China's big 2012 bets: South Africa rocks
Many investors are looking to Asia, in particular China, for returns as the world heads into yet another tough year. China, meanwhile, is foraging in Africa for opportunities to generate superior returns.
Most visible on its list is South Africa. The China-South Africa burgeoning trade relationship is in the spotlight yet again, with news just before Christmas that China's sovereign fund has acquired a sizeable stake in Shanduka.
China Investment Corporation has reportedly paid a staggering R2bn for 25% of the unlisted investment holding company with interests in coal mining and other industries. Shanduka is a familiar name in business circles in South Africa. Its charismatic chairman, Cyril Ramaphosa, was widely tipped to succeed Nelson Mandela as South African president.
The Chinese fund manages about $410bn of China's $3trn in reserves and has investments in Chinese banks and French energy companies, among other entities. Clearly it expects Shanduka to deliver lucrative returns. The China fund earned just under 12% last year on its overseas portfolio investing mostly in high-risk assets, according to the Wall Street Journal.
2012: Expect lots of China-Africa deals
We can expect big money deals involving the Chinese government and related financiers and South African companies to become increasingly common in 2012. Developed markets continue to look unattractive.
South Africa has a relatively sound regulatory environment, developed business infrastructure and entrepreneurs who are enthusiastic about unlocking returns across Africa. China spotted the obvious opportunities in hooking up with South Africa in its African forays some time ago.
China welcomed South Africa as the fifth member of its sexy Brics club along with Brazil, Russia and India this year. It has trumpeted the benefits of South Africa as an access point to a massive continental market of 1bn or so people.
The man who coined the term Bric, asset management heavyweight Jim O'Neill of Goldman Sachs Asset Management, was less convinced. He said on broadcasts televised in China when Brics delegates met on the Chinese island of Sanya in April that South Africa is effectively an economic minnow compared to the Bric countries. (For more on that, read China's favourite African son can do no wrong.)
But, criticism about South Africa gaining entry to the Bric clique this year failed to dampen China's enthusiasm for South Africa. Standard Bank (JSE: SBK), an adviser to Shanduka and a major deal-maker in Africa, recently declared that South Africa and the rest of Africa are "flavour of the month".
China's appetite for African assets, for now, appears to be insatiable. Earlier this year, Standard Bank released a forecast that China's investments in Africa would leap 70% on 2009 levels, to US$50bn by 2015.
There are no signs that this target won't be met. China is already Africa's largest trading partner, with China-Africa trade volumes for 2011 expected to come in at more than US$150bn (about $126bn in 2010). They are expected to double to US$300bn in four years.
Standard Bank has the inside track on what investors, and the Chinese in particular, are up to in Africa. It has banking tentacles across Africa.
It is also partly owned by the Industrial and Commercial Bank of China (ICBC) through a 20% stake acquired for US$5.5bn in 2008. Standard Bank has partnered with ICBC, the world's largest bank, to fund projects in Africa.
Africa's investment returns tantalise
There are many other signs that China is only just getting started with its investment programme on the continent. Ramaphosa said of Shanduka's latest deal, which saw China' s sovereign fund buying shares mainly from Old Mutual and Investec, that the plan is to explore future opportunities in South Africa and elsewhere in Africa.
In November the Wanning Declaration emerged from a meeting of more than 400 diplomats, politicians, researchers and business representatives from about 40 African countries in Wanning in the Chinese province of Hainan. Encouraging Chinese investment in private enterprise in Africa is a major objective in the new agreement.
Chinese and South African politicians are likely to get closer as a new parliamentary exchange mechanism is bedded down. A direct SAA flight from Johannesburg to Beijing, from January, will help oil the wheels of friendship.
In the Seychelles the political relationship is now so cosy that China is even considering taking up the offer of what effectively would be its own port. China refuses to acknowledge that it would be getting its very own African naval base.
Many of us will not like it that Chinese operators are likely to further entrench themselves across the continent. With a reputation for undercutting African firms and using their own cheap Chinese labour instead of creating jobs in communities, the jury is out on whether Chinese investment and loans in Africa are actually good for Africa in the long run.
China also has a reputation for aiding and abetting the continent's evil-doers in business. China's controversial diamond mining activities in Zimbabwe - with two mines this month placed on the United States' sanctions list - are a prime example.
But for some elite operators, like South Africa's Ramaphosa and Mugabe's diamond dealing pals, the opportunities on the horizon undoubtedly glitter as China explores the African continent for higher returns than it could expect elsewhere.