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China's growth an important indicator for Africa

Updated: 2013-09-20 16:26
By Andrew Moody ( China Daily)

China's growth an important indicator for Africa

China's economic engine now often determines how fast Africa motors too. Mining stocks on the Johannesburg Stock Exchange rose strongly on the back of improved economic data from China in August.

China's imports were some 7 percent higher at $162 billion, customs officials announced earlier this month. Factory output hit a 17-month high in August, growing at 10.4 percent year-on-year. Both relieved earlier fears of a sudden downturn in the China economy based on concerns about rising debt levels.

The overall trajectory of China's growth is downward, however. Even if GDP meets the government target of 7.5 percent by the end of the year it will be at a 14-year low.

Premier Li Keqiang made it clear at the World Economic Forum Annual Meeting of the New Champions in Dalian earlier this month that the world's second-largest economy was entering a "crucial stage" of its development.

This stage involves a major rebalancing away from investment-fueled growth to an economy based more on consumption.

Most economists believe a reworking of the model will inevitably mean slower growth.

But there was some reassurance for African commodity producers this week when a spokesman for the National Bureau of Statistics said a growth rate of 7 percent was the government's minimum tolerance level for the coming years.

This may be some consolation in South Africa. Exports to the Chinese mainland and Hong Kong, according to South Africa Revenue Services, have increased from 2.9 percent as a proportion of the total in 2002 to 13.3 percent - more than one-eighth of all goods sold overseas.

The share of South Africa's mining exports to Asia, a large part of which goes to China, have increased from 14.4 percent to 46.8 percent over the same period.

Dennis Dykes, chief economist of Nedbank in Johannesburg, says it is not necessarily the headline China growth rate that now matters in Africa.

China's growth an important indicator for Africa
Dennis Dykes, chief economist of Nedbank in Johannesburg. Photos Provided to China Daily

"I think that is only part of the story. What is also concerning the markets as well is that the nature of Chinese growth is changing.

"It is moving from being less infrastructure-based to more consumption-based so if you are a big commodities exporter it is going to impact you because Chinese demand for minerals is easing off to some degree."

Dykes, who believes China's growth will meet the Chinese government target of 7.5 percent a year but will average between 6 and 7 percent from next year to 2017, says African commodity producers have got an acute short-term problem.

"We had this peak in commodity prices before the global financial crisis in 2008. In response to this crisis China then embarked on this massive financial stimulus with a big fiscal program allowing for a massive expansion in credit and once again commodity prices soared," he says.

"You then had this big supply-side response with the commodity producers building a lot of extra capacity and this capacity is now coming on line. It is all built in anticipation of strong Chinese demand over the next couple of decades. The big question now is whether that demand can be completely fulfilled."

China's growth an important indicator for Africa
Henry Bell, first secretary, economic, at the British embassy in Beijing

Henry Bell, first secretary, economic, at the British embassy in Beijing, believes China's demand for African commodities will not fall significantly even if its growth falls.

"I think it can be overstated because Chinese demand for these commodities is still going to rise. It is just not going to be rising at the same pace as it has been rising for the past 10 years."

He insists that is easy to ignore the exponential nature of China's growth, which is actually what determines demand for its commodity imports.

"Projections need to be revised downward a bit but China is still going to be a big customer. China growing at 5 percent now has a much bigger impact than it growing 10 percent in 1972, for example."

Annabel Bishop, group economist for Investec South Africa, based in Johannesburg, also expects China growth to hit 7.5 percent this year.

She is also more confident than most economists and expects growth to exceed 7.5 percent over the next few years since she believes increased consumer demand will ease the economy through the transition it needs to make.

"Rising Chinese incomes would underpin this shift, as would a move to the manufacture of higher priced items," she says.

She is aware, however, of how vulnerable South African commodity producers are to demand from China.

China's growth an important indicator for Africa
Annabel Bishop, group economist for Investec South Africa. Photos Provided to China Daily

"South Africa's exports are mineral heavy and a further China-led slowdown in the global commodity cycle would impact our trade balance negatively.

"Indeed, South Africa's trade deficit has already widened in the second quarter of this year as lower commodity prices had a negative impact."

In Beijing, the concerns about China's debt level seem to have receded since the summer, mainly as a result of the recent positive economic data.

Some estimates had put China's total level of debt (combining central and local government and consumer debt) at 200 percent.

Bell at the British embassy says the concerns about China's growth are not going to go away.

"There was certainly a lot of noise in the media during the summer about what was happening to the Chinese economy and I think that this is something we are going to have to get used to," he says.

"The big picture is that China is transitioning from a long period of very high growth of about 10 percent between 1972 and 2012. In the coming years we are going to see that level of growth slow down more significantly."

