Resources locomotive needs fuel from banks

Emerging markets are an important part of overseas development of China's financial institutions

The export of oil, metals, minerals and agricultural products is one of the drivers of economic growth in most African economies. Thanks to such exports, African economies were spared the worst of the global financial crisis, compared with developed countries and large emerging economies.

Africa's banking market has become all the more appealing to Chinese financial institutions, too. The China Development Bank, the Export-Import Bank of China, Industrial and Commercial Bank of China, Bank of China, China Construction Bank and other financial institutions have all set up branches in Africa in the hope of a complete world economic recovery. Their presence will become even more important when growing China-Africa economic ties and trade place much heavier demands on financial services.

The banks' main task now is to grasp the important long-term strategic investment opportunity to accelerate business growth in Africa.

To cope with the adverse effects of the global financial crisis, African governments and enterprises have taken various measures and achieved some success.

Africa is poised not only to improve its infrastructure, adjust the economic structure, and accelerate regional economic integration, but also to reap the huge potential of growth in the financial markets.

Over the past 10 years, economic stability in Africa has laid a solid foundation for improving the financial system, and in fact the financial system in many African countries is significantly better than it was at the outbreak of the global crisis.

More than half the people of sub-Saharan Africa enjoy banking services, and that offers huge potential for the banking industry in the region, something that will result in more banks entering the market and branches expanding rapidly.

Emerging markets are an important part of the overseas development strategy of China's commercial banks and financial institutions. Africa no doubt accounts for the majority of business in those markets, as evidenced by the Industrial and Commercial Bank of China's hefty investment in Standard Bank of South Africa.

To broaden markets in sub-Saharan Africa, Industrial and Commercial Bank of China will continue to work with Standard Bank to expand their business.

Africa and China both have large populations and advanced personal remittance business. The deployment of expatriate labor on both sides and expatriate remittances offer huge business potential. Chinese banks and financial institutions should take advantage of their developed networks and information technology to build a global express remittance business brand. Working with local banks in the global remittance business would help with the efficiency and speed of such services.

Most of the commercial and financial business of Chinese enterprises in Africa is now done through the Paris branch of Bank of China. It serves as the main window of the African business for 31 countries, and is one of the few overseas branches of Bank of China that can perform transcontinental business.

This branch now supports more than 200 Chinese companies investing in Africa, most of them state-owned enterprises and big private enterprises.

In addition, China Development Bank has set up 28 representative offices in 54 African countries and regions, and the Export-Import Bank of China now has six offices in Africa.

These banks mainly provide two kinds of direct investment loans. One is resources development loan, especially for strategic materials. In giving such loans, the banks can require that the private company cooperate with state-owned enterprises. Such loans provide a fillip to private enterprises, and they help the nation obtain strategic materials.

The other type of direct investment loan is to foreign branches of private enterprises to help them expand their businesses and improve competitiveness abroad.

The Export-Import Bank of China has carried out this type of business, forming a multi-type credit system. Besides that bank, other banks devoted solely to making low-interest loans for state projects provide financial support for enterprises' overseas direct investment business.

China Development Bank's practices are distinctly different to those of other foreign banks in Africa. Often the business is done through bilateral financing. This is done from the perspective of risk mitigation, because it is often difficult for the government to guarantee a long-term project, so gradually many infrastructure projects in Africa require additional financing.

Many China-Africa cooperation projects cannot simply rely on the China Development Bank. They must have more diversified financing channels to ensure long-term liquidity.

Besides the China Development Bank, Africa's economic cooperation agencies and the European Bank for Reconstruction and Development can also join in in lowering risk, easing that burden on the government.

African countries have been working closely with foreign financial institutions to help inject fresh blood into the local financial sector.

In addition, with most African countries committed to modernization, a number of state-owned enterprises hope to raise funds by issuing stocks and bonds, giving the securities market in Africa huge growth potential.

The author is a professor at Nankai University in Tianjin, who specializes in China-Africa investment and market policies. The views do not necessarily reflect those of China Daily.

(China Daily 03/29/2013 page7)