Mobius: What the China Sponsored Boom in Africa Means For Investors

PUBLISHED: Mon, 15 Aug 2011 08:10:59 GMT

Africa, once called the lost continent, is beginning to demonstrate its potential. While the continent’s detractors point to poverty, corruption, AIDS and armed conflict, I am encouraged by another side of Africa that is gradually emerging: the development of capital markets, consumerism and technology.

In fact, I am keeping my eye on the key forces pushing and pulling China into Africa. China now has the world’s largest foreign reserves, exceeding $3 trillion, more than twice that of Japan. Up to now a large portion of these reserves have gone into U.S. government debt but increasingly China is finding it necessary to diversify those reserves given the precarious situation with the U.S. Dollar and U.S. government debt.At the same time, China’s burgeoning economy is demanding more and more natural resources whether it is oil, copper, nickel or gold. Looking further into the future, the demands of China’s more sophisticated diets mean imports of food will have to increase as well.

In both areas, minerals and food, Africa has great promise. It is well known that Africa is rich in a wide variety of minerals from oil to copper. It’s bigger than China, India and the United States. More importantly, Africa has huge resources of water essential for bountiful harvests.China’s attraction to Africa is clear, but Africa is also attracted to China. China is a developing country that has demonstrated a successful growth model. China also has the money to help build Africa’s urgent need for infrastructure.In 2000, the Forum on China-Africa Cooperation (FOCAC) was established to enhance economic and trade cooperation. Trade has expanded rapidly, moving from $12 million in 1950 to over $120 billion now.

China is now Africa’s largest trading partner. Visit any shopping center in any country in Africa and it is clear that China is flooding Africa with consumer goods as well as machinery, automobiles and electronics.

Yet, surprisingly, China has a trade deficit with Africa, importing more than it exports to the continent. 80 percent of Africa’s exports to China are raw materials such as oil, but increasingly, it is also manufactured and agricultural products such as Egyptian oranges, South African wines, and Tunisian olive oil. In order to promote that trade, China has set up bilateral trade agreements with 45 African countries, a number of which now have zero tariff preference with China.In addition to trade, investment from China into Africa has also surged. In the six-year period ended 2009, China’s investment in 49 African countries increased from $490 million to $9.3 billion. China’s Development Bank has created a $1 billion fund to buy equity stakes in African companies and projects. There are plans for the fund to be expanded to $5 billion.China is also promoting economic and trade zones in Zambia, Mauritius, Nigeria, Egypt and Ethiopia. So far over $600 million has been invested in such zones, creating more than 6,000 jobs.

As early as the 1970s, China was helping build infrastructure projects in Africa. Projects included the 1,860-kilometer Tanzania-Zambia railway line and the Cairo International Conference Center. But the number of projects have grown in recent years and the Chinese government has extended preferential loans amounting to over $10 billion to finance airports, housing and hydropower plants.There’s another link that has emerged between the two. From 2000 to 2009, China canceled 312 debts of 35 African countries, totaling 19 billion yuan. That demonstrates China’s determination to help Africa develop.With all this activity, China’s banks have followed. The China Development Bank, Export-Import Bank of China, Industrial and Commercial Bank of China (ICBC), Bank of China (BoC) and China Construction Bank (CCB) are all now active on the continent.Tourism is growing as well, with over 300,000 Chinese tourists visiting Africa each year. African and Chinese airlines have established direct flights between the two.All of this trade and investment is not without its problems. There have been scandals, corruption and disputes. Take for example, the Chinese infrastructure project in Algeria mired in a bribery scandal.There is no denying, though, that capital markets in Africa are developing rapidly. We have been investing in South Africa for many years and its stock market is one of the world’s most sophisticated. In our frontier market funds, we have been active in countries such as Kenya, Ghana and Mauritius. Nigerian companies now constitute the largest portion of the $1 billion that we have in our frontier funds.

In the last year or so, I’ve traveled to Egypt, Angola, Morocco, Botswana, Ghana, Tunisia and South Africa to evaluate markets and search for attractive investment opportunities on the continent. We expect to expand even further in Africa and to invest in many more countries on the continent. For investors from China, or anywhere else for that matter, seeking high growth and new opportunities, the future is certainly in Africa. Mark Mobius is executive chairman of the Templeton Emerging Markets Team, which manages over $50 billion worth of emerging market assets for Franklin Templeton Investments. The veteran fund manager treks the globe in search of opportunities in emerging markets. Templeton Emerging Markets Group has analysts located in 17 offices throughout emerging markets and Dr. Mobius opened research offices in Romania, Vietnam, Malaysia and Thailand over the last two years. Read more about his globetrotting experiences at his blog

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