China regularly has its motives in Africa questioned, but in recent years it is difficult to fault the country’s willingness to put its money where its mouth is.
Chinese aid and investment has flooded into Africa in the form of interest-free loans, infrastructure projects and lucrative mineral extraction contracts. The country’s foreign direct investment in Africa rose from just US$300 million in 2004 to more than US$5.4 billion in 2008. Meanwhile, the China Africa Development Fund, launched by Beijing in 2007, invested almost US$1 billion in 2009. Annual spending is eventually expected to hit US$5 billion.
As Chinese eyes increasingly turn to Africa, few could forgive nearby offshore finance centers for getting excited. Both Seychelles and Mauritius, with their strategic locations between Asia and Africa as well as their low tax rates, see the recent influx of Chinese capital as an opportunity to boost their relatively small offshore sectors.
"In the same way that the bulk of Chinese investment in Latin America goes to the Cayman Islands, I expect the vision is that Seychelles will play a similar role for Africa," said Chris Alden, a lecturer in International Relations at the London School of Economics and an expert in Sino-African relations.
Of course, while Beijing is ramping up its investment into the African continent, private enterprises in China are still reticent about moving into an unknown market, especially one renowned for its volatility. Until they do, Seychelles and Mauritius are playing a waiting game. "The drive by Chinese outbound investment is at a government-controlled level," said Conrad Benoiton, managing director of the Seychelles office for law firm Appleby. "But change is happening. With the policies and engagements of the Chinese government and the emerging strength of the private sector, individuals will want to use the structures Seychelles has to offer."
It is true that Beijing is keen for state-owned enterprises not to be the only Chinese businesses dipping their toes into the African market. In fact, some experts argue that investments made in recent years serve a secondary purpose as stalking horse, convincing entrepreneurs that Africa is open for business.
"The going out policy was designed to expose and encourage Chinese business to go abroad, and Africa is part of that. They’re putting a lot of money forward as an incentive to Chinese investors to come into Africa," said Alden.
Policy of encouragement
The government’s tactics appear to be working. A report published recently found that the number of Chinese companies operating in Africa has swelled from 800 in 2008 to more than 2,000 at the beginning of 2010.
Experts say this increase runs parallel to growing confidence among Chinese toward doing business in Africa. While Beijing’s investment is partially responsible for changing attitudes, the increasing local experience of Chinese managers is an important factor. Once ensconced in projects that were isolated from African conditions, these individuals are now striking out on their own.
"The government has provided opportunities for greater exposure that the best of these guys have used as a platform to get to know Africa," said Alden. "As long as Chinese money is coming in we’re going to see more individuals feel comfortable about working in Africa outside of the China support network."
This is good news for Seychelles, which boasts a political relationship with Beijing that dates back more than three decades. The country has also established itself as a tax-efficient route into China for offshore investors. Foreign direct investment entering China from Seychelles totaled US$42 million in 2008, up from US$2.46 million in 2003.
The money isn’t flowing in just one direction. Grants from Beijing have paid for all kinds of infrastructure projects in Seychelles in recent years, from housing to hospitals to schools. Chinese money was responsible for the country’s new parliament building and, most recently, Beijing agreed to stump up US$6 million for a new supreme court building.
Chinese visitors are also playing their part in boosting Seychelles tourism industry. Arrivals from China have doubled since 2003, peaking at more than 1,000 in 2007.
Despite the strong links between the two nations, John Esther, senior corporate manager at Barclays Bank Seychelles, says that the island’s offshore industry has so far been a well-kept secret in China. Nevertheless, as more entrepreneurs set their sights on Africa, this is set to change. "Seychelles can provide a tax structure for Chinese companies investing in Africa, both for those interested in manufacturing and mineral exploration, and for those interested in distributing Chinese-made goods into Africa," he said
Esther is quick to add that it is still very early days. Barclays has seen an increase in inquiries about the feasibility of using Seychelles as a springboard into Africa, but most of them are speculative. Chinese business is still very much testing the water.
While Bobby Brantley, managing director at Sterling Offshore, a Seychelles corporate services provider, agrees that in theory Seychelles should benefit from an increase in Chinese targeting Africa, he believes the country still needs to make more of its geographical presence between Asia and Africa.
A factor that is currently holding this back, Brantley says, is the lack of double taxation agreements (DTAs) with African nations. A Chinese company operating in Seychelles can benefit from the strong China-Seychelles DTA, but if it is using the islands as a conduit for Africa, it could be hit with withholding taxes in the target nation.
