Ethiopia's Partnership with China

In late November, Habros Seguar, an Ethiopian industry ministry official, told me how the ministry had just landed a major Chinese investment. During his August trip to China, Prime Minister Meles Zenawi had visited the Pearl River Delta, where higher costs are driving manufacturers offshore. He invited the Chinese to visit Ethiopia. Among other things, he wanted them to look at a leather-based industrial cluster Ethiopia is developing to better utilise its livestock population, Africa's largest.

Within weeks, a delegation of Chinese had arrived in Addis Ababa. Among them was the privately owned Huajian Group, which produces 16 million pairs of leather shoes per year. By October, Huajian had decided to invest in Ethiopia.

Huajian's general manager arrived in November, hired 50 Ethiopian technical school graduates and sent them off to China for training. "The machinery is already on its way to Djibouti," Habros told me, adding that Huajian was leasing a factory site in Ethiopia's Eastern (Oriental) Industrial Zone.

Ethiopia at the end of 2011 reflects the surprising complexity of Chinese engagement in Africa, how it differs from that of the west and – possibly of more significance to the continent – how central is the role of African agency.

China is no newcomer here. In 1972, China financed the Wereta-Weldiya road across Ethiopia's Rift Valley. Between 1998 and 2004, the Chinese contributed 15% of the cost of Addis Ababa's ring road (Ethiopia paid the rest).

But when Ethiopia's economy began to grow at Asian rates, the Chinese saw increased opportunities. Not all were in the direction stereotypes would have predicted. Yes, China's state-owned petroleum companies explored for oil, but they departed empty-handed. Rather, the Chinese unleashed a variety of state-sponsored tools for building economic ties.

Most of these do not involve China's relatively modest foreign aid. The China-Africa Development Fund has made equity investments in a leather factory, a cement plant and a glass factory. The Eastern Industrial Zone is being built and run by a private Chinese company, with performance-based subsidies from China's economic co-operation fund. Chinese telecoms firm ZTE teamed up with Chinese banks to provide a $1.5bn commercial suppliers' credit (at Libor – interbank lending rate – plus 1.5%) to roll out cellular and 3G service across the country.

A preferential export buyer's credit is paying more than half of the $612m cost of a toll road that will cut travel time between Addis Ababa and Djibouti, whose port now provides landlocked Ethiopia access to the sea. The tolls will help repay the loan over 20 years.

In a twist on a financing mode popularised in Angola, where infrastructure loans were repaid with Angola's main export, oil, China's Eximbank has provided commercial loans for electricity distribution lines, cement factories, and other projects, secured (and repaid) out of Ethiopia's exports to China: mainly sesame seeds. These credits are known (in Chinese) as hu hui dai kuan, or "mutual benefit loan". A Chinese company gets the business, Ethiopia gets finance for development: at Libor plus 2-3%.

To the west, Ethiopia typically conjures up images of drought and starving children; we want to save Ethiopia. To the Chinese, Ethiopia, with a fast growing economy and 90 million consumers, looks like good business. While western official engagement with Ethiopia's authoritarian but development-minded government is still largely limited to foreign aid, the Chinese offer multiple ways to make co-operation economically attractive.

Of course, there are downsides to China's engagement. Chinese banks continue to show interest in financing large hydro-power projects with daunting environmental and social challenges. Reportedly, working conditions were so onerous at the enormous African Union complex being built by a Chinese firm that some Chinese workers went on strike. Ethiopians complain about the quality of ZTE's technology.

At the same time, observers sometimes accuse China of sins it has yet to commit. In July, Günter Nooke, German chancellor Angela Merkel's Africa adviser, said that in Ethiopia, China's "large-scale land purchases" were partly to blame for a devastating famine. Ironically, the California-based Oakland Institute had reported just a month earlier, after an exhaustive four-month "land grab" study, that the Chinese were "surprisingly absent from land investment deals" in Ethiopia.

Ethiopia is clearly in charge in this engagement. Chinese traders and shopkeepers, who are fixtures across many African cities, are absent on Ethiopia's streets. These positions are reserved for locals, and Ethiopians enforce their rules.

And China listens. A decade ago, Chinese companies building the ring road complained they couldn't find enough local skilled workers. The Ethiopian government asked China to establish a college that would focus on construction and industrial skills. The fully-equipped Ethio-China Polytechnic College opened in late 2009, funded by Chinese aid. Chinese professors offer a two-year degree with Chinese language classes alongside engineering skills. Chinese companies are waiting to hire its first crop of graduates.