China’s investment in Djibouti

China’s investment in Djibouti is finally beginning to pay off, but the Red Sea crisis has brought mixed feelings about the business outlook among some Chinese executives based in the tiny Horn of Africa nation.

Djibouti has been a major East African investment destination for Chinese companies under Beijing’s Belt and Road Initiative, with their interests ranging from minerals to railway and port building. The country also hosts China’s only overseas military base.

While it is the smallest country in the region, Djibouti’s strategic importance lies in its location off Bab-el-Mandeb strait in the Red Sea, a key international shipping corridor linking Asia to Europe via East Africa and the Middle East

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On the other hand, Djibouti has limited manufacturing capacity, while its unforgiving climate and complex topography – with 90% desert and volcanic plateau – restrict agricultural output to just 1% of GDP.

These factors have led to a heavy reliance on imports. Djibouti is also home to Lake Assal, which holds the world’s largest salt reserve and is the second-saltiest water body, after the Don Juan Pond in Antarctica.

But for decades, this natural asset remained underutilized, stalling potential growth for local communities and investors.

In 2015, state-owned enterprise China Communications Construction Company acquired a majority stake in a previously American-held salt firm, and transformed it into the Djibouti Salt Investment Company.

Initially, the firm struggled as low salt prices made the completion of the shipping dock, abandoned by the previous American owners, financially unviable.

But it found success by extracting additional minerals from the lake and exporting them to neighboring countries and to emerging markets in Latin America. After eight years, the company finally turned a profit in 2023.

We are committed to this area and will ensure that local employment remains unaffected, said Pan Weidong, chairman and general manager of Djibouti Salt.

Djibouti’s strategic location and natural deep water port have made it a major regional logistics and trading hub, and it is home to major Chinese-funded infrastructure projects.

Such as the Doraleh multipurpose port, one of Djibouti’s six major ports and terminals, and the Djibouti free-trade zone. Bilateral trade rose 7.2% in 2023 to US$3.5 billion, according to data from the Chinese commerce ministry.

Djibouti plays a key role also in re-export trade, with goods transported to Horn of Africa neighbors Ethiopia and Somalia via the port’s mainly Chinese-built free-trade zone.

Chinese investment in Djibouti stood at US$3.67 million in 2023, down from US$4.23 million the previous year, after rising to an all-time high of 105 million in 2017, according to global data providers CEIC.

The year 2017 was also when China opened its military base in Djibouti, the first such overseas facility for the People’s Liberation Army.

Djibouti Salt employs about 300 local workers, representing about a tenth of the population of nearby communities, according to Pan. This is a far cry from the American days, when it had few permanent local staff.

Abdallah Ballah, 46, a truck driver for the past 20 years, once relied on odd jobs and meager government rations to survive and take care of his now 105-year-old diabetic father.

The stable decent income and social security benefits allowed Ballah to reinforce his dilapidated home with cement. He was also able to send all five of his children to their desired schools, both locally and abroad.

The arrival of the Chinese has significantly uplifted local livelihoods and forged tangible, long-term prosperity among Djiboutian communities, Ballah told the South China Morning Post in an interview.

But the Red Sea crisis had significantly increased the logistical cost of exports, threatening to undermine Djibouti Salt’s years of effort and possibly ushering in a financially challenging year, Pan said.

Since October last year, Yemen-based Houthi rebels have targeted Israeli and Western vessels in the Red Sea shipping routes in what they say is a campaign of solidarity with Palestinians amid the Israel- Gaza war.

As the route accounts for 30% of international shipments, the attacks have disrupted world supply chains.

The Djibouti Ports and Free Zones Authority, however, has benefited from the crisis, according to its chairman, Aboubaker Omar Hadi.

This is because many cargo ships now opt to stop at Djibouti off Bab-el-Mandeb, the strait connecting the Indian Ocean’s Gulf of Aden with the Red Sea and on to the Mediterranean via the key Suez Canal.

These stops allow vessels to offload their cargo in Djibouti and keep them temporarily in storage to avoid the risk of rebel attacks until such time as transits become safer, Hadi said. The empty vessels then head elsewhere to load more shipments.

Providing harbor and storage services has been lucrative for the ports authority.

The Doraleh container terminal, developed by the Port of Djibouti, crossed the milestone of 1 million shipping containers handled in the 10 months to October 2024.

According to the Djibouti ports authority, this put it on track to achieve 1.2 million container throughput by the year-end. However, a manager at China Merchants who wished to remain anonymous expressed mixed feelings about the overall outlook.

While the Red Sea crisis appeared to have a silver lining for port operations, it was not clear if this would be enough to offset the financial challenges, and the risks posed by delays and rising logistical costs to the firm’s other infrastructure and investment projects in Djibouti.

Uncertainty over when the crisis might end had also made it impossible to plan ahead for further projects.

The Red Sea crisis is however likely to have little impact on the Addis Ababa-Djibouti Railway, Africa’s first electrified cross-border railway, connecting the Ethiopian capital to Djibouti’s ports, another piece of infrastructure funded by China.

Construction started in 2012, led by China Civil Engineering Construction Corporation (CCECC), a subsidiary of state-owned China Railway Construction Corp. Commercial operations began in 2018.

The railway turned a profit in 2022, according to CCECC Djibouti deputy general manager Song Yongxian. China handed over its management to Djibouti in May this year.

Song, now second in charge at the railway, has been involved with the project since it began more than a decade ago, with postings both in Ethiopia and Djibouti.

By the end of their six-year contract, 90% of the Chinese staff had departed, leaving a technical support team of 37, which is expected to decrease further to just 10 by next year.

Djibouti is just one-tenth the size of its economically powerful neighbor Ethiopia, whose GDP is 35 times larger.

However, Djibouti’s ports handle over 90% of landlocked Ethiopia’s foreign trade, with cargo revenue accounting for at least 95% of the railway’s total income.

As a result, although shipment costs have surged due to the Red Sea crisis – which has sent insurance premiums soaring – demand for Djibouti’s logistics services has remained steady.

But Hadi noted that Djibouti’s growing economy would require significantly more energy, much of which is currently imported. The regional conflicts made supplies highly uncertain, he warned.

Under the Djibouti Vision 2035 plan launched last year, the country aims to achieve 100 per cent renewable energy generation and ensure energy security within the next decade. And China may play a key role in achieving this goal.

China-developed and manufactured equipment is crucial for Djibouti’s Vision 2035, Chinese ambassador Hu Bin told the Post in an interview last month.

This includes Chinese aerospace technology to monitor and track climate conditions from space, which is more efficient and greener than doing it from the ground.

South China Morning Post / ABC Flash Point News 2025.