

Nelisiwe Magubane, director general at South Africa's department of energy, told Reuters on the sidelines of a visit by China's vice president that Yingli would partner with a local company and aimed to start building the plant within 12 months.

Magubane on Wednesday also signed an agreement, witnessed by Vice President Xi Jinping, between South Africa and the China Development Bank on broad ranging energy cooperation.

"We have a memorandum of understanding on various projects... and this allows them the opportunity to invest in other's energy infrastructure projects," Magubane said, adding that no specific funds were discussed yet.

Yingli is on track for about a 10 percent share of the US solar modules market by volume this year, and if it meets forecasts, would vault the company among the top US suppliers.

China’s Xi in SA for minerals

Chinese Vice President Xi Jinping began a trip to mineral-rich South Africa on Tuesday aimed at securing resources for the Asian economic power, looking to extend its influence in the African continent.

Beijing sees global mining power and regional financial services leader South Africa as a vital source of commodities to fuel its rapidly expanding economy and industries and as a stepping stone to access other African states.

Xi, pegged as China's next president, is on a three-day official visit to Africa's largest economy, which exports about $5.5 billion a year in minerals to the state and has been increasingly a destination of Chinese foreign direct investment.

“As the international landscape evolves and China-South Africa cooperation deepens, the need for our bilateral cooperation is growing, the areas of cooperation are expanding and a confluence of our interests is increasing,” Xi said on Tuesday.

The Chinese delegation and South Africa are expected on Wednesday to sign a bilateral memorandum of understanding for co-operation in geology and mining, and a letter of intent related to South Africa's energy sector, among others.

“It makes sense that China's political diplomacy marries that desire to reshape the world with Africa's participation,” Jeremy Stevens, an economist at Standard Bank told Reuters.

Standard Bank, the largest on the continent, is 20 percent owned by the Industrial and Commercial Bank of China, in an arrangement analysts felt could foster increased Chinese investment in the continent but has yet to yield big dividends. - Reuters

Chanos Makes his case: "Overheating and overindulgence in China"

Corruption: South Africa not as bad as Brazil, Russia, China, India

With scores of 9.3 out of 10, Denmark, New Zealand and Singapore are the world's least corrupt countries, according to a new index from Transparency International, an anti-corruption watchdog. At the other end of the table, Somalia ranks bottom with a score of 1.1, ahead of Afghanistan and Myanmar. Worryingly, Brazil, Russia, India and China—the BRICs currently considered the global engine for economic growth—all score less than 4.

South Africa, with a score of 4.7, ranks in the top third globally, higher than Brazil (3.7), China (3.5), India (3.3) and Russia (3.1).

Source: The Economist, Transparency International

See also:
- Minister Fikile Mbalula talks about corruption

Big Mac Index says Rand still Undervalued

A weak currency, despite its appeal to exporters and politicians, is no free lunch. But it can provide a cheap one. In China a McDonald’s Big Mac costs just 14.5 yuan on average in Beijing and Shenzhen, the equivalent of $2.18 at market exchange rates. In America the same burger averages $3.71. That makes China’s yuan one of the most undervalued currencies in our Big Mac index, which is based on the idea of purchasing-power parity.

This says that a currency’s price should reflect the amount of goods and services it can buy. Since 14.5 yuan can buy as much burger as $3.71, a yuan should be worth $0.26 on the foreign-exchange market. At just $0.15, it is undervalued by about 40%. The tensions caused by currency misalignments prompted Brazil’s finance minister to complain last month that his country was a potential casualty of a “currency war”. The Swiss, who avoid most wars, are in the thick of this one. Their franc is the most expensive currency on our list.

Source: The Economist

First Movers Start to Solidify Thier Advantage

Citigroup said on Wednesday it has opened a China desk in South Africa, to support Chinese companies expansion on the continent.

The desk will work with trade and investment flows in and out of China, and help Chinese firms as they expand overseas, the U.S. financial services firm said in a statement.

International banks are increasingly looking to trap trade between Asia and resource-rich Africa. HSBC, Europe's largest lender, is in talks to buy up to 70% of Nedbank, South Africa's fourth-largest lender.

Standard Bank, South Africa's largest bank, is 20% owned by Industrial and Commercial Bank of China.

Citigroup has similar China desks in the United States, Europe, Asia and the Middle East.

