OPINION: Irony of Kenya’s ‘win-win relationship’ with China

By MOHAMED WEHLIYE

NAIROBI, KENYA: Last week, we welcomed Chinese Prime Minister Li Keqiang and his delegation for a visit to the country.

Kenya was part of the premier’s tour of four “carefully chosen” countries in Africa, which also included Angola, Nigeria and Ethiopia. All the four countries are leading trade partners of China and representative nations of the continent.

Kenya and other poor African countries are increasingly turning to China as a more privileged partner for development efforts. That is why the Chinese and the four African nations the premier toured signed almost 60 co-operation deals, covering trade, rail, health, aviation, culture and energy.

But as we do business with the Chinese, we must assess the nature of our economic relationship with them, and the impact of this relationship on our long-term interests.

There are a number of reasons the relationship so far is not in favour of Kenya.

DIFFERENT STORY

First, whereas the Chinese say their economic relation with Kenya is built on the principles of sincere friendship, equality, reciprocal benefit and win-win co-operation, trade figures tell a different story.

Chinese exports to Kenya were at Sh182.3 billion last year, but Kenya only exported goods and services worth Sh3.8 billion to China during the same period. 

These numbers show China has benefited 48 times more than Kenya from this “win-win” relationship.

Kenya mainly exports leather, tea, coffee, sisal fibre, scrap metals and horticultural produce to China. It, in turn, imports machinery, electronic and electrical goods, textile and fertiliser, among other products.

There is no doubt the imported Chinese goods provide many poor Kenyans with cheap access to manufactured goods. But this is bad in the long-term because it destroys local manufacturing capabilities and competitiveness, something this country needs badly if it is to meet Vision 2030 objectives.

Goods manufactured in Kenya cost much more than those imported from China, despite the imported Chinese products incurring additional costs like customs duty, insurance, transport, among others. 

The low cost of Chinese products is also having a significant impact on Kenya’s exports to the EAC region. Our domestic firms are, therefore, not only losing market at home, but also in our regional markets.

The volume of trade between the two countries is definitely far from being fair, and it is unsustainable in the long-term.

Trade imbalance

We should, therefore, aim to narrow the huge trade imbalance. We should tell the Chinese that, given we are buying so much from them, we should be enjoying commensurate patronage from them. Just like we have been pressuring Western governments for better market access, we should be making the same demands of China.

Second, Chinese Foreign Direct Investment (FDI) is laden with deception. Whereas China’s rise will definitely benefit us by injecting unprecedented investment in the country, we nevertheless must question the nature of these investments.

Is Chinese FDI currently of any benefit to us? The way it is designed means Kenyans derive little or no benefits from these FDIs. Unless we include sufficient local content requirements in the terms and conditions of the investment agreements, we will not see the economic benefits the big Chinese projects accrue to Kenyans.

For instance, how much local equity is there in the Standard Gauge Railway (SGR) project? Chinese private firms with huge financial backing from their government are usually the key drivers of Chinese investments.

In Ethiopia and Nigeria, where Chinese investments are mainly in manufacturing joint ventures, the governments demand domestic corporate participation. In Kenya, however, foreign loans mostly account for 100 per cent of costs. Thus, the benefits of such foreign investments do not accrue to Kenyans, and profits are in most cases repatriated back to China.

TIED LOANS

Furthermore, most loans are also tied; meaning the recipient must spend the money with Chinese companies, the SGR case being a classical example.

Kenyan firms, therefore, lose out on the major capital projects because of the conditions set by the creditor/donor that blocks local firms. Tied loans or aid also sometimes leads to shoddy work. With no competition, favoured firms get away with delivering bad and/or overpriced projects.

There is also little technological transfer because the Chinese frequently bring along their own expertise, with Kenyans mostly being confined to peripheral positions such as forklift drivers and bush clearers. The legions of Chinese workers — both skilled and unskilled — that accompany most of their big-ticket projects in the country should be a big point of concern as this is likely to crowd out employment.

Finally, there is the issue of how much exactly we end up owing China after all these mega projects. According to data from the Central Bank of Kenya, the country’s debt to China was Sh63.75 billion as at June 2013.

This is likely to substantially increase following the signing of the SGR project and other recent agreements. The Kenyan and Chinese affinity for corruption are the happiest of bedfellows, and the average Kenyan stands the risk of bearing some odious debt burden unless there is more transparency on the business transactions between the two countries.

Whilst there has been a lot going on between China and Kenya since the first term of the Kibaki Administration, not many Kenyans know the details of the nature of business the two countries have been conducting. The Chinese government is usually anything but transparent about its money.

Also, Chinese aid figures, unlike those in Western countries, are usually treated as State secrets. Chinese development banks and the main lenders hardly publish figures about the vast loans they give to countries like Kenya. In most cases, we don’t know whether what we get from China is a loan, a grant or an FDI.

Debt burden

Chinese FDI can sometimes be bundled together with concessional loans. This leads to it being double-counted, with a venture sometimes being recorded both as aid flow and as inflow of FDI. Given the current heavy volume of concessionary loans it has provided us, we should be concerned about both the transparency and size of our future debt burden with China.

China is no doubt an economic powerhouse with long-term ambitions in Africa. We are no different and there is no doubt that the Chinese are here to stay.

Asking whether China is good or bad for us is beside the point. What our Government must address is what exactly it is that we intend to gain from the partnership, and whether the nature of our relationship with China is in our long term-interests. Unless we address the relation’s skewedness, Kenya will have little to show for its decision to face East.

The writer is senior vice president, financial risk management, Riyad Bank, Saudi Arabia.

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