China's Quest for Resources: Mutual Convenience

CHINA'S QUEST FOR RESOURCES

Mutual convenience

Mar 13th 2008
From The Economist print edition

Congo has something China wants, and vice versa

IN POORER countries such as Congo, China's hunt for resources has more complex effects. On the one hand, Congo's long-deprived citizens are in much more desperate need of trade, investment, economic growth and the rising living standards they might bring with them. On the other hand, its corrupt and underfunded government is much less able or inclined to manage China's engagement for the benefit of its people. Nonetheless, even from the pot-holed streets of Lubumbashi, China's new needs seem like a momentous opportunity.

Congolese are constantly pointing out that their country should be one of the richest in the world. It has huge mineral wealth, including the world's biggest reserves of cobalt and tantalum, a rare metal used in the circuitry of mobile phones and laptops. It also has rich seams of copper, diamonds, gold, manganese, uranium and zinc. And much of the country is covered with virtually intact tropical forests, thick with valuable hardwoods.



In fact, though, Congo is one of the poorest countries in the world. Output per head is just $714 a year, the third from the bottom in the United Nations' global ranking—even after adjusting for the lower cost of most staples in poor countries. Over half of its citizens do not have access to clean water, and the life expectancy of a newborn baby is less than 46 years. Kinshasa, the capital, has some 15m inhabitants but no sewage system.

Dirt poor in the midst of plenty
In short, Congo has made very little of its natural resources. The Economist Intelligence Unit, a sister company of The Economist, estimates that the country's exports last year were worth only $2.6 billion—a paltry sum in a country of 60m people. This pitiful performance stems first from exploitative Belgian colonialism; then from the kleptocratic misrule of Mobutu Sese Seko, who ran the place for more than three decades until his overthrow in 1997; and then from the on-again-off-again civil war that has wracked the country ever since. Sporadic fighting continues, although UN peacekeepers have managed to instil a semblance of order which allowed elections to be held in 2006.

Western donors paid for the elections, which cost $460m, and have supported the resulting government with substantial handouts. This year's budget, for example, envisages aid of $1.3 billion—although it is not clear whether this will be forthcoming. The government has had testy relations with the International Monetary Fund, which thinks it is too lavish in its spending. That, in turn, has prevented Congo from joining the “Heavily Indebted Poor Countries” initiative (HIPC), under which Western donors agree to write off some of the debt of the poorest countries as long as the IMF approves of their economic policies.

While negotiations with the IMF on a reform package drag on, interest payments on Congo's foreign debt of $12 billion are consuming a large chunk of the budget. The remainder goes mainly to pay civil servants, leaving little for development. Moreover, complains Barnabe Kikaya bin Karubi, a member of the National Assembly and a former presidential spokesman, once the holes in the budget have been plugged, most Western aid goes into education and health care. These are important, he argues, but they do little to stimulate the economy in the short term. And all Western aid, he gripes, comes with endless strings attached: “If we say to the Europeans that we want a highway, they say, 'hold an election first, sort out your finances, crack down on corruption'—and in the end the highway never gets built.”

Congo is also receiving some private capital. Freeport McMoRan, an American mining conglomerate, has started construction of a $650m copper mine in Katanga province and hopes to begin operations by the end of this year. Last October Katanga Mining, which is listed in Toronto, secured a loan of $150m to finance the development of another copper mine nearby. The same month BHP Billiton agreed with the Congolese government to look into the construction of an aluminium smelter in the province of Bas Congo, at a cost of roughly $3 billion.

But Western firms are cautious. Freeport's mine, for example, has been in the works for over a decade as various prospective investors have balked at Congo's instability and dropped out. It has taken encouragement and financing from bodies such as the African Development Bank, the European Investment Bank and America's Overseas Private Investment Corporation to get the project up and running.