Bidvest Bank to Buy/Sell Yuan

Bidvest Bank has begun buying and selling Chinese yuan notes, a spokesperson said on Monday.

Craig MacFarlane, head of retail operations, said in a statement that demand for Yuan among South African business and leisure travellers had been growing for some time.

Bidvest is the first local bank to deal in yuan notes.

"Local demand for Yuan is already significant and is expected to grow in view of increasing trade and travel links between China and South Africa."

MacFarlane said currency restrictions applied in China and people were only permitted to take into China or bring out a maximum of 20 000 yuan.

"That's about R20 000 as the rate is close to one to one at the moment."

Bidvest Bank is South Africa's leading currency exchange operator.

Sasol: Potentially the Largest Foreign Single Project Investor in China

South African petrochemicals company Sasol expects China’s National Development and Reform Commission to conclude a review of its application to build a 90 000-bl/d coal-to-liquids (CTL) facility in that country soon.

Sasol entered into a 50:50 venture with Shenhua Ningxia to develop the $10-billion project, which is said to be the largest foreign single project direct investment in China and also the country's largest-ever CTL fuels project.

The CTL plant would be Sasol's first CTL investment outside South Africa, where the technology is used to produce about 40% of the country's fuel.

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Chinese Invasion of Africa - Since 1960

The influx of Chinese migrants, investors and businesses to the African continent is amazing:

By the 1960s, 19 African countries had official ties to Beijing. To help cement new diplomatic relations, Mao sent a number of Chinese to the continent in the 1960s, as well as 150,000 technicians between the 1950s and 1970s, to work in agriculture, technology, and infrastructure. Most returned to China after completing their contracts."

In northern Namibia, small Taiwanese businesses emerged as early as the 1970s, and Chinese textile firms were established in the Newcastle region of South Africa and Lesotho around the same time. These businesses established networks that current entrepreneurs still tap into when arriving in Africa.

Current immigration trends are linked more directly to China's liberalized migration and economic policies in the late 1970s, which permitted Chinese to leave the country and allowed for foreign investment.

Official estimates of the number of Chinese in Africa vary dramatically. Political scientist Sasha Gong reports official numbers to be only 100,000 Chinese workers in Africa — or 15 percent of the total overseas Chinese workforce. About 35 percent of those in Africa work in manufacturing and about 30 percent in construction, with the number of manufacturing jobs decreasing and construction jobs increasing over the past five years. Gong acknowledges that the official number is likely only a fraction of the whole.

An Ohio University database estimates the total number of Chinese in Africa at 137,000, the same figure Taiwan's government provided in 2001 (Taiwan's estimate in 2004 was 154,000).

Political scientist Emmanuel Ma Mung estimates the number to be between 270,000 and 520,000, with between 70,000 and 80,000 contract migrants. However, Xinhua, China's official news agency, estimates the total population to be significantly larger — as many as 750,000 Chinese working or living "for extended periods" on the continent.

In Angola, 2,500 Chinese work for Chinese companies financed by an oil-backed loan China granted to the Angolan government. University of Nairobi economist Francis M. Mwega anticipated a total of 30,000 Chinese workers for the project.

Political scientist Barry Sautman compiled press reports that estimate 1,000 to 3,000 Chinese in Cameroon, 5,000 in Lesotho, and as many as 50,000 in Nigeria (all estimates are for 2005). According to the Southern African Migration Project at Queens University, as of 2006 there were as many as 40,000 Chinese in Namibia on work visas and residence permits.

In a 2007 New York Times article, Chad Chamber of Commerce Director Renaud Dinguemnaial estimated an "influx of at least 40,000 Chinese in coming years" to Chad.

Perhaps one of the most telling signs of increased migration between the two regions is the rising number of weekly flights between China and Africa. In 2007, Chinese airlines began launching one flight per week between Beijing and Lagos, Nigeria's largest city.

Currently, three Chinese air companies offer routes to Africa: China Southern Airlines, China Eastern Airlines, and Hainan Airlines, which offers nonstop flights from Beijing to Cairo three times per week and a route from Beijing to Johannesburg via Guangzhou twice per week.

In July 2008, Emirates airline also began offering six flights per week to Guanghzhou, with connections in Dubai for those coming from Cape Town, Lagos, Cairo, Addis Ababa, and Nairobi.

