Roadblocks on the highway to investment

More needs to be done to encourage private participation in African development projects

During President Xi Jinping's visit to several African countries, he encouraged Chinese enterprises and financial institutions to take part in financing cross-border and inter-regional African infrastructure construction, and promised that in three years China would provide a $20 billion loan to African countries. On different occasions Xi said Africa and China were always sincere and reliable friends and partners. At the beginning of this year, Foreign Minister Wang Yi visited Africa and stressed that strengthening solidarity and collaboration with African countries has always been a cornerstone of China's foreign policy.

Chinese private companies are also looking for new competitive markets. After more than three decades of reform and opening-up, Chinese enterprises are relying on industrial restructuring and technological innovation to remain competitive. But for various reasons, many private companies are part of sunset industries.

With the increasingly high cost of production in China, they are bound to transfer to low-cost countries, and the move can effectively avoid trade barriers to products made in China and achieve foreign currency reserves diversification.

Chinese private investment in Africa had been limited mainly to food and beverages, retail and hospitality industries. However, in recent years, the scope has extended to project contracting, pharmaceuticals, textiles, machinery and telecommunications. In addition, Chinese private companies have begun to become involved in agriculture, mining, energy and other industries.

China's direct investment in Africa is worth more than $20 billion, private companies accounting for about 10 percent of that, a proportion that is increasing. Even in a small landlocked country such as Lesotho with a population of 2 million, the number of Chinese businesspeople is more than 10,000. Investment diversification has pushed forward private investment into a variety of fields, and in various forms such as joint ventures and cross-border mergers and acquisitions.

But Africa is the world's poorest continent. Private investment there will inevitably face difficulties.

Lack of finance is the biggest brake on private enterprises wanting to expand in Africa. China's policy financial institutions concentrate on central enterprises, and small private companies cannot get loans. The China-African Development Fund is small, with cumbersome procedures and a long review cycle, and it is difficult for private companies to benefit from the fund. Other domestic commercial banks have narrow network coverage in Africa, their financial services are even less diverse and they simply cannot meet the financing needs of these private companies.

Disorderly competition among Chinese companies is not a rare occurrence. They all rush to certain sectors, and slash their prices. Some even cut corners by using inferior materials and turn out substandard goods. Some that have won bids for projects sometimes just abandon them because of the shortage of money, and this has badly tarnished the image of Chinese enterprises.

The central government has introduced a number of incentives, such as simplified procedures and preferential policies in financing, but some local authorities have not implemented them as they should.

Investment in Africa lacks an effective public service information platform. By the end of 2012, China and 32 African countries had signed bilateral investment treaties, but many are vaguely worded, making the rights and obligations of both parties ambiguous, and the multitude of interpretations makes resolving investment disputes difficult.

Many private companies know little about local laws and regulations, diplomatic etiquette, culture, religion and social customs. At the same time, the interaction of private investment in Africa with Chinese embassies there is shaky at best.

Many private investments have not established risk control systems, and some have made hasty decisions to invest in Africa ignorant of possible political, legal and foreign exchange risks.

The Chinese government has stressed the need to expand individual investment overseas, allowing investors to play to their advantage by setting up innovative financing mechanisms such as opening up financing channels for them. Here are my suggestions:

First, the China Development Bank and the Export-Import Bank should provide preferential loans and set aside an appropriate proportion for private investment projects in Africa.

Second, to establish an African Investment Bank, create an equity investment fund or expand the scale of the China-Africa Development Fund, and simplify procedures to provide project financing for private companies in Africa.

Third, guide domestic commercial banks into Africa to set up more overseas branches.

Fourth, set up an internal and external security loan financing model to encourage commercial banks to use overseas assets, equity, mining rights and land as collateral, and provide guarantees for private enterprises to obtain loans in Africa.

Fifth, speed up the pace of the establishment of a bilateral investment protection agreement, and include the issue of private capital investment for discussion at meetings of the China and Africa economic and trade joint committee.

The author is chairman of the Wenzhou Small and Medium-sized Enterprises Development Association.