American Markets Can Beat Chinese Money in Africa
For Prosper Africa to work, it needs to unleash the power of U.S. investors.
Nearly two months after it was announced, the Trump administration’s new Africa policy—Prosper Africa—remains largely mysterious. But one thing is crystal clear: This deal is mostly about China and its growing influence on the continent. If the Trump administration is serious about addressing Chinese competition in Africa, it needs big ideas to challenge Beijing’s power.
China has remade the African economic landscape so dramatically that it has become a threat not just to America’s strategic engagement on the continent but to the very idea that U.S. capitalism can create companies able to compete in markets such as those in Africa—fast growing but hard going. In virtually every sector, China is dominating the commercial landscape—and it’s not just government investment. According to McKinsey & Co., more than 10,000 privately owned Chinese firms are investing on the continent. One company, Transsion, a smartphone manufacturer founded in 2006, is estimated to have gained 45 percent of the African market share in 2018. That’s why Prosper Africa needs to be a signature international policy designed not just to promote African prosperity but to promote the American way of doing business: competitively, transparently, and efficiently. That means expanding capital markets in every major emerging market, starting with Africa.
If the United States is to counter China on an investment to investment basis, it cannot do so through state-directed means. Competing by copying isn’t what America does. But more to the point, it’s not feasible. China’s ability to deploy capital through state-owned entities far exceeds anything America could consider through the U.S. Agency for International Development, which manages America’s official development assistance; the Overseas Private Investment Corp. (OPIC), which helps U.S. investors access private market opportunities abroad; or the U.S. Export-Import Bank, which helps finance companies exporting their products and services abroad. America’s only chance to compete is by wielding the considerable clout of its investment class—the pension funds, endowments, and institutional investors that deploy trillions of dollars of Americans’ savings into the bond and equity markets around the world.
But right now, there’s not much (listed) for them to invest in: The second-largest exchange in Africa (Nigeria) has a market capitalization of less than $30 billion. To put that in perspective, the U.S. company Salesforce has a market cap more than twice the size of all of Africa’s equity markets (excluding South Africa). Creating capital markets would allow the United States to deploy the full strength of its investments—and benefit African business owners by providing a new, large, and competitive source of financing for growing their businesses, as well as a mechanism for African savers to invest more efficiently.
The United States is uniquely situated to help create the regulations and governance necessary for a thriving capital markets system. Redirecting the limited resources of the U.S. Securities and Exchange Commission’s Office of International Affairs to a topic the institution knows well (such as capital market governance), rather than focusing on topics it knows nothing about (such as fighting conflict minerals), would go a long way to advancing U.S. interests and values abroad.
It would also help promote an alternative development financing path for companies in places such as Ethiopia, which have little options for financing their growth beyond eye-wateringly high lending rates from local banks or seductive low interest loans from Chinese state-owned entities. Some of Africa’s most promising companies are also its youngest. But getting funding is next to impossible for start-ups and scale-ups if you’re not connected. The United States should help back an AIM-like listing structure—in Nairobi or Lagos—for Africa’s most promising younger companies. Giving these companies the opportunity to list on a stock exchange “lite” would strengthen local corporate governance while also offering investors with the risk tolerance an option to participate in their growth.
The development of capital markets is also positively correlated with the development of the private sector, the primary job creator on the continent. Recent in-depth research by the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund offers compelling evidence outlining the multiplier benefits of stock markets in emerging economies. The United States may not have invented shareholder capitalism, but it’s done more than any country to expand the idea around the world—except in the markets that need it the most. As one fund manager put it, “an entire year’s worth of trading in the frontier African markets is done before lunch on the New York Stock Exchange.” Helping to establish new, and reconstructing existing, exchanges would continue a long history of advancing private sector growth through capital market development.
Developing capital markets on the continent will provide ways for U.S. investors to participate in the continent’s growth directly and diversify their 401(k) portfolios at the same time. Perhaps the best place to start in developing Africa’s capital markets is the bond market, where the World Bank’s International Finance Corp. (IFC). has already had some marked successes. The IFC’s Managed Co-lending Portfolio Program provides asset managers with a securitized instrument to do co-lending on a large scale with a sophisticated institution. OPIC, which recently doubled in size as a result of the passing of the BUILD Act—which seeks to facilitate the participation of private sector capital and skills in developing low-income economies—should look to create a similar vehicle across its portfolio. As I have written in the past, the existence of samurai bonds, dragon bonds, and Yankee bonds all demonstrate an appetite for specific investment profiles. Project-specific ratings in infrastructure, for example, would go a long way to countering what the Trump administration refers to as “Chinese predatory lending” by offering an alternative financing path for project sponsors. But in order to get there, bond issuers need credit support or enhancements to secure the investment grade ratings necessary to crowd in institutional investment.
Eight years ago, then-President Barack Obama said America faced a new “Sputnik moment” in China’s rise. But America has put forward no strategic framework that comes remotely close to China’s global Belt and Road Initiative. According to UNCTAD, in 2016 “there were nearly 50,000 companies listed on 81 exchange groups around the world. The combined market capitalization of these companies was approximately $70 trillion.” But there are still more than 40 countries without a stock market. A multiyear capital market development effort across every emerging market, starting with Africa, could be America’s answer. A Prosper Africa strategy that concentrated on this would offer the current administration a way to counter China in the world’s fastest-growing frontiers by doubling down on what it knows best: expanding capitalism by creating the markets that make it possible.