A few months ago, Sally Limantour and I attended a conference in London. The theme was “emerging market risk.” The speakers focused on some of the more interesting and less stable regions of the world -- places like Africa, the Middle East and the former Russian satellite states.

Apart from the odd standout or two (like Sally and me), most of the attendees were risk analysts and insurance writers. The group had a very “London” feel to it, if there is such a thing, with a diverse mix of nationalities and financial houses from all over the world.

Of all the people Sally and I met, one was truly unique. His name was Peter, I think... though it might have been Paul. At any rate, we’ll call him Peter.

Peter was a journalist from the Democratic Republic of Congo. He stood about 5 foot 3, in a dapper black suit that was too big in the shoulders. He kept a pocket square in his suit coat and wore blazing red socks. (The socks were hard to miss.)

I never saw any of Peter’s work, but got the sense he was a good journalist. Good journalists are passionate about what they do -- and Peter turned out to be very passionate.

We saw this during a presentation on risks and opportunities in Africa. The speaker had just mentioned Congo, along with a laundry list of other African countries, when Peter stood up. We all thought he was going to ask a question -- and he did -- but his question soon morphed into a deeply emotional speech.

Concerns for Congo

Peter was greatly concerned about human rights abuses in Congo, and about the risks of African exploitation in general. He described how some very interesting things were happening, particularly in regard to China.

What China was doing in Congo, Peter told us, involved some of the most massive barter-style transactions the world had ever seen. Instead of paying large sums of money to the Congolese government, China was trading infrastructure for raw materials.

The idea goes something like this: If you have large deposits of copper and lead and zinc, but no way to get at them, and I have manpower and workers and tools, then we can make a deal. I carve roads through the jungle -- literally beat a path to your door -- and then supply your mines with all the manpower and equipment needed. Then I staff up the mines with a combination of my trained labor, flown in from the outside, and your untrained labor, providing much-needed jobs.

In exchange for all this, you pay me in copper, or uranium, or timber, or whatever particular resource we’ve agreed to have a go at with our joint arrangement.

There are both pluses and minuses to an arrangement like this, as Peter was keen to point out. On the one hand, China is doing a great favor for countries like Congo. Without their manpower and equipment, the natural bounty of the country would go untapped. On the other hand, China is not much interested in things like human rights or long-run political stability -- except insomuch as it serves them -- and so China is happy to wink at or otherwise disregard whatever awful arrangements exist. The pragmatic mindset can be brutally efficient. But it can also be just plain brutal.

Big Plans Underway

I was reminded of Peter this week as a result of some big news. China Railway Group Ltd., the biggest construction company in all of Asia, according to Bloomberg, is teaming up with China’s Sinohydro Corp.

Their aim? To launch a breathtaking $4 billion venture in the Democratic Republic of Congo.

There will be roads, power plants, and, of course, a massive mine. The two Chinese companies will together own roughly two-thirds of the new venture. Congo Mining and Gilbert Kalamba Banika, a Congolese national bank, will own the rest.

China Railway and Sinohydro are expected to pitch in nearly $3 billion worth of financing for construction. Congo Mining, the state-owned mining outfit, will pony up the rights to 10 million metric tons of copper and cobalt reserves.

Let’s go back and think about that $4 billion for a second. On the one hand, that doesn’t sound like a lot of money, especially in comparison to the good that will be done (roads, hospitals, power plants). Millions of metric tons in raw materials made ready for extraction. A launching pad for further deals with the Congolese government. Vast pools of further natural resources waiting to be tapped.

Indeed, when you think about the billions and billions being written off by Western banks every week, $4 billion seems a drop in the bucket. But that’s exactly the point. While the West overdosed on bad leverage, China is loading up on amazingly good leverage here. That $4 billion is an amazing, amazing opportunity, because China is successfully grabbing some of the most valuable resources in the world on the cheap.

Just imagine… How much might $4 billion ventured in Congo today be worth five years from now? Ten years from now? What might the final dollar tally be for all the natural resource China will harvest?

Not just copper and bauxite, mind you, but lead, uranium, timber, potash, phosphates, natural gas, hydropower… the list goes on and on. Will the ultimate worth be $40 billion? Four hundred billion? More?

How about the fact that Congo is just the start? That China intends to do this -- is doing this -- in multiple countries all across Africa, local political concerns be damned?

The West Should Worry

Peter is right to be worried about human rights abuses and exploitation. He is right to be worried that, in their hunger to make deals, Congo and other countries might wind up selling out their most precious assets on the cheap. He is right to be concerned that China will come in like a ravenous dragon and eat everything Africa has.

But we in the West should be worried, too, I think. On top of human rights concerns, we should be worried for a different reason… We should worry that we’re losing the race for Africa.

When $4 billion wisely invested in Congo today can be worth $400 billion in precious resources down the road, how can the West ignore what’s happening? There is a resource gold rush going on, one that offers long-run returns on a scale and scope that absolutely boggles the mind, and we in the West are sitting here twiddling our thumbs.

Not only that, but we are talking about finite resources here. It’s not as if we can say “Oh well, Africa’s been all locked up. We’ll just find another Africa, hey?” Good luck with that! (Maybe when we finally develop the technology to mine asteroids, but that could take a while.)

It’s almost comical when you see the full contrast. While we in the West have pumped trillions of dollars into a housing and derivatives bubble -- one that has now burst and left us with utterly empty hands -- countries like China are sowing investments in Africa that could reap them tenfold, hundred-fold, or even thousand-fold real asset returns later on. Talk about the grasshopper and the ant!

China has troubles, too, of course. They’ve had their own taste of bubble foolishness with the collapse of the Shanghai market. (More on that in a future Taipan Daily.) But the difference is, China’s equity shenanigans are surface level.

Instead of a paper-based economy -- a “finance economy,” as some used to categorize the USA with pride -- China has a real-asset based economy. They are investing in production… in manufacturing… in things… in real assets that you can point to with your finger, in stuff that hurts when you drop it on your foot.

The race for Africa will produce many winners. I hope the African peoples themselves will count among the winners, that Peter’s human rights concerns are addressed, and that China does more good than harm in places like Congo. All those power plants and roads and hospitals and jobs certainly won’t hurt.

As much as I hope, though, I also fear. I fear that the West will deeply regret its credit crunch navel-gazing in a few years’ time, as the value of natural resources only skyrockets and we find ourselves completely shut out of the game.

The good news is, many companies will benefit immensely too as the new race for Africa kicks into high gear. You don’t see natural resource opportunities leveraged a hundred-fold or a thousand-fold on a continent-wide scale without creating an investment opportunity or two along the way.

Some of those companies will be U.S.-based, but many more will not. We’ll be following those companies… and investing in them… and growing with them. The race for Africa is on.