Mauritius, Seychelles’ Indian Ocean neighbor, currently has 21 DTAs worldwide, 13 of them with African countries. Of Seychelles’ 12 DTA partners, South Africa and Botswana are the only African representatives.
"I think a lot of the investment will be treaty-driven, and I know Seychelles is in the process of negotiating a lot of treaties with African nations. [In the absence of a DTA] most countries have a withholding tax on dividends and royalty payments," Brantley said.
As a relatively new player on the offshore scene, Seychelles clearly has ground to make up, and Mauritius is a natural target. Although Appleby’s Benoiton says the two jurisdictions aren’t necessarily competitors – he argues that there is more than enough business to go around in the Indian Ocean, Asia and Africa – a degree of rivalry is only to be expected. This is especially true of nascent China-Africa business. Mauritius and Seychelles are the preeminent Indian Ocean financial centers; both are keen to appeal to a wider base of clients; and both have DTAs with China.
Neil Puresh, director of corporate services provider Intercontinental Trust (Seychelles), believes Mauritius has capitalized on its head start by introducing relaxed labor laws that draw in foreign talent. As such, it boasts a larger number of international banks, law firms and accountancy firms than Seychelles.
"Mauritius has seen a lot more of these international firms come in. They attract more foreign labor by offering incentives to set up there and they also have a better scheme for expats to obtain work permits," he said.
Traditionally, Mauritius has been known for its links to India and its offshore business has thrived thanks to a DTA with the country. But recent high-profile investments from China, as well as Indian efforts to modify the long-standing tax treaty, have served to push Mauritius closer to Beijing.
"China is the main target now," said Roshan Boodhoo, managing director of Alliance Trust in Mauritius. "It’s positive from both sides: Chinese companies benefit from Mauritius’ tax treaties, while Mauritius benefits from Chinese companies coming in and stimulating the economy."
Chinese investment into Mauritius in the last three years has indeed been substantial. During President Hu Jintao’s visit to the country in 2009 he promised US$260 million to redevelop the island’s international airport. Meanwhile, the US$730 million Shanxi Tianli Enterprises Park, currently in development near the capital of Port St Louis, represents the largest ever foreign direct investment into Mauritius.
Acknowledging that Mauritius has a more mature offshore industry and that it attracts its fair share of Chinese patronage, Seychelles people still claim to hold a geographical advantage. The country’s sheltered port is one of the deepest in the world, potentially offering a base to Chinese ships traveling between Africa and China, whether carrying manufactured goods westward or African minerals eastward. Mauritius, with its shallow harbors and additional eight hours sailing time from the coast of east Africa, cannot match this.
"Logistically it’s very well placed. A Chinese company can have a business located in Seychelles to bring in goods and redistribute from here," Esther said.
It remains to be seen if Chinese entrepreneurs are willing to provide the business that Seychelles and Mauritius are expecting. Similarly, it is impossible to put a precise date on when private enterprise will take a significant place in China-Africa trade. The situation is complicated by the fact that some of China’s efforts to encourage private investment in the African continent haven’t been as successful as Beijing would like.
China’s widely-lauded Special Economic Zones (SEZs) are a good example. Currently up and running in Zambia and in various stages of completion in five other African nations, these zones have so far failed to attract Chinese companies en masse. LSE’s Alden recalls visiting a Chinese SEZ in Luanda, the capital of Angola, China’s leading African trading partner, and finding most of the office blocks empty.
At the same time, while Chinese entrepreneurs at every level – from laborers to shopkeepers to managers – are viewed with ambivalence by many Africans, there has been an increase in anti-Chinese sentiment in some areas.
Chinese ownership of mines in Zambia in 2007 became a major election issue, with local leaders using anti-Chinese sentiment to win support. In Lesotho, a backlash over the importation of cheap Chinese-made goods led to riots and protests in 2007 and 2008. These attitudes could serve to persuade Chinese entrepreneurs that the time is not yet right for large scale investment on the continent.
"We are very anti-Chinese in some ways," said Hannah Edinger, senior manager at South Africa-based research firm Frontier Advisory. "There are a lot of companies that see China as a huge opportunity, but just as many are chicken. They see China as a big competitor and are afraid of losing something."
Nevertheless, investment on this scale by a single country has never been seen before in Africa and it polarizes opinion. In some countries the Chinese presence is resisted; in others it is seen as a valuable store of commercial opportunity. Seychelles remains firmly on the side of the optimists. If Chinese investment in Africa evolves as the experts predict, the archipelago nation has a great deal to gain.
"With the wealth that is emerging in that one country alone, if Seychelles serves China right we don’t have to go anywhere else," said Appleby’s Benoiton. "The sheer scale will be more than we can cope with."