OUTSIDE THE BOX: MADE IN CHINA – BY ALEX OTTI
“When I was growing up, my parents told me, ‘Finish your dinner. People in China and India are starving.’ I tell my daughters, ‘Finish your homework. People in India and China are starving for your job.’” Thomas Friedman
The story is told of a woman who came to her younger sister’s house to commiserate with her over the untimely demise of her little son at the age of 6. As other sympathizers wore a mournful look and were discussing in low tones, this woman started shouting to the consternation of everyone in the room “ I knew it! I knew it!! I knew it!!!”. Another woman rushed to her, feeling she was almost losing it, out of the shock of the loss and asked, Aunty, what is it? What do you know? She went on, I warned my sister about marrying this her Chinese husband, but she wouldn’t listen. The inquisitive lady then retorts “what has your sister’s husband got to do with her son’s death? Her response shocked everyone in the room. “Chinese products don’t last”. Many of the people had to temporarily suspend their grief to manage a laugh.
The preceding Thomas Friedman quote and the morbid humour that followed it should not be seen as Sinophobic slurs but instead a compliment to the amazing transformation that has become the Chinese story. Poor quality products, imitation of original products, fake products, cheap and inferior products were until very recently, associated with China. The truth, however, is that China has made a lot of progress from the above characterisation.
Before we dwell further on China, it is apposite to briefly look at the experience of Japan. Those who are old enough would remember that this was exactly how Japanese products, including cars, were derided in those days when Europe and America dominated the manufacturing sector of the global economy. At the end of the 2nd World War, following the crushing defeat of Japan, the hitherto warmongering nation was banned from keeping any significant army not to talk of waging wars.
Japan was forced to become a pacifist nation and its hitherto world dominance waned. Japan was forced into industrialisation as a way of lifting its economy and reasserting her pride in the world. Diverting her warring skills into manufacturing, it began making a range of items, largely for domestic and personal use. The first wave of such products were met with derision worldwide as the sobriquet, ‘Fabrique au Japon’ became synonymous with imitation and inferior products. This did not deter the resilient Japanese and with people like Akio Morita of Sony, Honda, Toyota and Suzuki leading the charge, it did not take long before, the hitherto substandard Japanese products became the dominant brands in the world. The Hondas, the Toyotas, the Nissans and the Mitsubishis took over the market. They went further into the luxury premium brands like the Lexus, Infiniti and Acura to give Mercedes and Bavaria Motor Works, a run for their money. As if that was not enough, other counties like South Korea started making their own vehicles. Until very recently, the market did not place a lot of premium on Korean cars. Their brands like the Hyundai, Daewoo, Kia and Ssangyong have become popular not just because they come in cheaper than the more popular brands, but because they are also efficient in terms of fuel consumption and maintenance
Back to China; a country, which has become one of the fastest growing economies in the world with a dizzying annual growth rate of close to 7%. According to the World Bank, China’s GDP grew from $150 billion in 1978 to $12.24 trillion by 2017. Analysts had predicted that 2018 GDP growth figures would be lackluster. This is because of the US trade war. China, however, defied the projections of analysts throughout 2018 with average quarterly growth of 6.6%. Even though this was the worst performance in about 30 years, it was still better than analysts’ expectation. Note that the US grew at an average of 2.9% in the same period.
So, how come China’s economy defied the prediction of experts by recording such spectacular growth even in the face of sustained aggressive US tariff warfare? One needs to look more than four decades back to know why. During the Mao era, China embarked on a cultural and economic revolution that was fundamental and comprehensive. It gradually turned the socialist supertanker into a nimble capitalist freighter. While the world overlooked the changes, China dug deep into her capitalist past and prepared her society and people for global competition. By the time Carter was making approaches to open up the Chinese economy to the West, it was ready. The latter day leaders like Deng simply keyed into the reform blueprint that had been laid out years earlier to create an economy that the West could not overrun even in the area of free competition.
The first thing that the managers of the economy in China did was to roll out a stimulus package that focused on infrastructure projects. They prepared their workforce for manufacturing and globalization. They also invested in 5G telecommunications and encouraged investment in real estate. All the investments yielded fruits as more money found their way into the hands of the people which in turn energized consumption. The result is a consistent GDP growth, even in the first quarter of 2019.
China has been the world’s second-largest economy by nominal GDP since 2010 as it has remained the largest economy in the world by purchasing power parity (PPP) since 2014. China is also the world’s largest exporter and second-largest importer of goods. In the area of armaments, China is already a nuclear power, maintaining the world’s largest standing army and second-largest defense budget. It is a permanent member of the United Nations Security Council. It is also the most populous country in the word with over 1.4 billion people, occupying a land space of about 9.3m square KM, second to Russia with a land size of 16.3m square KM.
China is obviously a behemoth of a country and you ignore it only at your own peril. China’s position has been consolidated in the international financial market. As at the end of February 2019, the United States owes China a whopping $1.13 trillion. This figure is 28% of the $4.02 trillion US Treasury bills and bonds held by foreign countries. China is closely followed by Japan which holds $1.07 trillion. The rest of the $22 trillion US National debt is held locally. It is clear that this kind of country is a big challenge to the hegemony of the United States. Again, cheap labour and efficiency have made the US and some parts of Europe outsource a large chunk of its manufacturing to China. Between 2001 when it joined the World Trade Organisation and 2013, China sucked up about 3.2 million jobs from the US. 75% of those jobs were in manufacturing. Trump had accused China of unfair market-distorting trade practices, manipulation of its currency to make exports cheaper, suppression of labour rights and state enforcement of lower wages. We shall leave the argument of whether Trump is right or wrong for another day, but one must point out that those are some of the challenges of the market economy which China had adopted.