For several years now the World Bank has ranked Congo as the worst place in the world, bar none, to do business. It has a totally dysfunctional legal system, a hugely cumbersome bureaucracy and a near-total lack of physical infrastructure. Kinshasa suffers from paralysing traffic jams, due not to a surfeit of cars but to the appalling state of the roads. Last year analysts and businessmen surveyed by Transparency International, a pressure group, ranked it 168th out of 179 countries for freedom from corruption. To top it all, the government is conducting a much-needed but opaque and long-winded review of all mining contracts signed during the civil war, adding to foreign investors' anxiety.

None of this seems to deter China's state-owned firms, however. Last September Export-Import Bank, through which the Chinese government disburses all its foreign aid, signed an agreement with the Congolese government to finance $6.5 billion-worth of improvements to the country's infrastructure and $2 billion-worth of construction and refurbishment of mines, using mineral reserves as collateral. The following month a similar deal was signed with China Development Bank.

Victor Kasongo, the deputy minister of mines, says the total value of these deals could eventually reach $14 billion, a conservative estimate of the value of the 3.5m tonnes of copper reserves the government has set aside as collateral. The state-owned mining firm, Gécamines, also holds the rights to a further 13.5m tonnes of copper reserves, so if the model proves successful there is enormous scope for expansion.

Joseph Kabila, Congo's president, has labelled the Chinese deals as “exemplary co-operation”. “For the first time in our history”, he told the National Assembly, “the Congolese people will finally be able to see what the use of their cobalt, nickel or copper will have been.”

But Western governments have all sorts of questions. For one thing, they are loth to forgive billions in debt to Congo only to see it rack up similar obligations to China. They also want to be sure that firms from their countries will not suddenly find themselves at a disadvantage to Chinese ones with political connections. Nor do they want to be put at a disadvantage themselves, with little leverage over a Congolese government flush with Chinese cash. At best, that would jeopardise their recent efforts to steer Congo towards solvency and democracy. At worst, it might help to rekindle the civil war, undermine stability in the region and put 18,000 UN peacekeepers at risk.

Reuters

The power of picks and shovelsIt is true that China has sold arms to the Congolese government. But if those arms help to stem the various rebellions wracking the country, they might actually make it more stable. At any rate, China is not the only outside power to go down that road: the UN's peacekeepers, despite their title, have joined the Congolese army in an offensive against one of the most disruptive rebel groups. It is hard to see how provoking instability in the area would be in China's interests. After all, it would make it harder to get at the minerals which Chinese firms are so keen to secure. It would also generate embarrassing publicity, especially in the run-up to the Beijing Olympics in August.

It is also true that Congolese politicians chafe at the dictates of the IMF. But Congo is so poor that it cannot afford to turn its nose up at either Western or Chinese money. The government certainly could not do without the funds European donors have lent it to help balance the budget. It also desperately needs the debt relief that only the IMF can provide, through the HIPC scheme, so it is trying to get back in the fund's good books.

Anyway, there is no sign that China intends its aid as a substitute for Western handouts. In December the World Bank and China agreed to develop aid projects in Africa together. Chinese diplomats have begun attending the meetings in Kinshasa at which Western donors try to co-ordinate their development schemes, says Ross Mountain, the local head of the United Nations Development Programme. He sees no problem with a big increase in Chinese aid: the more the merrier.

The same goes for mining firms. The Congolese authorities insist that Western companies have nothing to fear from the sudden appearance of Chinese rivals. No sooner had the Chinese deals been signed than Mr Kabila flew to America to reassure both the American government and Freeport McMoRan. “We want all investors,” says Moise Katumbi, the governor of Katanga province. “We don't care what colour they are.” Mr Kasongo vows that no existing mining concessions or contracts will be voided to make way for Chinese investors. As long as Congo has undeveloped mineral deposits, he argues, it would be counterproductive to do so.

