Taking stock

China's economic slowdown prompts debate on consequences for Africa

The challenge for China to maintain GDP growth of about 7 percent has exercised minds worldwide over the past two or three years, and in Africa concerns about lower figures boil down to the fact that many of the continent's economic hopes are hitched to those of China.

Robert Rotberg, founding director of Harvard Kennedy School's program on intrastate conflict, has said that "as China goes, so goes Africa. If the Chinese economy continues to cool, the raw material and commodity exporters of Africa will suffer correspondingly. Neither American nor European buyers will be able to replace Chinese purchases."

The Commercial Bank of Africa says a slowing Chinese economy will result in falling foreign currency income in some African countries heavily dependent on commodity exports, and also bring currency depreciation.

Africa Alliance, an investment bank, says that in the first three months of this year Zambia's currency depreciated 9 percent, Ghana's currency by 7 percent, and Nigeria's and Tanzania's currencies by 3 percent.

But Xue Xiaoming, a Chinese businessman who has been doing business in Africa for more than 15 years and is now vice-chairman of the Nigerian Chinese Chamber of Industry and Commerce in Lagos, says he remains optimistic.

"Nigeria's economy has performed very well in recent years and its economy has surpassed South Africa's as the No 1 in Africa. And Chinese businesses have done very well for many years, provided you were in the right industry."

He has received many inquiries from China about doing business or investing in Nigeria or other parts of Africa, he says.

"There is change in the air, but I don't think that's such a bad thing."

Unlike previously, when two-digit increases in GDP were routine, the focus is now on the quality of growth, rather than its speed. Premier Li Keqiang has said that there can be flexibility in GDP growth targets, the main thing being to ensure that jobs are protected, employment grows and people's incomes rise.

"We are not preoccupied with GDP growth. The growth that we want is one that brings real benefits to the people, helps raise the quality and efficiency of economic development and contributes to energy conservation and environmental protection."

Li made the comments during the annual session of the national legislature in March. Growth during the first quarter of this year was 7.4 percent, the lowest in 18 months.

But figures on services and consumption are promising, pointing to continued successful economic restructuring and upgrading to offset downward pressure on growth.

The National Bureau of Statistics says the service sector contributed 49 percent of growth in the first quarter, an increase of 1.1 percentage points on the corresponding period last year. The figure was 4.1 percentage points higher than for manufacturing.

The value of imports and exports fell 1 percent compared with the corresponding period last year, to $966 billion.

Sheng Laiyun, a spokesman for the Bureau of Statistics, says: "Even though it's too early to say the Chinese economy has transformed from a manufacturing-driven one to a service-driven one, or from being investment-driven to consumption-driven, change is indeed happening, and is becoming more obvious."

There are fears that a slowing economy will hobble Africa's development, heavily dependent on China's consumption of raw materials and natural resources, and that ensuing problems could hamper growth in fields such as finance or manufacturing.

Shilan Shah, an economist specializing in Africa with Capital Economics Ltd in London, says it is not so much a slowdown in Chinese growth that could affect Africa as the changing drivers of Chinese growth.

"Looking ahead, growth in China is likely to be driven more by consumer spending and less by investment. This will curb its demand for commodities, which in turn is likely to weigh on growth in parts of Africa. In particular, demand for industrial metals, used extensively in construction, is likely to be hit especially hard as China's property boom cools."

This is a serious concern for Zambia, a big producer of copper; South Africa, a big exporter of minerals; and Mozambique, an exporter of aluminum, he says.

China's economy has become closely bonded with Africa's over the past 10 to 15 years, he says. In particular, growth in China over the past decade has been investment-led and resource intensive, which in turn has sucked in commodity imports from a number of countries.

However, amid the worrying figures, investors and bankers continue to voice confidence about economic ties between China and Africa, predicting rapid growth in trade.

Standard Chartered Bank has estimated that the value of trade between China and Africa will exceed $280 billion next year, compared with $210 billion last year.

"The growth in trade between the two sides has been remarkable, but there is still a lot of scope for improvement," says Zhang Xiaolei, chief executive officer of Standard Chartered Bank China.

"Three trends in this bilateral trade will complement one another: trade will expand from raw materials and cheap products to high value-added products and services based on the upgrade of economic value chains on both sides; the rise of Africa's consumer class will make China's trade with and investment in Africa cover more African countries; and the Chinese yuan is expected to be a core currency in Africa for settlement, investment and forex reserves."

Zhang made the comments recently at an investment and financial forum in Beijing for Chinese investors interested in investing in Africa. Lamin Manjang, CEO of Standard Chartered Bank in eastern Africa, says there is great investment potential for China in Africa in areas such as oil, gas, mining, telecommunications and agriculture.

"With agriculture, for example, there is a lot of arable land in Africa where production is highly inefficient. Chinese companies could invest in this to lift productivity. There is also huge demand in Africa for infrastructure construction. Annual investment in that is worth nearly $93 billion, and there are plenty of opportunities for China in that."

As growth in China slows, the strength of the China-Africa relationship is underlined by figures that show bilateral trade was worth $210.2 billion last year, an increase of 5.9 percent on the previous year, the China Chamber of International Commerce says.

Chinese exports to Africa rose 8.8 percent to $92.8 billion, and imports from Africa rose 3.8 percent to $117.4 billion, the chamber says.

More than 2,000 Chinese companies had set up operations in Africa by the end of last year, in areas including agriculture, finance, infrastructure, logistics, manufacturing, resources exploration and trade, the chamber says.

Shah of Capital Economics says the relationship between China and Africa extends beyond the demand for natural resources.

"A number of state-owned companies in China have set up factories in East Africa in particular to take advantage of lower labor costs. Chinese companies are also exporting consumer goods to Africa on a larger scale to tap into Africa's growing consumer market.