Bell, however, insists the recent positive data might suggest that the economy is on course to meet the government's growth target of 7.5 percent for the year.

"I think a lot of the more hysterical reporting is probably far from the mark. I don't think there is much danger of China suffering a hard landing - however that might be defined - in the coming period."

China's growth an important indicator for Africa
Oliver Barron, head of the China office of NSBO

Oliver Barron, head of the China office of London-based China economics research company NSBO, believes it is easy to underestimate the scale of the transformation that China has to make if it wants to move away from its export and investment-led model.

"What China wants to do is boost consumption and reduce its reliance on investment but when you look at what has happened over the last decade, the consumption share of GDP has been falling and investment has been steadily rising," he says.

"So there is a lot of momentum that China has got to reverse and I don't think it has to happen in one step."

Zhu Ning, deputy director of the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, says people were rightly concerned about debt and these fears have not gone away.

"If you look at the way local governments have been able to achieve their economic growth in the past several years, a large part of that has been coming out of infrastructure building," he says.

"One way to look at it is that the investment-driven growth model has been sustainable for the past 20 years but will it be sustainable for the next 20?"

Leading economists like Paul Krugman have argued recently that China's growth will inevitably fall because it has run out of what he calls "surplus peasants", the supply of people willing to move from the countryside to urban centers.

Louis Kuijs, China economist at the Royal Bank of Scotland in Hong Kong, insists that such an argument overstates the role urbanization has played so far in the China growth story. He points out that between 1995 and 2012, it accounted for only 1.4 percentage points of the 10 percent annual growth during this period.

China's growth an important indicator for Africa
Left:Zhu Ning, deputy director of the Shanghai Advanced Institute of Finance. Right: Louis Kuijs, China economist at the Royal Bank of Scotland. Feng Yongbin / China Daily

"It is very much a Krugman type of thinking and it is really a caricature. His argument is that China's growth and that of other Asian countries has been based on perspiration and not inspiration and just simply throwing people into factories.

"If you look closely at China, you will see that there is an awful lot of growth coming from other sources, the capital deepening of all that investment and also learning by doing. There has been a lot of technology improvement and productivity growth."

Kuijs also insists that if China's growth was based on urbanization as Krugman has suggested there would also be a lot further scope for growth since 30 percent of the population was still in the countryside.

"China needs to have less than 10 percent of its population in the countryside so in my view there is still quite a lot of surplus labor left," he says.

What happens next in terms of China's economic development could be determined by announcements from the Third Plenary Session of the 18th Communist Party of China Central Committee in November.

Many observers are looking for measures that might boost consumption such as the reform of the hukou household registration system allowing migrant workers to bring their families to urban centers and lead a higher spending lifestyle instead of just saving money and remitting it home.

Steps to strengthen China's social safety net, which will give people the confidence to spend and not save, are also seen as vital.

Further moves toward interest rate liberalization, seen as vital for the private sector to get finance and better capital allocation are also anticipated.

What the government intends to do to bolster the service sector and encourage innovation will also be seen as critical.

Zhu at Shanghai Jiao Tong University says much significance is now being placed on the forthcoming Party session.

"We are all putting a lot of hope in what is going to come out of the third plenary meeting and we are hoping for a great deal of reform and historically these policies always have a big impact on how the economy is going to pan out. I am sort of confident about what is going to happen in November," he says.

Bell agrees that what the government does will ultimately determine what happens to growth.

"The key variable at the moment is government action. What happens in terms of government economic policy," he says.

He adds, however, that according to a recent IMF report, growth is ironically likely to be higher at between 7 and 7.5 percent over the next five years if it takes no action than if it were to implement reforms with growth then slowing to 7 percent by 2018.

"The economic rebalancing model is a more sustainable one. I don't think you should assume that lower Chinese growth is inherently wrong," he says.

It is not just Africa, however, that finds itself dependent on how the China growth story unfolds over the next few years but the rest of the world too.

George Magnus, senior independent economic adviser for UBS in London and author of Uprising: Will Emerging Markets Shape or Shake the World Economy?, believes the impact of China's growth goes way beyond that of just the commodity sector.

China has accounted for some 40 percent of global economic growth since the financial crisis began.

"China is also the world's biggest exporter, a crucial export market for others, and a rising chunk of global GDP. It matters what happens to China, and slowing growth in China will have consequences, which the rest of the world may not be able to compensate for fully," he says.

For Kuijs at RBS, you only have to see the reaction of the global stock markets, including those in Johannesburg and in other African financial centers, to the recent encouraging economic data from China to realize just how significant the world's second-largest economy now is.

"There were people who had become very bearish about the Chinese economy. You have only got to see how the investment community responded to the latest good data and its effect on global markets to realize how important China now is," he says.



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