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Risky business: instability and lack of local knowledge hold back Chinese firms in Africa, report says

Chinese investors in Africa have suffered huge losses due to instability on the continent and the failure of some mainland companies to fully grasp local conditions, a major think tank has warned.

China has greatly expanded its infrastructure, energy, mining and manufacturing businesses in Africa in recent years, but the investment environment there has many risks and many companies’ operations are flawed, according to the annual report on development in Africa by the Beijing-based Chinese Academy of Social Sciences.

Official statistics showed China’s direct investment in Africa reached US$32.35 billion in 2014, with more than 3,000 companies operating in 52 countries across the continent.

But the projects faced security risks, the report said. Regional wars and conflicts have cost Chinese enterprises massively in countries such as Libya, Ivory Coast and South Sudan, while investment in the oil industry is going to areas where extremist groups like Boko Haram are ­expanding.

China National Petroleum Corp took a financial hit as unrest flared near its two most important oil fields in South Sudan after the country declared independence in 2011.

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Continued violence severed links between the fields and refineries run by CNPC and Sinopec.

The report listed five security risks Chinese companies and their personnel faced: political disturbances, military conflicts, terrorist attacks, organised crime and public security incidents.

Last year, three executives of a Chinese railway construction company were killed in a terrorist shooting in Mali, and in 2014 a series of kidnappings and attacks targeted Chinese workers in Nigeria, Zambia and Cameroon.

“China should proactively respond to African countries’ call for peacekeeping and counterterrorism cooperation, and increase protection and risk management of major projects in sensitive regions,” the report said.

Other unfavourable factors include weakening market demand amid the economic downturn, administrative inefficiency, non-transparent legal systems, foreign exchange controls, high tax rates and high labour costs, the report said.

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For example, Sinosteel had to sell a mining project in Cameroon in which it had a 97.5 per cent stake in 2008 because of poor government efficiency, the report said.

Some media outlets had branded China’s expansion in Africa as “neo-colonialism”, adding to political difficulties for Chinese businesses, it said.

But some losses were the fault of Chinese companies. They had in certain instances lacked local knowledge, engaged in vicious competition with Chinese rivals, and failed to comply with local laws.

Despite the obstacles, China should still continue to acquire resources and energy in Africa, and promote settlement in yuan, it said. The report also called for Chinese companies in Africa to make corporate social responsibility a priority and be fully aware and prepared for security and business risks.