"And Africa now is diversified enough to deal with headwinds from other parts of the world including China. Africa came through the 2008-09 global recession relatively well, and the key with China is that, although some countries may slow down, the region as a whole should continue to perform well. Indeed, we expect Chinese demand for oil and consumer goods to hold up relatively strongly. As such, the likes of Angola, which exports oil to China, and Botswana (diamonds) are less vulnerable to a slowdown in China."

In the meantime, there are a number of structural reforms and policies that can be implemented to improve the region's growth prospects, Shah says.

"Firstly, a more diversified export base, with less reliance on China, will help to mitigate some risk. Perhaps most useful would be to increase regional trade links. Indeed, there is evidence of this happening in East Africa, where lower trade tariffs are being negotiated. More generally, structural reform to reduce corruption and bureaucracy and increase infrastructure spending is vital for medium-term prospects."

The latest issue of the World Bank publication Africa's Pulse, a two-year analysis of the continent's economic prospects, predicts that economic growth in sub-Saharan Africa will continue rising, from 4.7 percent last year to 5.2 percent this year, with a fillip from rising investment in natural resources and infrastructure and strong household spending.

More importantly, capital inflows to the region continued to rise last year, 5.3 percent of regional GDP, significantly above the developing-country average of 3.9 percent. Net foreign direct investment grew 16 percent to a near-record $43 billion, boosted by new oil and gas discoveries in many countries including Angola, Mozambique and Tanzania, the Word Bank says.

Daouda Cisse, a research fellow with the Center for Chinese Studies at Stellenbosch University in South Africa, says that while China's economic growth is lower than it has been over the past 30 years, its ties with Africa will remain strong and become more diversified.

"Basically the volume of trade is likely to remain important, and the positive aspect is the changing pattern of trade. With Chinese exports slowing, Africa could enhance its manufacturing sector, which has had to face competition from products made in China. This could enable African countries to tackle the issue of trade with China that is out of balance mainly through the composition of trade - resource exports in most cases versus imports of manufactured goods."

But Cisse also says that the measures that China recently unleashed to promote infrastructure development through construction of railways may feed its appetite for resources such as copper, cobalt, steel and iron, that some African countries are endowed with.

"Resources will be a major interest in Africa's trade with China. However, interest in other sectors such as manufacturing and services including information and communications technologies, finance and insurance involving both public and private sectors is growing on both sides."

Manufacturing is considered crucial to Africa's growth, and joint ventures between African private businesses and their Chinese counterparts could be one way of developing the sector in Africa, Cisse says.

"But the private sector in Africa has to make sure that kind of approach develops African industry, contributing to employment, skills and technology transfer. Relocation of Chinese companies to Africa that conforms with rules, regulations and policies or joint ventures with private companies, if well managed by host African countries, could be another way of enhancing manufacturing in Africa through technology transfer and skills development."

Azwimpheleli Langalanga, a researcher at the South African Institute of International Affairs in Johannesburg, says the slowing of China's economy may have little impact on Africa's growth because of the special economic relationship between the two economies.

"China's role in Africa is mainly linked to its quest for raw materials, chiefly minerals and oil. However, China's involvement in Africa is largely through state-owned enterprises. This means that a slowing economy may not have a significant impact on its economic involvement in the continent as it would not affect the reserves China (uses to invest in) Africa."

He says that if Chinese ties with Africa entailed the latter exporting finished products to China, the slowdown there would greatly affect Africa. And if Africa faced economic difficulties, that would affect China as the latter's finished products have a ready market in the continent.

"But I do not see China buying fewer minerals and less oil in Africa because of an economic slowdown. Chinese companies have enough capital to continue financing infrastructure development in the continent. The key to all this is the involvement of Chinese state-owned enterprises, which are well capitalized. If Chinese involvement in Africa was mostly driven by private companies, the economic slowdown in China would be worrying."

But changes in China also provide opportunities for Africa, such as firms that are becoming uncompetitive in China because of high labor and operating costs relocating to the continent, he says.

"This would lead to the development of manufacturing in Africa, which in turn could use the infrastructure that China is helping build in the continent."

Liu Jie, the representative in Kenya for the China-Africa Development Fund, says economic reform in China provides a perfect opportunity for the country and Africa to develop the economy.

"From a meso- and micro-economic perspective, the African market could become crucial to the Chinese economy, and Africa's growth could greatly benefit from China's growth. For example, China has become Kenya's biggest trading partner and investor, which means its old, simple trade ties are evolving into a more sophisticated and sustainable partnership."

There are certain rules and parameters within which an economy can be slowed, he says, laying solid foundations for future robust growth, and what needs to be remembered is that China's economy is still very healthy.

In the partnership between China and Africa, it would be short-sighted and risky to treat Africa as a whole, because there are many dimensions to their relationship.

"We have to support many resource-rich countries in building up large-scale infrastructure projects or give them loans on favorable terms, and this is more suitable with giant state-owned enterprises. But for many that don't have raw materials and resources, we have to concentrate on light industries or manufacturing, which presents an opening for private companies."

China's economic future will be determined by new driving forces rather than exports, Liu says. So companies must focus on overseas consumption and overseas investment, and Africa is one of the best destinations, he says.

Africa is still not well equipped for industrialization, he says, but this gives Chinese companies a chance to build Africa's infrastructure, such as power, water and transport.

"But manufacturing is the most important thing. For example, Africa's information and communications technologies industry is no worse than that of China or Western countries, so one day handset and chip card manufacturing could be done in Africa."

lilianxing@chinadaily.com.cn

(China Daily Africa Weekly 05/02/2014 page1)