Analysis of Approvals for Chinese Companies to Invest in Africa's Mining, Agriculture and Forestry Sectors Analysis of Approvals for Chinese Companies to Invest in Africa's Mining, Agriculture and Forestry Sectors Working Paper 81

Cover photo by Iain Ding Ministry of Commerce (MOFCOM) complex on Chang'an Avenue in Beijing. MOFCOM serves Chinese business interests both at home and overseas and its support is behind many of China's recent international business expansion endeavors. Any views expressed in this publication are those of the authors. They do not necessarily represent the views of CIFOR, the authors' institutions or the financial sponsors of this publication.


Table of contents
Abbreviations v

Summary
The impacts of Chinese investment in and trade with Africa have become the subject of much speculation. CIFOR's 'Chinese trade and investment in Africa' project seeks to understand the impacts of China's role in shifting global trade flows and investment patterns on forests in 2 African eco-regions, the Congo Basin and the southern African woodlands, with a focus on sectors with potential direct impacts on forests: mining, forestry and agriculture.
The lack of a comprehensive database of Chinese investments in Africa makes it difficult to build a picture and analyse trends and patterns. The analysis in this working paper draws on a database (spanning 1983 to 2010) of approvals by the Ministry of Commerce of the People's Republic of China (MOFCOM) for Chinese companies to engage in overseas investments. Records in the database indicate the companies' intent to invest overseas, but do not record actual investments that were completed. Additional sources are used to characterise trends in Chinese merger and acquisition activities in the sectors of concern in Africa.
The database contains 1346 records of approvals for Chinese companies to invest in Africa from 1988 to 2010, representing 8.47% of all approvals for overseas investment awarded to Chinese companies. Before 2002, fewer than 10 approvals were made per year. After 2002, approvals grew at an annual average rate of 250%, reaching 388 in 2010. Of these, 278 approvals were for the mining, forestry and agriculture sectors, of which 128 (44%) were in the 2 eco-regions of interest to the CIFOR project.
In the mining sector, there were 209 approvals, with 70% concentrated in 10 countries: Democratic Republic of Congo (DRC), Zambia, Nigeria, Algeria, South Africa, Sudan, Tanzania, Ethiopia, Ghana and Chad. More than half of the approvals were for mineral extraction and a third were for prospecting.
Approvals for mining investment in the 2 eco-regions accounted for 45% of all mining records for Africa. The DRC, Zambia and Tanzania accounted for 90% of mining sector approvals, the vast majority (86%) of which were for mineral extraction and prospecting activities.
In the forestry sector, there were 34 investment approvals in 14 countries. The top intended investment destinations for Chinese forestry companies in Africa are Gabon, Zambia, Ghana, Nigeria and Republic of Congo. Overall, Gabon accounts for almost 23% of forestry sector approvals. Eighteen of the 34 approvals were in the 2 ecoregions, and over 40% of these were in Gabon. Timber extraction and sawnwood manufacturing together account for most (84%) of the approval records.
For crop-based agriculture, there were 35 records. Zambia, Tanzania, Sudan, Ghana and Ethiopia accounted for almost 60% of approval records. Most (74%) approvals were for crop production, with smaller numbers for wholesale and retail (20%) and manufacturing (5.7%) activities. Overall, 43% of agricultural approvals were in the 2 eco-regions, almost half of which were for investment in Zambia.
Globally, mergers and acquisitions (M&A) by Chinese companies have been increasing in recent years. Africa is the second most frequent destination for mining M&A events, and research shows increased interest in M&A activity in Africa. Most M&A activity is in the oil and mining sectors.
Further research is required to produce a comprehensive database of actual Chinese investment activities in Africa. M&A as a growing form of overseas investment by Chinese companies also merits investigation.