For the rest of this article, click here.

BRICs 'not complete' without SA

South Africa's foreign minister said on Thursday the informal grouping of fast-growing emerging economies known as BRIC -- Brazil, Russia, India and China -- should add South Africa to become BRICSA.

"We have doubled our efforts on BRIC and we remind them that it does not sound complete without SA at the end," Foreign Minister Maite Nkoana-Mashabane told a media briefing on her visit to China last week with President Jacob Zuma.

"The Chinese said they are hearing us and we should watch this space," she said.

The BRICs, a term coined by Goldman Sachs economist Jim O'Neill in 2001 to describe the growing influence of large emerging economies, accounted for about half of global economic growth between 2000 and 2008 and will account for 61% of global growth in 2014, according to the International Monetary Fund.

The countries are not formally linked but have held summits and taken steps to boost financial cooperation and investment opportunities between them.

South Africa, whose economy is about one-fourth the size of India's, has been lobbying heavily to be admitted to the group.

Zuma has made a point of visiting all four BRIC countries since taking office in May last year.

"In diplomacy one keeps knocking without annoying the occupants of the house," Nkoana-Mashabane said.

"We have done our best and made a positive impression with BRIC members."

Source

China to Build Solar Power Plants in South Africa

Suntech Power Holdings, China's largest maker of solar panels, said on Thursday that it has signed a deal to develop solar plants in South Africa with up to 100 megawatts in capacity as the country looks to boost clean energy output.

Read more...

China Visit Investment Report

CHINA VISIT: ECONOMIC REPORT
By Simon Hunt

In all likelihood, China has entered the most critical and taxing period since the country was reopened to the outside world in the 1970s. Domestically, there are a slew of issues, any one of which could create instability. These issues include:

- Home affordability
- Leadership instability
- A potential if not actual housing bubble
- The rising income and wealth differential between those who have made it and those who have not
- The country's continued dependence on exports as its principal driver of growth
- Cheap credit, which punishes savings and encourages investment/speculation
- The misallocation of capital that springs from the previous factor
- Local/provincial government indebtedness
- A new assertiveness and arrogance at all levels
- Policy making that focuses on short-termism without addressing structural and longer-term issues, etc.
- Impact of rising wages
- Energy intensity
- Role of foreign companies
- Resource dependability - water, raw materials, etc.

The list could go on, but these issues are evolving at a time when the global environment is fraught with difficulties and uncertainty, making policy making within China that much more complex. The infighting within the leadership, which goes beyond the normal tensions that often occur during the period leading up to a change in leadership (due in 2012), is making policy management more difficult and has led to conflicting views being expressed by various factions, in the media.

Few can know the full story of what goes on within the State Council, but there appears to be a battle royal being fought over the real estate sector. There are those within the leadership who are concerned that average home prices have gotten too high for most first-time buyers (see our previous visit report). They want to see average prices fall by 10-20% across the country. Against this group are not just real estate developers but local governments and many others within Beijing. This group, of course, depends for much of their revenue, or in the case of developers, their profits, on rising land and building values. In fact, local governments depend on land sales for one-third of their revenues. In 2009, land sales brought in RMB 1.6 trillion, compared with a total budget income of RMB 3.3 trillion. Moreover, land is the most-used collateral for bank loans; its value is thus crucial to the credit edifice.

Many local governments have not adhered fully to the new restrictions imposed by the central government on the real estate sector. This has infuriated those in Beijing who are determined to encourage a fall in home prices. In effect, what is being seen is a battle between central and local governments. In our view, this is a fight that central government cannot afford to lose.

The scale of speculation in real estate is enormous. There is a total of 64.5 million apartments and houses lying purchased but vacant in urban China, about five times the surplus in the USA, according to an economist from the Chinese Academy of Social Sciences.

A report written by the National Bureau of Economic Research in July this year provides interesting data on China's housing market. Real housing prices have risen by 140% since the first quarter of 2007. In the first quarter of this year, house prices rose by a record 41%, since when it appears that prices have stabilised but not fallen. Price increases have not been driven by any shortage in housing. In five of the eight markets that the authors of the report studied, the net new number of housing units provided since 1999 was at least as large as the net increase in the number of households. In the three others, the relatively modest gap does not explain the huge rise in home prices.

