Recently, I finished an intriguing book, China Safari: On the Trail of Beijing’s Expansion in Africa, by Serge Michel and Michel Beuret, two journalists from Le Monde and L’Hebdo, respectively. The book wasn’t investment-related but was relaxing compared to my usual reads.
Rather than focus on the specific economics of African and Chinese trade, the book shares the journalistic field experiences of the authors in Africa. The book centers more on the individuals participating in trade than the GDP figures and export numbers. In many ways, this insight can be more valuable. Statistics aren’t hard to find, but it can be difficult to understand the sort of entrepreneur who leaves Beijing to set up shop in Nigeria. In a sense, this is a merger of two strange worlds into a third, even more unfamiliar place.
While globetrotters on the Casey Research team have traveled to dozens and in some cases over a hundred countries, my international experience resume is still short. As a result, China Safari was enlightening. However, while the book gave the reader a great feel for the Chinese entrepreneur, it did lack some insights. Being journalists, the authors naturally saw the world through their lense. But from an investment perspective, I see it differently.
For one, there should be distinctions between the different Chinese operations in Africa. The interests of factories, oil companies, and Chinese small businesses are not necessarily aligned, but the authors lump them all together. When it comes to reporting on Chinese capitalism, this is a common mistake.
On the one hand, headline stories report on powerful Chinese companies laying claim to global commodities in Africa and around the world. But this shouldn’t be our only focus in terms of China’s growth. The expansion and growth of these companies is often planned and subsidized by the central government. It’s not a self-sustaining form of capitalism. These companies often only prosper due to “special” relationships set up by the Chinese government.
If an oil company drills in Africa only because the Chinese government agreed to build new roads in the region, the company does not actually stand on its own two feet. The firm succeeds only due to the government’s actions.
On the other hand, there are small Chinese entrepreneurs moving into Africa with no link to the central government. They are operating smaller factories or importing and exporting smaller quantities of goods. They’re not getting special favors or opportunities. Instead, they’re under the radar, so to speak. In the long run, these entrepreneurs will drive China’s economic growth.
China’s economic strength can only be measured through naturally occurring growth. The subsidies and government companies are simply smoke and mirrors – and may not reflect the actual economy. Ultimately, the non-subsidized sector must drive the economy.
Think about the U.S. in the same way. What are some companies driving the U.S. economy? Names like General Electric, Microsoft, Coca-Cola, and Exxon-Mobil might all come to mind. These are huge U.S. names, but if someone naively examined the U.S from afar, he might reach a completely different conclusion.
Consider that six of the 10 richest counties are located around Washington D.C., an area that basically produces nothing of value. An observer may think that companies such as Northrop Grumman and Lockheed Martin are driving America, but that’s far from the truth. On the surface, D.C. appears economically vibrant, but in reality, it’s a parasite dependent on economic producers elsewhere.
The same story applies with China. Often, the state-owned companies and the enormous state-funded construction projects capture the headlines. And in some cases, this really is the vibrancy in China, but in others, the projects hide the actual health of the economy. Though it’s important to watch international acquisitions by the large Chinese commodity-based companies, it’s also important to feel the pulse of the regular entrepreneur. The organic growth in China will provide sustainable development and is the key to evaluating the nation’s heartbeat.