Introduction
The 'Chinese trade and investment in Africa: Assessing and governing trade-offs to national economies, local livelihoods and forest ecosystems' project, launched in March 2010, aims to advance understanding of the social, economic and environmental impacts of Chinese investment in commodities or sectors affecting forests and livelihoods in Africa (e.g. timber, mining, agriculture), and to strengthen the capacity of decision-makers in government, civil society and the private sector to enact reforms to maximise social and economic benefits while minimising adverse effects.
This project seeks to understand China's role in shifting global trade flows and investment patterns; to understand what is unique about Africa's trade with China (relative to other development partners) in the forestry sector; and to identify how trends in forest-related trade and investment are playing out in the Congo Basin and the southern African woodlands. These regions were selected because of the importance of their forests. The countries of concern in these eco-regions are Republic of Congo, Cameroon, Democratic Republic of Congo (DRC), Equatorial Guinea, Gabon, Mozambique, Tanzania, Zambia and Zimbabwe. Together these countries have a total area of 6.3 million km 2 , spanning more than a fifth of the total African land mass. The project is identifying the economic, social and environmental trade-offs (positive and negative impacts) for a selection of Chinese investments that have an impact on forests on the continent (e.g. timber, agricultural cash crops, biofuels, mining).
In recent years, in line with China's 'Going Out' strategy announced in 2000 (MOFCOM 2001), many Chinese companies have begun exploring and making investments in Africa. The impacts of this trend -both positive and negative -have generated a great deal of speculation worldwide. A growing number of reports from academics and civil society organisations document some of these activities and, in some cases, the specific impacts on the local ecology, livelihoods and economy. However, nowhere have specific investment events been systematically collated, making it difficult to build a picture and analyse trends and patterns from the available scattered documentation. One part of this project is to develop systematic documentation of investment events in the Congo Basin and southern African woodlands.
In the absence of a complete database, the analysis in this working paper draws on a database of applications by Chinese companies for permission to invest overseas. The database is the China Companies Overseas Investment Database of the Ministry of Commerce of the People's Republic of China (MOFCOM). The MOFCOM database contains a list of Chinese companies that received approval to make overseas green land investments during the period 1983-2010. The database was built to comply with Chinese government regulations, first issued in 1983 and subsequently updated several times, that require Chinese companies intending to make non-trade investments overseas to apply to MOFCOM for approval to invest (State Council 1983, MOFTEC 1984, 1985, 1992, 1999, NPC 1991, MOFCOM, 2003, 2007, 2009. Listing in the database can only be taken as an indication of a company's intent to invest overseas. Listing does not imply that all these companies eventually made the actual investments either in Africa or in the sectors under which they applied. There are 2 other caveats to note. First, the database does not include merger and acquisition (M&A) or other minority equity investments. Since the database does not include companies solely involved in M&A investment, this working paper describes some trends in Chinese M&A (see Section 5). Second, the database does not record the value of intended investments. The relevant Chinese government agencies record outward foreign direct investment (OFDI) value data separately and report them using other systems.
Drawing primarily on the MOFCOM database, this working paper examines trends in intended investment and the major intended investment destinations of Chinese companies in 3 important land use sectors that may have direct environmental and social impacts: forestry, mining and agriculture. The analysis focuses on data for companies intending to invest in these sectors in countries of the Congo Basin and southern African woodlands (Congo, Cameroon, DRC, Equatorial Guinea, Gabon, Mozambique, Tanzania, Zambia and Zimbabwe). Section 5 analyses available data on M&A investments in these sectors drawing on other data sources. The final section elaborates on some questions for further research raised by the analysis.

Intended investments by type and sector
To analyse the intended investments by sector, we adopted the classification in the Chinese National Economy Industry Classification and Code (GB/T 4754-2002), a national standard applied in China. Application of this classification method reveals that Chinese companies mainly intend to invest in 8 economic sectors: manufacturing; leasing and business services; wholesale and retail; construction; mining; research, technical services and geological prospecting; farming, forestry, animal husbandry and fisheries; and real estate 1 (Figure 3).
Amongst these sectors, manufacturing is the most frequent investment target, accounting for around 27.6% of all approvals. This industry category covers manufacturing across all industries, including textiles, chemicals, mining, wood processing and food processing. The leasing and business services sector is the second largest intended investment sector for Chinese companies, accounting for more than 21% of the total number of records. This sector includes a large number of representative offices intending to make investments or to expand marketing of their products, many of which have the purpose of searching for potential business opportunities and clients in Africa. Companies engaging in international trade are categorised as being in the wholesale and retail industry, which accounts for almost 14% of all investment records. The construction industry, which includes construction activities such as housing, roads, railways and bridges, accounts for just over 12% of records. The mining sector is also an important investment field for Chinese companies, accounting for over 9% of records. It should be noted, however, that in this method of classification, mining only includes mineral extraction activities, such as extraction of oil, natural gas, metal and non-metal ores. Other miningrelated activities are classified into other sectors, such as research, technical services and geological prospecting. The classification that includes agriculture, animal husbandry, fisheries and forestry in one category can be considered 'agriculture' in its broadest sense. This sector accounts for just over 4% of the total number of records.