In Beijing, there has been an almost eight-fold increase in land values since 2003, but since the end of 2007 land prices have nearly tripled. The impact of rising land prices on home and apartment prices has been equally great. From 2003 to 2007, the ratio of land-to-house values hovered between 30% and 40%, but since then it has doubled to just over 60%. The report also found that when a central government state-owned enterprise (SOE) was a winning bidder for land, prices rose by about 27% more than if they had not been involved, thus showing the influence that SOEs bring to bear on land values, an influence that grew in 2009 when they became more active. A separate report shows that so far this year 82% of Beijing's land auctions have been won by SOEs.

Price-to-rent values in Beijing and seven other large markets across the country have increased from 30% to 70% since the start of 2007, and current price-to-rent ratios imply very low user costs of no more than 2-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. The report continues with calculations suggesting that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing.

In summary, against a background of cheap money and plenty of credit, house prices across the country have become unaffordable to most first-time buyers. In Beijing, for instance, average house prices have been between 14 and 15 times incomes for the past three years, but rose to 18.5 times in the first quarter of this year. If average home prices do not fall significantly across the country, the risk is that Beijing will be forced to tighten policy another notch. A softening in monetary policy is likely only if average home prices fall within the 10-20% range.

This is what the policy fight is all about, because if these price developments continued unchecked the leadership would risk encountering social instability. Workers everywhere are demanding higher wages. The demands are not just amongst the SMEs and foreign companies, but within the SOEs. We understand that a significant number of SOEs have seen de facto strikes, just not in name. The workers clock in, go to their stations, put down their tools, and clock out without doing any work.

The list of grievances is long, with rising wages being one. How government deals with this situation remains to be seen. We were reminded that in 1989 it was only when the workers joined the students that an explosive situation developed. No one is expecting anything remotely similar, but these developments do illustrate the tensions lying beneath the surface which the leadership is having to grapple with.

Politics in China is all about maintaining social stability. The demographics of the country are forcing the leadership into a new economic model, which will be partially driven by the level of average wages over the coming five years being at least double that of the last five years.

Dr Clint Laurent of Global Demographics has consistently stated that China's statisticians have overstated the country's birth rates since 1990. This implied, as he said in a paper in 2005, that China's labour force would peak at 770 million in 2008, falling to 690 million by 2025. Another major consequence is that the important age group of 20-39 peaked in 2000 at 458 million and by this year will have fallen by 4%.

The consequences of these demographic changes are immense. First, wage inflation will be a given, not just in the private and foreign sectors but amongst the SOEs, as we mentioned earlier. Second, it means that manufacturers will introduce automated machinery to reduce the workforce (the new booming sector) and improve productivity. Third, rising wages lay the foundation for better consumer spending; though households, as in the past, will have to cover the losses racked up by local governments, according to Michael Pettis, a visiting professor in Beijing. Fourth, disposable income in the rural sector is improving. This development, combined with subsidies granted to rural households for buying a range of household appliances, has lifted the demand for these products in rural areas. Nonetheless, it is human nature that when a gift is offered there is a rush to buy, so how long the subsidies will affect sales of appliances is a moot point.

Finally, policy makers know that the time has come when the country's dependence on exports for growth must be replaced by domestically driven growth that focuses on consumer spending and not fixed-asset investment. Local coastal governments, however, will fight to see that exports from their regions continue to drive their own growth; but their success will depend on global trade.

Much of the surge in exports so far this year has been due to the replenishment of inventory within the distribution and sales channels and to the expected increase in export prices out of China. Inventory replenishment has now run its course in Europe and the USA. Given the expected slowing of consumer spending in the US in the second half of this year, some inventory liquidation might actually be seen. Even so, exports from China should weaken sharply by year-end.

The move to de-peg the RMB from the US$ gives Beijing the flexibility to either appreciate or depreciate the currency depending on global conditions. Any appreciation will be modest given the small margins that most exporters enjoy. If our profile of the world economy is even half correct, we should expect to see the RMB depreciate against the US$ and other currencies post-2012.