The Chinese government may well seek to use its clout on behalf of its companies, but Western governments do the same all the time. Congolese politicians like to point out that France's president, Nicolas Sarkozy, has been flitting from country to country, badgering officials to buy reactors from Areva, a French nuclear firm. And it is not as if the new Chinese arrivals were subverting a perfectly transparent system of allocating mining licences. Almost all Congo's existing mining contracts were negotiated with little scrutiny by governments of dubious legitimacy—hence the decision to review them.

Without fear or favour
The authorities do not appear to be going especially easy on the Chinese businesses that already have a presence in Congo. Mr Katumbi says he has expelled 600 Chinese found working in Katanga without proper documentation. “This week I closed three Chinese companies,” he adds proudly, citing environmental abuses. At the special office he has set up to enforce mining and customs regulations, employees show off a huge block of malachite that one Zhang Cao had tried to smuggle out of the country. A close eye, all the staff agree amid much tutting and shaking of heads, needs to be kept on Chinese firms.

That attitude should encourage Congolese and foreign NGOs who worry about how the new Chinese investors will behave. They point to neighbouring Angola, where China is paying for the construction of roads and railways but is using mainly Chinese contractors and workers, denying work to the legions of unemployed locals. There are also fears that Chinese firms will cut corners on quality, or ignore labour laws and environmental standards, or simply not prove up to the job. Some ask whether the Chinese will come to resemble European colonialists of the past, neglecting Congo's development as they loot its natural resources.

No colonialists here
But Congolese officials seem determined not to be taken for a ride. Mr Kabila has said that Chinese firms investing in the mining sector will have to take on Gécamines as a partner, process the ore they produce before exporting it and employ as many locals as possible. Mr Kasongo adds that the government will set tough deadlines for the completion of the roads and railways to be built under the ore-for-infrastructure deals, the details of which are still being negotiated. And Mr Kikaya, the MP, gives warning that the National Assembly will not tolerate “shoddy work”.

The small Chinese companies that are already operating in Katanga do not seem to behave any better or worse than their competitors. At the smelter in Lubumbashi run by Mr Lee, three-quarters of the employees are local. The trading firms that buy the smelter's output are Swiss and Belgian, he says, not Chinese. Global Witness, a pressure group, has complained about the exploitation of wildcat miners, but the main objects of its ire are Lebanese- and Indian-owned mineral-processing and export firms. It says that Chinese tradesmen, by contrast, have a reputation for paying miners promptly and well. In 2001, a United Nations report on the looting of Congo's natural resources named a number of African and European companies that were said to be pillaging the country but no Chinese ones.

Chinese firms do, however, seem to move faster than their foreign rivals. Mr Lee says that his smelter went up in six months, a quarter of the time it has taken an Indian firm to build a similar facility on an adjacent plot. Mr Katumbi, the governor, says Chinese firms find it easier to finance investment in Congo because Chinese banks have steelier nerves than their Western counterparts. Chinese companies are also keen to upgrade their plants, he says, and to expand into other businesses—something other foreigners are reluctant to do.

As for the idea that China's sudden interest constitutes a new form of colonialism, Congolese politicians seem to see it as the opposite: an opportunity to put meddling foreigners in their place. China's growing presence, Mr Kikaya says, might encourage Western governments to drop their “patronising attitude, that we know what's best for you”. He also points out that China has got involved in Congo before. In the 1970s Chinese workers came to construct a parliament building that is still in use today. In the 1990s another contingent arrived in Kinshasa to build the national stadium, Africa's largest. Those projects did not turn Mobutu into a Chinese stooge; if anything, he was seen as an American puppet.

As in Australia, some perspective is needed. China is only one of a number of countries with interests in Congo's minerals and influence over its politicians. As Mr Kasongo points out, all the government is proposing is to put 3.5m tonnes of Congo's copper reserves into Chinese hands. That is only one-third of the amount controlled by a single American firm, Freeport, as operator of Congo's huge Tenke Fungurume mine. Indeed, the biggest worry about the deal with Congo is whether it will go ahead at all: six months after it was first announced the two sides are still haggling over the details.