Approvals for Chinese companies investing in
Africa's mining, forestry and agriculture sectors

Overview
As mentioned above, many mining, forestry and agriculture companies' approvals to invest in Africa are classified under other economic sectors, such as manufacturing, wholesale and retail, and geological prospecting. In this section, we separate mining, forestry and agriculture out of the general 'agriculture' category, and include records relating to these 3 sectors that are allocated to other sectors using the standard classification presented above.
In the mining sector, records referring to metal and non-metal ores (e.g. quarries) are sometimes difficult to distinguish, and some non-metal mining  Geological prospecting is also an important intended activity, accounting for around 31% of records. Some of these records refer to companies that provide mineral prospecting services to other enterprises, while others are for companies intending ultimately to extract the ores discovered through prospecting.
Manufacturing and leasing and business services each account for around 6% of total mining records, and the wholesale and retail industry accounts for just under 2% of records ( Figure 5).
The mining industry also includes 14 oil companies, of which 12 obtained approvals to engage in oil extraction and 2 in manufacturing (Table 1).

Forestry investment approvals in Africa
Thirty-four forestry investment records distributed across 14 African countries cover forest management, logging, wood processing, paper and furniture and wooden floor materials manufacturing.

Country distribution
The top investment destinations for Chinese forestry companies in Africa are Gabon, Zambia, Ghana, Nigeria and Republic of Congo, among which Gabon is the most important, accounting for almost 40% of the total records. Gabon is an important African timber provider to China; it's rich forest resources and a comparatively stable political environment, have attracted Chinese  This re-categorisation results in 278 records relating to the mining, forestry and agriculture sectors, accounting for more than one-fifth of the total investment application records. There are 209, 34 and 35 records in the mining, forestry and agriculture sectors, respectively, or around 15%, 2.6% and 2.6% of all investment application records.

Country distribution
The re-categorised database shows a total of 209 records in the mining sector, distributed across 33 African countries. The top 10 intended investment destinations of these companies are DR Congo, Zambia, Nigeria, Algeria, South Africa, Sudan, Tanzania, Ethiopia, Ghana and Chad. Records referring to these 10 countries account for just under 70% of all mining sector records.

Sector distribution
Mining-related records are mainly distributed across five sectors of the standard classification: mineral extraction, geological prospecting, manufacturing, leasing and business services and wholesale and retail. Mineral extraction is the most common of these, accounting for 55% of all mining-related records.

Sectoral distribution
Within the forestry sector, about 45.7% of investment approvals were for forest resources extraction (forest management and logging). Other activities included processing of wood products (wood-based panelling, etc.), paper and paper products and furniture manufacturing, which account for around 22.9%, 20.0% and 11.4%, respectively ( Figure 7).
When logging and sawnwood processing are categorised as 'primary processing' and other

Agricultural investment approvals in Africa
In this section, we consider agriculture only narrowly defined as cropping, i.e. excluding forestry, animal husbandry and fisheries. Applying this narrow definition, 35 records are found in this sector.

Country distribution
The 35  investment approval records. Amongst these five countries, Zambia is the most frequently represented, accounting for almost 20% of the total number of records.

Sectoral distribution
Most approvals in the agriculture sector are in crop production. The other sectors recorded are wholesale and retail and manufacturing, accounting for 20.0% and 5.7%, respectively ( Figure 9).

Overview
This research project focuses on the Congo Basin and southern African woodlands because of the importance of their remaining forests. The countries of concern in these two eco-regions are Cameroon, DR Congo, Equatorial Guinea, Gabon, Mozambique, Republic of Congo, Tanzania, Zambia and Zimbabwe. Together, these countries cover 6.3 million km 2 , more than one-fifth of the total African land area.
The MOFCOM database includes 293 investment records in these countries, which, at less than 22%, is not a very large share of the total records for Africa. However, of these, 44% (128 records) relate to mining, forestry and agriculture. This indicates that these sectors in these investment destinations are relatively significant for Chinese companies.

Mining investment approvals in the eco-regions
Country distribution A total of 95 records for the mining sector in these countries account for over 45% of the total mining records for the African continent. The major destinations for mining investment are DR Congo, Zambia and Tanzania. These three countries combined account for over 90% of mining investment records in the eco-regions ( Figure 10).

Sectoral distribution
When records are analysed by economic sector, mineral extraction is seen to account for a large share (64%). Extraction and geological prospecting together account for 86% of the total mining sector investment records. No oil-related records were found in the target eco-regions.