Let us examine the state of Nigeria-China relations. Formal diplomatic relationship started in 1971, during the military era. The Nigerian regime found common interest in the Chinese regime which, at that time, was also unpopular with the international community. Strategic partnership did not start fully until 2005. Trade between Nigeria and China had steadily been on the increase. From $7.8 billion in 2010, it rose to $12.5 billion in 2017 and further rose to $15.3b in 2018. At the moment, Nigeria is the biggest Chinese investment destination in Africa, the second largest export market and the third largest trading partner of China in the whole of Africa.
Chinese banks and contractors have helped to fund and construct the 186 KM Abuja – Kaduna rail line which was delivered in 2016. Less than a year ago, we signed a contract of $6.68b with the China Civil Engineering Construction Corporation (CCECC) for the construction of the Ibadan -Kaduna segment of the Lagos-Kano rail line. Meanwhile, a $1.685 billion contract was signed in 2016 to link Kaduna with Kano on the standard gauge rail system. The 156KM Lagos – Ibadan segment started in March 2017 would be delivered this year at the cost $1.5 billion. The total cost of the entire 2,733km project is $11.12 billion
Again, Chinese companies are working on the International terminals of four of our airports. Additionally, they are handling roads, bridges, power and agriculture projects. With funding of $4.4B, the Chinese are involved in the Zungeru hydro electric power project, fiber cables for internet infrastructure and Lekki Deep Water Port Project.
There is no doubt that China has a lot to offer an infrastructure-deficit nation like Nigeria. It has technology and skilled manpower, in addition to excess industrial and manufacturing capacity. Most importantly, China has funds, which it is willing to release to needy economies at a reasonable cost. However, there have been concerns over increasing loans from China. One major area of concern is what happens in case of default. People always point to Zambia as a case in point, where default has led to asset swap also known as takeovers and seizures. The fear is that most of the infrastructure built by Chinese are at the risk of being taken over if there is default in meeting the terms of the loans. Zambian authorities have continued to deny these allegations. For what it is worth, we should not ignore this concern as it is always a possibility with loans. Again, it is important that we use our clout to ensure we negotiate favorable conditions given how important we are to our partners in the global arena. The second fear is that of dumping and crowding out of domestic manufacturers by cheap and sometimes poor quality goods.
This fear is not unfounded as it is on record that the entry of China led to the closure of about 65 textile mills in Nigeria over a period of 10 years and the loss of over 150,000 jobs. There is also the security concern. It is alleged that the African Union headquarters in Addis Ababa built by the Chinese was bugged as construction was going on. There is no confirmation of this allegation and China has come out to vehemently deny it. Furthermore, the Chinese are known to export their goods and technology with their people. Partnership, to them requires that virtually everything including manual labour and basic raw materials which can be sourced locally are hardly allowed from the host country. Closely related to this is that there is hardly any room for “technology transfer”and the partner country would depend on China even for routine maintenance.
As we were completing this piece, news came in that at the just concluded Spring meetings of the World Bank/IMF, Tobias Andrian, a director of the IMF warned Nigeria and other emerging markets taking loans from China to consider the terms of such facilities especially their compliance with the Paris Club of Creditors conditions. Even though he did not condemn borrowing from China, he was emphatic that the terms of loans from China are always questionable. His worry was that if there is any debt restructuring in future, the Chinese may just take a pound of flesh. According to Andrian, “Nigeria had been borrowing from international markets which gives the IMF some worries. At the moment, funding conditions in economies such as Nigeria and other sub Saharan African countries are very favourable, but that might change at some point.
And there is risk of rollovers and whether the need for refinancing can be met in future”. We consider the advice a good one even though one can argue that it is laced with some subtle political considerations. In the first place, following the trade war between the US and China, the latter has to look for alternatives to compensate for the $500B trade with the US which had been placed at risk. Africa provides that alternative as total trade between Africa and China is already heading towards the $200B mark. With the right incentives and planning, Africa can replace US in China’s trade equation, soon. Africa also holds additional promise of being in a position to sell agricultural products to China, replacing its reliance on the US and its partners. So, there is a perfect match. Recall that China has over $1trillion low yielding investment in US treasury bills and bonds. It can comfortably reduce that and swap same for investments in Africa.
This cause of action gives it two advantages. The first is that China has been enduring low US interest rates for a long time now, obviously because of the trade opportunities with the US. Africa has the appetite for funds at higher rates and can comfortably absolve the $1 trillion investment. Secondly, if it is true that China deliberately reduces prices of its goods to dominate the the US market, a reason the US imposed the 25% tariff on Chinese goods, then it can comfortably channel the same goods to Africa with a population four times as large as that of the US and still come out much better. Africa, particularly Nigeria has a lot of natural resources waiting to be tapped and exploited and China has both the skills and technology to take full advantage of that.
Given all these, my take is that while we appreciate the “brotherly” advice of the IMF and should do everything to ensure that we are not left with the short end of the stick in our relationship with China, there are mutual economic interests in dealing with China. China provides us with opportunities to trade, provides us with funding and is also in a position to provide us with technology, manpower and infrastructure to support our own growth. As a former lender, I can understand how it feels when disruptive competition is contemplated. On the part of China, their President, Xi Jinping, had pleaded their innocence thus “Some foreigners with full, (read, pot) bellies and nothing better to do engage in finger-pointing at us. First, China does not export revolution; second, it does not export famine and poverty; and third, it does not mess around with you. So what else is there to say?”
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