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Chinese Colonialism

“Is China becoming the new colonial power in Africa?”

To the colonies and back again

The African continent went through a period of rapid colonisation between 1880 and 1900 as European nations sought to gain control over raw materials, land and labour; this time period is commonly referred to as “The Scramble for Africa”. This colonisation was as a result of several factors. The advent of iron hulled boats with steam engines allowed for the navigation and transportation of people and materials up Africa’s rivers. Medical advances, specifically the extraction of quinine to combat malaria allowed Europeans a better survival rate on the continent – during the 18th century, only 1 in 10 Europeans sent to Africa survived, with 6 of the 10 dying in the first year! The European political backdrop and the creation of a unified Germany meant there was little room for European expansion and a rapid land-grab began. The colonisation process started to reverse after World War II with the signing of the Atlantic Charter in which US president Franklin D Roosevelt introduced a provision on the autonomy of imperial colonies. Italian East Africa (Ethiopia) initiated the independence process in 1944 with leader Haile Selassie coming to power. Some of the last countries to gain independence from their colonial rulers were Southern Rhodesia (Zimbabwe) in 1980 under Canaan Banana and the de facto independence of South West Africa (Namibia) in 1990 under Sam Nujoma.

African Colonial Powers – 1913

map-china-colonialism

Chinese shopping spree

The American Enterprise Institute and the Heritage Foundation keep a publically available dataset of large Chinese investments and contracts worldwide. What is clear is that the Peoples Bank of China (PBoC) has been on a shopping spree that shows little sign of abating irrespective of the global or domestic economic backdrop. Focussing just on Africa, we can see that just over $36bn was spent across the continent in 2013.

Chinese Investment & Contracts in Africa, 2005-2013

chinnese-investment

Source: The American Enterprise Institute & the Heritage Foundation

Over the 2005 to 2013 time period, Nigeria has been the largest recipient of Chinese cash flows followed by Algeria and Ethiopia.

Chinese Investments & Contracts by Country, (cumulative 2005-2013)

investments

Source: The American Enterprise Institute & the Heritage Foundation & RealCap

What’s in the bag?

The largest component of Chinese shopping has been within the energy sector, principally for gas and oil. China has been known as a “hoarder” of natural resources and ensuring a secure energy supply to meet growing domestic energy demand has been a key strategy to their investments. 2013 also saw a big increase in spending within the metals sector – there were two large investments in steel in Sierra Leone and a large aluminium investment in Guinea. Notably, the largest investment contract within the financial sector was in 2007 with the purchase of a 20% stake in South Africa’s Standard Bank.

Chinese Investments & Contracts by Sector, 2005-2013

investments-by-sector

Source: The American Enterprise Institute & the Heritage Foundation & RealCap

Is it colonialism?

There is much colloquial evidence that if you want a smooth path through Africa; a fistful of US Dollars or “Chinese money” is what is required. China however, is particularly sensitive to any accusation that it is becoming a colonial power and goes to great lengths to point out the relationship between itself and its African partners is a mutually beneficial one. Coupled with Chinese investment in natural resources comes hospitals, roads and schools and of course job creation. China also sees Africa as an ideal market for its goods and services and actively promotes Africa as a tourist destination for Chinese travellers. In answer to our question, the sovereignty of African governments has not been threatened by Chinese investment; in fact, many governments have shown themselves to be quite astute dealmakers; so colonialism it is not. However, security of natural resources, particularly energy resources is a growing theme globally and African leaders need to take care their shiny new shopping mall has not come at too high a price.

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Gold Flow

“There has been a distinct flow of physical gold from West to East. What does this means for gold’s place in the world – should it have been bronze, silver and bitcoins1 awarded in Sochi?”

Empty the vaults

The Federal Reserve Bank of New York vault sits 5 storeys deep underground, anchored to the bedrock of Manhattan and capable of surviving atomic bombs and hurricane level flooding. The location of commercial vaults remains a closely guarded secret, although many theories abound on exact positions in the major financial centres. The NY Fed acts as custodian for 6,700 metric tonnes of gold, most of it the property of more than 60 sovereign nations. Much of the gold arrived after World War II as many countries wanted to store their gold in a safe, “imperial” location. Germany’s central bank made waves last year when it announced the repatriation of gold stored in New York, London and Paris to its own vaults. Another gold withdrawal from US domiciled vaults came on the 23th of January 2014 when Comex (Commodity Exchange Inc.) reported that JP Morgan saw 321,500 ounces (about 10 tonnes) of gold leave it’s vault on the day. China is the answer to that flow.