Wage inflation threatens to feed into general inflation. Food prices remain quite stable overall for now, but there is a risk that they will be rising by year-end. Vegetable prices are rising sharply, according to friends who shop every week. Meat prices are stable for the time being, but wheat prices had risen well above the government's sale price of RMB1800, to over RMB2350, when we last looked. Friends fear that food prices will be rising in the fourth quarter, with some economists predicting that CPI will be increasing at a 5% rate by then. We are told also that the cost of getting an electrician, plumber, etc. in to do odd jobs has doubled over the last year in Beijing and other major cities. Our general take is that China is on the threshold of seeing an overall increase in the cost of living. Whether it shows up in official numbers or not, households will feel it.

A long-term concern is whether China has key resources to maintain the growth profile that the country has experienced over the last 40-odd years. Water may well be a key constraint. China's water-resource capacity is only ¼ of that of the world average. In other words, the country has 20% of the world's population but only 7% of global water resources. The problem is compounded by the dispersion of those resources. The area around the Yangtze River accounts for 36.5% of the country's land mass, but holds 81% of its water. North of the Yangtze River lies 64% of the country's territory, but only 19% of its water resources.

A World Bank report shows that more than half of China's 660 cities suffer from water shortages; and 90% of cities' groundwater and 75% of their lakes and rivers are polluted. These are examples of the physical constraints on growth. China's rapid pace of industrialisation has left the country with severe burdens and a massive clean-up, not just in urban areas but throughout the countryside. Water is a global depreciating resource, as William Houston and Robin Griffiths showed in their book Water: The Final Resource. History also shows that wars are fought over access to water.

Local government indebtedness is being exposed as a potential time-bomb, as one friend remarked to the writer. Whatever the correct figure, it is large and is in the range of RMB6 trillion to RMB11.4 trillion, equivalent to 71% of the country's nominal GDP. Some reports suggest that banks will have difficulty recouping about 23% of what they have loaned out. The China Banking Regulatory Commission has told banks to write off nonperforming project loans by the end of this year.

No one should be surprised by these numbers. Back last October we were told - and we reported - that one-third of the fiscal stimulus and bank lending never went into the real economy. There are likely to be more hidden black holes. One consequence is that credit is tight, with receivables mounting across a wide swath of manufacturing.

Markets will sense some of these uncertainties. In line with falling global equity markets, which should start very soon, the Shanghai and other Chinese stock markets are likely to fall sharply by year-end. This will take the stuffing out of consumers' willingness to buy large-ticket items like cars and appliances. Already, so we hear, inventories of these items are growing within the distribution systems, with production levels likely to fall over coming months.

Many companies believe that the weakness now being seen is seasonal. But others, whose opinions we respect, believe that weakness will be seen at least until year-end. Prices of raw materials, semi-fabricated products, and finished goods are likely to start falling very soon. Instead of accumulating inventory, stocks within the entire manufacturing and distribution systems will be slashed, repeating to a lesser degree what occurred in the second half of 2008. Construction activity will continue to slow, notwithstanding the continued high rate of completions, consumer spending will slow also, exports will be weak in the fourth quarter, and growth of fixed-asset investment will be lower. By year-end, the psychology of businessmen and consumers will have shifted from optimism towards pessimism in line with movements in the Shanghai stock market. Real business activity will be pretty flat in the fourth quarter. The latest PMIs from the Government's Logistical Office and from the HSBC both indicate a slowing economy. The former is geared more to the SOEs and the latter to the private sector. The HSBC sub-index of new orders fell from 49.7 in June to 47.9 in July.

In summary, we doubt there will be any easing of policy until average house prices fall into the 10-20% range. China is transiting into a very difficult period as focus shifts towards sustainable domestic growth and away from short-term measures to defend the 8% GDP mantra. This transition is occurring when the existing leadership is preparing to give way to the new set in 2012, when social stability could be threatened if there are policy mistakes, when the rest of the world is starting to stand up to China's increasing assertiveness, and when foreign companies are questioning their future in China. China will muddle through, but it won't be an easy ride.

The dragon in Africa: An overview of China's presence on the continent

China, an emerging global superpower which will likely become the world's biggest economy within fifteen years, has planted itself deeply into the vast continent of Africa -- a land of huge untapped natural resources and incredible growth potential.

It would seem to be an ideal marriage -- China possesses immense intellectual capital and an inexhaustible appetite for commodities to keep its economic engines running, while much of Africa remains poor and in dire need of external assistance.

“Africa has an abundance of resources and is regarded by many as a frontier market that has strong growth prospects,” said Avior Research (Pty) Ltd., an equity research firm based in Johannesburg, South Africa.

