Analysis: Chinese investors to tread more carefully in Africa
BEIJING (Reuters) - China's oil and commodities firms are set to tread more carefully in Africa after being stung by kidnappings, seizures of cargo and, most recently, the expulsion of a chief executive.
But they won't pull back.
If anything, China will broaden its exposure to the region, home to some of the world's most resource-rich but unstable countries, as it scours the globe for resources needed by the factories and businesses of the world's fastest-growing economy.
Any major change is instead likely to be in tone rather than intent, with Chinese investors expected to take a less aggressive approach and to increasingly partner with other foreign firms in dangerous and unpredictable markets.
"When Chinese firms started in Africa, it was more driven by the political motivations of top executives of state energy giants," said a Beijing-based oil executive.
"So the investments were made in a rushed and aggressive manner ... But (now) I think they will be more cautious when it comes to due diligence and investment decisions."
Recent problems in Sudan have shown China the risks of being a big and politicized investor in a continent that accounted for 24 percent of China's crude oil imports last year.
Rebel forces operating in Sudan, near the border with South Sudan, kidnapped 29 Chinese workers last month, apparently using them as political pawns before releasing them 10 days later. It was the fourth case of abduction of Chinese in Sudan.
Chinese oil firms have also become tangled in an oil row between Sudan and newly independent South Sudan, leading to production shutdowns and the expulsion this week from South Sudan of the head of Chinese-Malaysian oil consortium Petrodar, the main oil firm operating in the new African nation.
As Chinese firms go overseas in pursuit of profit and raw material, such problems have multiplied. In the last year alone, China has seen two dozen cement factory workers kidnapped by Bedouin tribesmen in Egypt, and a spate of strikes for better pay and conditions at mining operations in Zambia and Zimbabwe.
Given that stepping back from Africa is not an option, China must learn to better navigate the region's hazards, experts say.
China's state-owned energy and mineral firms have usually tried to remain above the fray, saying disputes with workers or ethnic groups are the local government's responsibility, but experts say they should work on their public relations savvy.
"They become associated too closely with the government and don't make enough effort to tell the local people and the NGOs at home or from abroad that they are doing a good job," said Zha Daojiong, a professor at Peking University who studies China's energy deals abroad.
At the very least, China will certainly strive to improve the security of its projects in Africa, said Michael Arruda, a specialist in energy deals and partner with legal firm Jones Day in Beijing.
"China isn't going to change its strategy when it comes to Africa. They are going to go where the oil is. You can't say you'd like to go to nice places like California because that's not where the super-sized resources are. In contrast, the resource potential of Africa remains enormous."
"But I think they are going to be more cautious about the safety of their operations on the ground there."
While Sudan may provide far less oil to China than Iran or Saudi Arabia, it ranks as Chinese oil company CNPC's most valuable overseas investment.
In building investment ties, China sometimes trades off long political ties to many of the regimes in charge. And it also has a lot of human capital invested in Africa and elsewhere around the world, with more than 800,000 citizens employed abroad.
Jobs for hundreds of thousands of Chinese at these overseas locations also relieves pressure on the teeming domestic job market, said Zha of Peking University.
"China is in a vulnerable position. It is different from the United States or Britain or other countries primarily because of the employment of its own nationals," he said.
China's focus on Africa and some other emerging markets also reflects its struggle to make inroads in other, more established regions, and not just because of political opposition.
"(That) is one of the explanations and it remains true, but I don't think it is the only explanation," said Zha.
"Oil and other energy investment is a competitive market and Chinese companies in comparison with their peers -- not only in Europe and America but closer to home in Japan and South Korea -- are not as competitive in terms of quality and efficiency, the quality of equipment, post-project services.
"In more stable places, the demand for quality ... is higher and it is an issue whether Chinese companies are capable of winning contracts in those countries."
China describes its investments in Africa as "normal commercial practice," but many of its state-owned firms have won contracts on the back of a high-profile campaign by Beijing to expand its political, diplomatic and economic presence on the continent. They have thus been exposed to political blowback.
The China Non-Ferrous Metals Mining Corporation (CNMC) has had more problems than most, and became the much-maligned face of Chinese investment during a bitter election campaign last year in Zambia, where it owns several lucrative copper deposits.
Many of the troubles facing Petrodar -- a consortium of Chinese state firms Sinopec and CNPC along with Malaysia's Petronas -- are derived from China's support for Khartoum during decades of civil war between the Muslim north and mainly Christian South that killed two million people.
One way Chinese firms can lower their profile in Africa is by joining consortia led by foreign firms.
On Tuesday, state oil firm CNOOC teamed up with France's Total (TOTF.PA) to sign a $2.9 billion deal to join British firm Tullow to develop an oil field in Uganda.
Metals conglomerate Chinalco has also sought to cut its exposure by teaming up with Anglo-Australian miner Rio Tinto (RIO.AX) (RIO.L) to develop the huge, politically troublesome Simandou iron ore project in Guinea.
"You are seeing them taking stakes in consortia instead of looking for 100 percent control over an asset," said Arruda.
"As time goes on, they are more confident in taking positions that are smaller, and they are doing so not just to get access to reserves but also to knowledge and expertise."
The trend is likely to continue, said Zha, the Peking University professor.
"It will help internationalise our operations and increase the number of stakeholders when it comes to such issues as political risk," he said.
(Additional reporting by Jim Bai and Aizhu Chen; Writing by Raju Gopalakrishnan; Editing by Mark Bendeich)
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