Stock piling in the East

There are numerous articles about global mints being unable to keep up with the demand for gold bars and coins from Eastern (Middle East, Chinese and Indian) consumers. Asian buyers typically like smaller bars and the mints melt down and refabricate the gold stocks to meet that demand. The Singapore bank vault is expanding to accommodate the storage requirements from Asian buyers and a new 2,000 metric tonne vault recently opened in Shanghai. All this happens as Western investors have withdrawn record amounts from physically backed gold exchange traded products – see table below. The West has been dumping physical gold and the East has been happy to become the new owners. 1Bitcoins are a digital peer-to-peer currency introduced in 2009 and are being suggested by some proponents as a viable alternative to fiat currencies (much like gold) for those who mistrust central banks. Whether bitcoins themselves have longevity remains to be seen.

2013 World Gold Demand Overview (Tonnes)

goldflow1

Consumer Demand in Selected Countries/Regions (Tonnes)

goldflow2
Source: World Gold Council

Central bank reserves

Central banks and organisations like the IMF (International Monetary Fund) still hold vast quantities of physical gold in reserve in addition to fiat currencies. The IMF tracks these gold reserves through voluntary reporting by central banks. In terms of actual tonnes of gold, the United States holdings far exceed that any other sovereign with just over 8,100 tonnes in reserve. They are followed up by Germany, the IMF itself, Italy and France. China has the sixth largest physical gold reserve with 1,054 tonnes. What is of interest is the percentage that physical gold makes up of total reserves of the ten largest gold holders – see the chart below.

Top 10 gold holders – gold as a percentage of total reserves, February 2014

gold3
*IMF: Statistics not calculated Source: IMF International Financial Statistics
 

Peoples Bank of China

The Peoples Bank of China (PBoC) has over 1,000 tonnes of gold reserve, but this accounts for just 1.1% of total reserves. This is in sharp contrast to the Western Nations (US, Germany, Italy, France) where gold holdings account for over 65% of total reserves. As a percentage of total reserves, Portugal followed by Greece have the highest percentage of gold at 85% and 78% respectively. An often drawn conclusion by the gold bulls it that the PBoC has enormous fire power and capacity to increase its physical gold reserves as it seeks to diversify its reserves away from US Dollars.

Investing opportunities?

Gold investing has been likened with marmite – you either love it or you hate it. There are incredibly compelling arguments for and against holding gold, but the undeniable truth is that gold is here to stay as a means of storage of wealth – for individuals and sovereigns. Olympic athletes will continue to strive for the coveted gold medal and investors should certainly hold gold as part of a diversified investment portfolio.  

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Overview Ukraine - Geopolitical Commentary

Historic context

  • Russia believes Ukraine is part of Russia; Ukraine (parts of it) believe they are an independent nation with ties to Europe
  • The Crimean peninsular has been repeatedly colonised and occupied over the centuries
  • The Russian Empire annexed Crimea in 1783 after numerous wars with the Ottomon Empire
  • The Crimean War of 1853-56 was fought by the Ottomons, British and French against the Russians – the Russian prevailed and Crimea remained part of Russia
  • After the 1917 Russian revolution, Crimea became part of the USSR
  • In 1944, Stalin deported Crimea’s entire population of ethnic Tartars to Siberia!
  • In 1954, Nikita Krushchev (Soviet leader but ethnic Ukrainian) transferred the Crimea to the Ukrainian Soviet Socialist Republic
  • On the breakup of the USSR, Crimea remained part of Ukraine
  • Sevastapol is the largest Crimean city with strategic military importance. It currently serves as a Russian naval base under a 20-year lease signed in 1997; the lease was extended in a “gas deal” in 2010 for another 25 years with the option to extend again in 2042

Map of Ukraine

ukrainemap  

The Georgia Parallel

  • Georgia was established as a sovereign nation after the breakup of the USSR
  • The pro-West government elected in 2004 alienated relations with Russia
  • In April 2008, Russia formally “recognised” two small, breakaway Georgian provinces (Abkhazia and South Ossetia) as sovereign nations
  • Russia and Georgia accused each other of escalating tensions
  • The pro-West Georgian government ordered a full-scale military operation to retake control of South Ossetia in August 2008 giving Russia the excuse it needed to launch an invasion into Georgia
  • The 5 day war lead to hundreds of deaths and thousands of casualties
  • An uneasy cease-fire remains in place; Russian troops remain in the breakaway provinces

Russia has an historic precedence for “engineered” occupation – it is currently acting within historic norms

Russian Gas

gases
  • In late January, the Ukraine asked Russia for a deferral in payments for gas
  • On March 1, Gazprom said they would consider cancelling Ukraine’s price discount
  • On Monday, Gazprom said there “may be” supply disruptions to Europe
  • Russia supplies 25-30% of Europe’s natural gas through Ukrainian based pipelines

Extra Detail

  • Russian and China are “in agreement” over Ukraine – China came out with a very pro-Russian statement which was subsequently softened to fall in line with international norms on sovereign borders
  • A G8 meeting is scheduled in Sochi for June – there is talk of suspending preparations
  • In 1994, the United Kingdom and United States signed a treaty with Ukraine agreeing to come to it’s defence were it to be threatened . . . It would be very difficult for the UK or US to stand back should Russian troops invade
  • Ukraine owes Gazprom a reported $1.5bn in overdue payments
  • The US has agreed $1bn of aid to Ukraine; Russia is “offering” $2-3bn
  • Ukraine has only 4 months of gas supply stockpiled

Scenarios

outcomes      

Cold War v2.0

“November of this year will be 25 years since the fall of the Berlin Wall and arguably the symbolic end of the Cold War. History never repeats itself, but it rhymes – are we seeing version 2.0 of the Cold War in 2014?”