“China is well aware of their need for resources as their own economy grows and, therefore, it is in China’s interest to gain a strong foothold on the African continent if it wants have access to those resources. China’s biggest investments into Africa have been in infrastructure, mining and banks.”

The two-way trade between China and Africa is expected to exceed $100-billion this year -- but that is only a pittance of what the future holds.
China's interests in Africa is nothing new, of course, but only in the past two decades have these giant entities established a firm and burgeoning economic cooperative.

Africa is the source of at least one-third of the world’s commodities, Avior Research estimates, and from the perspective that China needs raw materials “it is understandable that they are determined to build roads, ports, and railroads all over Africa.”

It could be argued that China moved into Africa only after the U.S. and Russia began to scale back their presence on the continent after decades of using it as a 'Cold War' chessboard.

Avior Research explains that as an emerging economy, China is arguably ideologically more aligned to Africa, than what the U.S. or Russia currently is.
“Much of the US/Russian interests arose out of the Cold War crisis between these countries,” Avior stated. “However, once hostilities ceased, a lot of the U.S and Russia’s political drive to economically re-colonize Africa lost momentum.”

In its recent approach to Africa, China could not be more different from the West, Avior Research added.
“It has focused on trade and commercially justified investment, rather than aid grants and heavily subsidized loans. It has declined to tell African governments how they should run their countries, or to make its investments contingent on government reform. China has moved quickly and decisively, especially in comparison to many Western aid establishments.”

In October 2000, Beijing created the Forum on China-Africa Cooperation, which regularly holds summits between Chinese leaders and various African rulers to discuss and formalize deeper relations. China has become one of the continent's leading investors and creditors.

From constructing a housing project in Algeria, to running a huge mining and infrastructure complex in Guinea, to an iron ore project in Liberia, to a massive dam enterprise in Ghana, to a highway construction endeavor in Rwanda, China has its fingerprints all over Africa. Indeed, China has established joint committees in at least 43 African nations to discuss and deepen economic and trade relations.

Of course, China's incursions into Africa has drawn much criticism, particularly from the West which fears that China is simply using Africa to feed her own economy at the expense of indigent Africans (which, of course, was the same charge leveled at the European colonialists for centuries).

Chinese officials have also come under attack for their lack of transparency and accountability regarding its numerous activities in Africa and its apparent unwillingness to reduce political corruption on the continent.

In response to such criticism, Fu Ziying, the senior trade official in charge of China's Africa portfolio, was recently quoted as saying: "China's presence in Africa is becoming more and more market-driven, the actors operating there are diverse, there are many models, and the areas they are in are broad.

The Chinese government is more and more aware that as the economic and trade cooperation between China and Africa evolves, there need to be some laws and protections in place."

In fact, China herself developed and modernized its own economy back in the 1970s and 1980s by talking loans from wealthier powers (in this case, Japan, among others) in exchange for mineral resources and oil. Within a few decades, China became an economic heavyweight and correspondingly became a net importer of commodities, rather than an exporter.

It would appear that the Chinese are now doing something similar with resource-backed lending in Africa (with China now as the dominant benefactor).

In "The Dragon's Gift: The Real Story of China in Africa" a book by Deborah Brautigam, a professor at American University and an expert on China-Africa relations, she points out that while the Chinese presence in Africa is largely benevolent, there are many problems associated with this complex relationship. For one thing, working conditions in many China-funded projects in Africa are very poor; and the Chinese do not seem to view the destruction of the ecosystem and environment with much concern.

However, she also indicates that China has made tremendous infrastructure investments in countries like Rwanda, Kenya and Senegal, which lack significant commodities -- thereby refuting the notion that China seeks only to 'exploit' Africa.

Moreover, China's financial investments remains far below the capital that flows to the continent from Western sources.

Brautigam estimates that in 2007, Chinese investment in Africa totaled about $1.4 billion, far smaller than the outlays by the U.S., European Union and World Bank of $7.6 billion, $5.4 billion, and $6.9 billion, respectively, for that year.

Nonetheless, China will surely deepen its involvement in Africa in the years to come. Only time will tell how much the Africans benefit from this relationship.

Direct Link

Karoo Wind Turbines (With Help from China)

De Aar in the Karoo is currently the focus of one of China’s largest power companies.

