How China Uses State Capitalism to Gain Power and Influence in Djibouti

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February 3, 2021 Topic: Security Region: Africa Blog Brand: The Buzz Tags: ChinaDebtAidState CapitalismDjibouti

How China Uses State Capitalism to Gain Power and Influence in Djibouti

Over the years, Beijing has heavily invested in infrastructure development around key Indo-Pacific maritime strategic sites, and the efforts have been quite fruitful.

China’s business environment has long functioned under a state-led “networked hierarchy.” The Chinese Communist Party, of course, sits at the top of this structure. With the support of state financial institutions and several other party organs, a State Council-managed party agency called “State-owned Assets Supervision and Administration Commission (SASAC)” plays a central role in operating this top-down business structure for Beijing.

SASAC administers China’s wholly state-owned national champion companies and wields significant influence over the conglomerates’ outstretched hierarchical networks of numerous formal and informal subsidiaries and affiliates. Those large networks are linked through strategic partnerships, joint-ventures, leadership exchanges, and asset swaps. But now, this top-down networked business hierarchy is no longer only seen in the Chinese domestic environment.

Over the years, Beijing has heavily invested in infrastructure development around key Indo-Pacific maritime strategic sites, and the efforts have been quite fruitful. Among Beijing’s expanding foothold in the Indo-Pacific stands out Djibouti in the Horn of Africa, where now hosts the first permanent Chinese overseas military base.

Djibouti’s transition to a legitimate Chinese strategic site has sparked active discussions on implications for regional competition and how countries should react. But just how Beijing managed to hold such an impressive sway over the development scheme of Djibouti may not have received enough spotlight. In Djibouti, China Merchants Group (CMG), a mega-conglomerate directly administered by SASAC, has been the crux of Beijing’s engagement.   

China Merchants Network in Djibouti

In recent years, Djibouti transformed into a multipurpose strategic hub of trade, investment, and military activities for China. In this process, CMG, with ample governmental support from Beijing, acted as a dominant investor and facilitator. The CMG debut in Djibouti traces back to 2013 when CMG became a 23.5% shareholder of the Port de Djibouti SA—a Djiboutian state-owned enterprise that operates the Djibouti Port.

In China, CMG had already gained much success as a prominent maritime infrastructure developer. CMG’s “Shekou” development model, which converted a small fishing town in Shenzhen into a highly developed port city comprising an industrial park and a free-trade zone, highly appealed to Djibouti. The “Shekou” model eventually served as a template for the “port-park-city” framework presented in Djibouti’s “Vision 2035” launched in 2014.

Ever since it entered Djibouti, CMG has been heavily involved in numerous “Shekou-style” development projects around the Djibouti Port area as the top stakeholder. Among these projects, the Djibouti International Free Trade Zone (DIFTZ) launched in January 2017 may best present the dominant presence of CMG in developing and operating the Djibouti Port area.

The East Aden holding Company, a firm exclusively created for the operation of the DIFTZ, consists of two stakeholders—the Djiboutian government (40% stake) and a joint-venture between five Chinese firms (60% stake). The five Chinese firms include three CMG subsidiaries (China Merchants Port, China Merchants Investment Development, Cheer Signal) and two other major Chinese firms of Dalian Port Company (DPC) and IZP Network Technologies (IZP).

While CMG reportedly owns over two-thirds of the 60% Chinese stake, its actual influence may be greater since CMG is known to be a shareholder of Dalian Port Company and a strategic partner of IZP. CMG, DPC, and IZP formed the DIFTZ Project Preparatory Group and together played a significant role in developing and operating the DIFTZ. DPC served as the constructor of the DIFTZ, and IZP collaborated with CMG on digital infrastructure development, including a big data center around the Djibouti Port area.

Behind the omnipresence of the CMG ecosystem in Djibouti exists the substantial backing of a state financial institution. The vast majority of CMG-managed projects around the Djibouti Port area, including DIFTZ, Doraleh Terminal, and Ethiopia-Djibouti Railway, have been financed by China Export-Import Bank, a state policy bank. Since CMG entered Djibouti, how businesses are done in Djibouti have not been far apart from how they are done in China—a networked hierarchical interplay between a state financial agency, a SASAC-administered national champion, and its subsidiaries and affiliates.  

Implications and Outlook

In March 2018, the Djiboutian government unilaterally terminated an existing operation contract of Doraleh Terminal with Dubai-based DP World and reportedly handed over partial stakes to CMG. Soon after DP World’s departure, a CMG partner company came in to take over critical tasks such as cargo trades. Though the terminal was not ceded to Beijing, the whole saga pointed out a major challenge Washington and other Indo-Pacific actors may run into in the future—possible Chinese monopoly leading to minimization of their access around the terminal and eventually the broader Djibouti Port area.

The state-capitalist networked hierarchy structure empowered Beijing to shape its domestic business environment in its favor. Beijing may have been attempting to replicate the design in Djibouti, and if so, the efforts seem to have turned out quite successful. As the local presence of Chinese state actors and their network continue to expand in Djibouti as one ecosystem, Beijing’s geostrategic influence there will soar while others may continuously witness a narrowing window of opportunity for them.

While the alleged “debt-diplomacy” of the Belt and Road Initiative has been the focal point of observation for many China observers, it may not be the only method Beijing seeks to employ to broaden its strategic foothold in the Indo-Pacific. Beijing owns or holds stakes at multiple key strategic ports around the Indo-Pacific, including one in Gwadar where already exhibits considerable Chinese geostrategic presence. As further Chinese strategic expansion progresses in those areas, it may be worth keeping eyes on the potential unfolding of state-capitalist networked hierarchy.

James Park is a M.A. student in International Politics and China Studies at the Johns Hopkins University-Nanjing University Center for Chinese and American Studies.

Image: Retuers.