Forestry investment approvals in the eco-regions Country distribution
There are a total of 18 investment approval records for the forestry sector in the Congo Basin and southern woodlands eco-regions, accounting for almost 53% of the total forestry records in Africa. Gabon is the most frequent intended investment destination, accounting for more than 40% of the total investment records in the eco-regions.

Sectoral distribution
When we look at the sectoral distribution of Chinese forestry investment in the study countries, we find that primary processing (i.e. timber extraction and sawnwood manufacturing) accounts for most (84%) of the records (Figure 13).

Agricultural investment approvals in the eco-regions
For agriculture, the MOFCOM database includes 15 records in the eco-regions, accounting for over  42% of the total agricultural records for Africa. This indicates that these regions are important Chinese agricultural investment destinations.
Amongst the countries in the two eco-regions, Zambia is the most frequent intended investment destination, accounting for nearly half of all records. The potential for investment in Zambia makes southern Africa an important agricultural investment destination; together with Tanzania this sub-region accounted for over 73% of all investments in the two eco-regions.
Of these, 13 records (87%) are for intended investment in crop production, and two records are for manufacturing.

Chinese companies' merger and acquisition activities in Africa
In addition to the green land investments recorded in the MOFCOM database, Chinese companies have been engaged in a large number of overseas M&A activities in recent years, many of which are in Africa. M&A approvals are not included in the MOFCOM database. For insights into trends in this area, we rely on two reports compiled by Deloitte (2010a, 2010b). Deloitte's reports include only completed M&A activity, and do not account for the likely large number of M&A initiatives that are not followed through to completion.
From 2003 to mid-2010, Chinese overseas M&A activity increased greatly in terms of both value and number ( Figure 15).
Amongst these mergers and acquisitions, a large number (in terms of both quantity and value) were in the oil and mining sectors. These M&A activities account for 39% of the total records Deloitte collated.
Amongst Chinese mining companies' M&A target markets, Australasia is the most important destination, accounting for a quarter of total M&A events. Africa is the second most important continent, accounting for 15% of the total records. It should be noted that some Australasian and other companies may have been taken over or purchased by Chinese companies that are also operating in Africa.
Deloitte (2010b) presents an analysis of possible future trends in Chinese outward M&A activity in the mining sector. Using data from interviews with 26 Chinese mining companies with prior involvement in outward M&A, Deloitte identified   33 Chinese outward M&A events in the mining sector in 2009, representing US$9.2 billion of investment. Most of the M&A events involved the purchase of majority or minority stakes in the overseas company. Most interviewed respondents revealed that they expected Chinese outward M&A activity to increase in 2010-2011. The most commonly cited driver of this anticipated trend was the goal of securing resources supply. Increasing market share, achieving economies of scale and price bargaining power were also frequently mentioned drivers. Environmental protection concerns were the third most commonly mentioned obstacle to M&A deals, after currency regulations and financial market instability. Africa was by far the most frequently cited potential future destination for outward M&A. Reasons given for this include the complementarity between Africa's abundant resources and Chinese companies' ability to invest, low labour costs and the then (pre-July 2010) threatened imposition of a super-profits tax in Australia that made acquisitions in other countries relatively more attractive. Drivers explaining Chinese companies' need to secure raw materials supply in the mining sector are reviewed in Zhang (2011).

Discussion
The analysis of records of Chinese government approvals for participation in overseas investment by Chinese companies shows 1346 investment records of intent to invest in Africa. This is equivalent to less than 8.5% of the total number of approvals for Chinese companies to invest overseas. Amongst the specific sectors of concern to this research project, mining investment in Africa is an important field for Chinese companies investing in Africa, accounting for 15% of the total number of investment records. reported or claimed in their own media products to have made investments in forest management, and four companies reported that they made investments in wood product processing in Africa (Huang et al. 2011). However, in-country investigations (e.g. Putzel and Kabuyaya 2011) sometimes find that some claimed investments are in fact not operational, as occurs when concessions are subsequently withdrawn or when other factors impede investment activities. Further research would be required to identify which companies have gone on to undertake actual investments. Investigation of the reasons for success or failure in following through with investment intentions would increase understanding of the factors affecting investment decisions by Chinese firms.
Industry actors forecast that Chinese M&A activities in Africa will increase in the short term. Another issue arising from the increased M&A activity is whether international but Chinese-owned or partly owned companies are also active in the target sectors in Africa.