Over the weekend Zhu Yongpeng, president of the state-controlled electricity company China Guodian, accompanied by some of his top executives and the general manager of the Chinese wind-power company Longyuan, a subsidiary of China Guodian, got together in De Aar to meet the local authorities in the district.

China Guodian envisages establishing a 100MW wind farm in the De Aar area, in collaboration with South Africa’s Mulilo Energy. This is part of a portfolio of six to nine wind farms across the entire country with a capacity of more than 1 500MW.

The De Aar project can be expanded to generate 300MW to 400MW, said Mulilo chief executive Johnny Cullum. The first phase, with a capacity of about 100MW, involves an investment of R1.8bn.

China Guodian, together with Mulilo, has already erected a couple of anemometer masts, the data from which will be monitored in China.

China Guodian is considering building a wind turbine assembly plant and blade factory in South Africa if there is sufficient demand for wind turbines in this country and in the rest of Africa. Such plants could create more than 1 500 jobs.

China Guodian has power stations generating 85 000MW in China. These include nuclear power, coal and hydroelectricity plants. Its wind power subsidiary, Longyuan, each year builds new wind farms generating 2 000MW and it aims to become the world’s biggest wind-farm operator by 2016.

If everything goes according to plan, construction on the De Aar wind farm could begin by March 2011, and the first stage be completed by 2012 with 67 1.5MW wind turbines.

Sindisile Madyo, manager for local economic development at the Pixley ka Seme district municipality, said the region was focusing on solar and wind power as well as hydroelectricity and biomass in its strategy to become the future focal point for renewable energy in the Northern Cape.

- Sake24.com

See also:

• The move to Alternate Energy - Wind Turbines in Port Elizabeth
• Sasol to explore for shale gas in the Karoo
  

A Door to Africa: Standard Bank Reaps the Benefits of Old Thinking

To understand where Standard Bank is today, says its boss, Jacko Maree, you have to go back to South Africa in early 1987, when Standard Chartered, its original parent, sold out completely. Most South African firms were not welcome in the rest of Africa, he says, and “it wasn’t entirely obvious” that Standard Bank’s priority should be there or indeed in emerging markets at all. When South Africa moved to majority rule in the 1990s, plenty of South African firms shifted their domicile to London and tried to diversify into developed markets, but Standard Bank stuck to its guns. Something of this determination is reflected in its choice to keep its headquarters in downtown Johannesburg even though most financial firms moved to Sandton, a safe but dull suburb where adventure is a bar named the Bull Run.

Mr Maree, at the cuddly end of the spectrum of South African bankers, has been pretty astute. He became chief executive in 1999 after a failed takeover bid for his bank, which he says “was a big kick up the backside”. That meant making more of its main activities abroad: an African presence built from branches bought from Australia’s ANZ in 1992; an investment-banking unit in London (originally put there because of foreign-exchange controls in South Africa); and small operations elsewhere, including Russia, where natural-resources banking, an obvious specialism for African firms, is important.

The result has been solid, with compound annual growth in profits per share of 8% since 2003 and only a small dent in earnings from the financial crisis. In 2009 almost a quarter of profits came from abroad, either the rest of Africa or indirectly linked to the continent—for example, currency trades executed in London.

South Africa has had two lending booms since the end of apartheid. The first was driven by the opening of the economy to foreign capital, the second by lending to the rising black elite over the past decade. As a market it is fairly mature. But Africa as a whole is set for a “tectonic shift”, says Goolam Ballim, Standard Bank’s chief economist. The proportion of Africa’s trade with China, Brazil, India and Russia rose from 5% in 1993 to 19% in 2008. Much of this, inevitably, is in resources, but governments are getting better at saving the proceeds of the good times for the less good ones, reckons Mr Ballim.

Old Africa hands who used to roll their eyes at this kind of analysis got a surprise in 2007 when ICBC, now the world’s largest bank, spent $5.5 billion on a 20% stake in Standard Bank in what was then China’s largest ever corporate foreign investment. Mr Maree and Mr Jiang, ICBC’s chairman, stitched the deal together after spending a day in Cape Town together. There is still a wow factor about it, says Mr Maree. Although the revenues generated from working with ICBC are modest—some $78m in 2009—co-operation is being stepped up. Standard Bank has 30 bankers in Beijing now, as well as a main board director in an office close to ICBC’s, who help clients of the Chinese bank interested in expanding in Africa.