A lesson in history

The Cold War is named as such as there was no direct large-scale armed conflict between the key players – the Western Bloc (the United States and NATO allies) and the Eastern Bloc (USSR and allies of the Warsaw Pact
[1]). Instead there were regional wars, the simmering threat of nuclear war and a dedicated fight for psychological supremacy and power that was waged through propaganda, espionage and the Space Race.

Cold War Alliances

map

US Propaganda

Soviet Propaganda

usprop russian-prop
After World War II, Stalin imposed Soviet-style communism on its eastern neighbours, just as Chinese communism was establishing itself. The Soviet Union actively promoted its communist ideals in Latin America (Cuba), the Middle East (Afghanistan) and Asia (Vietnam, North Korea) while the US through programmes like Operation Cyclone[2] provided direct financial aid and weaponry as well as covert support to anti-Soviet groups; and all out military force in Vietnam. Successive American presidents and Soviet leaders used differing strategies to try and maintain political dominance both domestically and internationally often through rhetoric and posturing. Due to the very real threat and awareness that escalations to a “hot war” would ultimately mean nuclear weapons deployment and MAD – mutually assured destruction – a delicate balance-of-power needed to be maintained by both super-powers. Defence budget figures for the ex-Soviet Union are not readily available, but the chart below details US Military spending post-World War II. Within the Cold War era, the Vietnam War – in many ways a proxy for the Cold War – consumed a large portion of the US budget – over 10% of US GDP during the 1960’s. Although beyond the scope of this article, it is interesting to see the post 9/11 response in defence budget allocation; now around 5% of US GDP.

US Defence Budget History (Billions of 2005 Dollars)

graph1

Take two . . .

There is much literature detailing the previous Cold War era – the question is whether we are once again forming East-West power Blocs. The Cold War was largely about ideology, what appeared to be a credible alternative to capitalism and democracy – people across the world were prepared to fight and die in the name of Communism. However, there was no direct conflict between the US and the USSR – no troops were sent “behind the Iron Curtain” – neither side wanted to risk all out conflict, particularly after the Cuban Missile Crisis[3]. The US right-wing media and politicians are currently having a field day accusing the current US government as being “weak” in its response to Putin’s manoeuvring in Ukraine. They of course have their own political agenda at play and are enjoying the opportunity to use Cold War scare-mongering. There is certainly no Western military force assembling to combat the increasingly hostile Russian-orchestrated breakup of Ukraine and a military response is unlikely. Instead, we have a situation where the current degree of economic interweaving between the east and west makes economic sanctions imposed on Russia by the west a bit of a blunt tool. Those sanctions may hurt Europe almost as much as Russia (oligarch London playboys aside). The threat of nuclear conflict has also diminished, New START (Strategic Arms Reduction Treaty), a follow-on from the START I treaty signed between Presidents Bush and Gorbachev in 1991 was signed by Presidents Obama and Medvedev in 2010 with both nations committing to further reductions in nuclear weapons.

Nuclear Weapons Stockpiles

russia-usSource: Norris, Robert; Hans M. Kristensen (July 1, 2010). "Global nuclear weapons inventories, 1945−2010". Bulletin of the Atomic Scientists

Version 2.0?

We are certainly in a situation where on the surface, Cold War analogies abound. There is rhetoric and political posturing, displays of Russian nationalism (Sochi) and incitement of conflict in Ukraine – but the ideological underpinning of the Cold War is absent. No one is going to take up the Communist cause for Putin’s rich circle of ex-KGB officials. The west will continue to make noises about respect for sovereign borders and freedom and democracy which served as the back track (but with little real effect) for version 1.0 of the Cold War. Rather than Cold War v2.0, the current situation could be better described as “Cold War Lite”.

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[1] The Warsaw Pact: a pact for the mutual defence of Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania and the Soviet Union.
[2] Operation Cyclone was the CIA code name for the operation to arm and finance the Afghan mujahideen who opposed the Soviet intervention. Critics of this operation claim the US was responsible for arming and financing the very groups that would coalesce to form the Taliban.
[3] The Cuban Missile Crisis was a 13 day confrontation in 1962 between the Soviet Union and Cuba against the United States. The Soviets intended to place nuclear missiles in Cuba; the US would not permit the delivery of such weapons and equipment and a naval blockade was set up. Several Soviet ships attempted to run the blockade and the Cold War came unnervingly close to a nuclear conflict.
 

Copyright © ItemBridge inc., 2013

Copyright © ItemBridge inc., 2013