Paul Clark, Africa Specialist at Ashburton Investments, explains the implications of a changing Chinese economy for Africa. China’s trade with Africa was only 5% of its global trade total, according to 2011 figures from Global Trade Atlas. But its impact on the continent is profound.
Equally so, China’s current woes will weigh heavily on Africa. The past decade has seen a growing interaction between African economies and China from a trade perspective as well as in terms of investments and the construction of infrastructure.
The impact of lower commodity prices as a result of the Chinese economic slowdown is already being felt as it highlights the twin deficits many countries run. Over the last year we have seen many African currencies weaken in a similar fashion to what are generally deemed to be ‘commodity’ currencies (such as the Australian dollar, South African rand and Russian rouble). Secondly, lower tax revenues from mining, oil and other commodities have constrained government budgets. Higher domestic interest rates in many African countries are a result of imported inflation due to the weaker currencies, as well as increased government borrowing needs. Thus far, many developing nations around the world are dealing with a lower growth economic environment; the continent is certainly not immune.
However, in spite of this constrained environment, Africa still needs significant investments in infrastructure as well as foreign direct investment (FDI) to continue on its growth path.
On the infrastructure front, we have seen Chinese engineering contractors pursuing contracts around the world as their domestic economy and investment into infrastructure there slows. Almost a third of the value of China’s foreign engineering contracts in 2014 (according to statistics from the China Global Investment Tracker) was on the African continent. The eastern regions of the continent have benefitted significantly and have received a third of all Chinese project spend in Africa over the last decade. Having recently launched the Asian Infrastructure Investment Bank and the Silk Road Infrastructure Fund with US$40 billion, we do not see the Chinese government reducing its support for engineering firms’ project expansion outside the country. Support is, however, not unconditional and funding for the Accra Ring Road in Ghana was recently turned down by the EXIM Bank of China.
On the FDI front, there is even less cause for concern. Although FDI from China into Africa is growing, it only amounted to 4.8% of the total FDI into Africa in 2014 (according to EY’s Attractiveness Survey Africa 2015). This, according to various sources including the China Global Investment Tracker, amounted to 6.1% of China’s FDI, which is largely in line with Africa’s portion of global GDP. FDI into Africa remained constant in 2014, despite a 16% decline in global FDI from 2013, according to United Nations Conference on Trade and Development (UNCTAD’s) World Investment Report 2015.
This year is expected to be a record year for FDI into Africa (projected to hit US$55 billion) and should exceed development assistance (aid) for the first time. The type of FDI into Africa has also moved away from extractive or primary industries. In 2014, 43% of the greenfield investments were in the services sector, with 33% in manufacturing and only 24% into primary sectors, says the UN report. This shows a significant move away from the primary or mining sectors of the economy, where the existing investment makes up 31% of the total.
So, while we expect slightly lower growth across the continent in the near term as a result of the economic constraints imposed by a slowing Chinese economy, the longer-term outlook remains robust. FDI and other long-term investments into the economies of Africa, as well as continued growth in its infrastructure are continuing apace. In line with global risk aversion we have seen some portfolio investors reduce their exposure to the continent, while others appear to be waiting for further currency weakness before investing. However, the weakness that this has caused in equity markets appears to us to be overdone in the longer term.
|Did you know?
• China estimates that one million Chinese nationals work and live in Africa.
• Over the past 50 years, more than 160 Chinese dignitaries visited Africa; some 524 African ministers or higher visited China 676 times.
• China sent its first medical team to Algeria in 1963. Since then, China had built over 100 hospitals across Africa by the end of 2011.
• China had aided the construction of 270 infrastructure projects in Africa;140 in transportation, 60 in utility and 70 in telecommunications.
• South Africa is China’s largest trading partner in Africa, at a volume of $20.2 billion. Yet this is 4% of China’s trade with the European Union.