For China’s banks the deal is a test case of whether “treading softly” overseas will work. The combination ticks every box, bringing a presence in key markets for Chinese clients and exposure to a sophisticated foreign firm with skills in areas like investment banking and foreign-currency funding. Yet ICBC has limited influence with Standard Bank, with only a couple of directors on its board. A full takeover looks unlikely. ICBC would need permission from Standard Bank’s board to buy more shares, and South Africa’s government would probably not approve.

For Standard Bank the merits of the deal are clear: more capital, and kudos, to build a bigger presence in Africa and elsewhere. It is mulling buying a bank in Nigeria (where the government is opening up more to foreigners). And it is eyeing India, which Mr Maree says is “the missing link”, given that Standard Bank already has an operation in Brazil and a stake in a Russian investment bank, Troika Dialog. With Standard Bank’s complex history and relatively isolated position, explains Mr Maree, “we’ve had to think in a much more out-of-the-box way.”

Link to The Economist article, part of a Special Report on Emerging Financial Institutions

Wesco AGM Notes: Golden Advice from Charlie Munger

Notes from the 2010 Annual General Meeting of Wesco Financial, chaired by Charlie Munger.

I recommend reading the document as it's filled with genius that only Munger could provide.

Key Comments:

Who else failed us? The academic types thought that diversification was the secret to success. Diversification may be a way of avoiding disaster but does not represent a path to success. A person is not much of a teacher if all he or she can do is prevent disaster. This is why he calls it de-worsification. BRK owns things they know a lot about [instead of blindly. The concept of beta or volatility is asinine. It isn’t always bad ideas that cause bad outcomes but good ideas taken to excess. Obviously if you own very volatile stocks your returns can be volatile day to day. The main problems in life can only be solved when you know what works, what doesn’t and why.

Gilford Glazer [a longtime friend of his], came back from the war and went to HBS. But his father’s little machine shop needed attention and he asked them to defer acceptance for a year so he could help his father. After a year he contacted HBS and asked for another year. The guy from Harvard then asked him how many employees he had last year at this time. He answered 50. Then, when he asked him how many employees he had now, the answer was 900. The Harvard guy laughed and told him he didn’t need to go to business school. That kind of approach is no longer present at HBS. They were probably wiser then than they are now.

Charlie thinks GS has the best morality and best wisdom of all of the banks. Accordingly, the government should not jump on the bank that is the best. The government just stumbled into this SEC investigation and it is not an appropriate response. He thinks the world would work a lot better off without this stuff [derivatives]. It worked well without them before.

The George Washington of Singapore, Lee Kuan Yew, decided to marry the smartest girl in his class. Their son is now the PM of Singapore. He was a very practical man. He didn’t want people dying of Malaria so he drained all the swamps and didn’t care if a little fish went extinct. He didn’t like the drug problem and he looked around the world to solve the drug problem. He found the solution in US by copying the US Military’s policy. Any time you can be tested and if you fail you go to jail. If something was going to grow like cancer he would check it hard with the wrath of God. He turned a country with no resources or agriculture into a prosperous country, starting from 0 mph. We need to pay more attention in our country to the Singapore model.

There is Alice and Wonderland and nut case accounting in the US. These people need to be thrown out and people who think more like Lee Kuan Yew need to be installed. Jamie Dimon of JP Morgan is actually complaining about this but he is the only one. Charlie takes his hat off to him but his derivative book needs to go away. He should not run a gambling parlor next to a legitimate business. Actually, in recent years, some of our banks actually bought casinos. “Why run a casino in drag when you can run a real casino?” When it comes to casinos, maybe we should have these things but we should minimize them. Casinos work so well--no inventories and no accounts receivable. It’s like god gave you the ability to print money. But real casinos have huge CAPEX and asset requirements. On the other hand, on Wall Street they can create a casino without those requirements. How many of us could resist those temptations to print money?

Don’t go where the big boys have to be. You don’t want to look at the drug pipelines of Merck and Pfizer Go where there are inefficiencies in which you can get an advantage and where there are fewer people looking at the stocks. Go where the competition is low.

Read the full notes here (courtesy Inoculated Investor)