Will China’s Economic Slowdown Dent Africa’s Rise?
After almost three decades of double digit economic growth, China’s economic growth declined to 6.9 per cent in October-December 2015, less than the government’s target of 7 per cent growth per annum. There is a broad consensus that the numbers are incorrect. Some economists and analysts opine that the economic growth rate is in the range of 3-5 per cent. According to the Chinese government, the ‘new normal’ is 7 per cent. However, some analysts state that 5.5-6.0 per cent growth is more realistic.
China is the second largest economy in the world and the economic slowdown has had a negative impact on the world economy. This can be attested by the decline in bourses across the globe and decline in the economic forecasts of the global economy. China has increased its footprint exponentially in Africa since 2001. In 2002, China’s trade with sub-Saharan Africa (SSA) was USD 20 billion and China-Africa trade was forecast to touch USD 300 billion in 2015. China’s investment in Africa increased from USD 1 billion in 2000 to USD 100 billion in 2015. China surpassed the US to become Africa’s largest trading partner in 2009.
China’s economic slowdown has led to a decrease in trade and investment in Africa. African exports to China decreased by 38 per cent to USD 67 billion in 2015. China’s investment in Africa declined by approximately 84 per cent to USD 568 million in the first half of 2015 relative to USD 3.54 billion in the first half of 2014. According to the IMF, a 1 per cent decline in China’s growth rate leads to a 0.6 per cent fall in exports from Africa with larger effects on resource rich countries like Zambia, Democratic Republic of Congo (DRC) and South Africa. The IMF has cuts its growth forecast for Africa. It revised down its estimate for SSA for the financial year 2015 from 4.4 per cent in July 2015 to 3.8 per cent in October 2015 amidst warnings that growth could decline further.1 In 2014, the region grew at 5 per cent and after downward revisions is forecast to grow at 3.7 per cent in 2016 and 4.3 per cent in 2017.2
China’s slowdown will dent ‘Africa’s rise’
Will China’s slowdown dent ‘Africa’s rise’? – a catchphrase that symbolized a growing middle class and domestic demand. This is causing a lot of anxiety worldwide and especially in Africa. At a press conference in Malawi on January 31, 2016, China’s Minister for Foreign Affairs Wang Yi denied claims that China’s economic slowdown has affected development in Africa. Is this political rhetoric or is there some substance in his assertion? Analysts comment that the narrative of ‘Africa is rising’ was not entirely true and the argument of ‘Africa is no longer rising’ is also false.3 The answer to the billion dollar question “will China’s slowdown dent ‘Africa’s rise’?” is that it is contingent on various factors including the rate of growth in China.
In the twenty first century, China ventured into Africa for new markets for goods and services, natural resources especially oil, timber, metals and minerals and for political and economic influence. There is a broad consensus amongst scholars and policy makers that China’s foreign policy and diplomacy in Africa is being driven by commercial interests and domestic economic imperatives. Africa is an important player in China’s strategic calculation and its engagement with Africa will not change fundamentally.4
Economic growth in Africa in 2015-2017 will decline relative to growth before 2014 but it will still be higher than the global average.55 However, Africa is not a monolith. It has 54 countries which have been impacted differently by slowdown in China. Some countries will be more severely affected, some less affected and others will experience rapid growth. China’s engagement will decline with countries where the operating cost and opportunity costs for China’s state owned enterprises (SOEs) are high leading to decline in their operations.
The eight oil exporters in SSA which account for 50 per cent of the regions GDP and mine owning countries such as Nigeria, Angola, South Africa, Zambia, Guinea and Sierra Leone will be most severely affected. These countries did not diversify their economy and suffer from the ‘Dutch Disease’. They are experiencing a double whammy of decline in demand from China which in turn has exacerbated the decline in prices for most of the commodities. According to economists, South Africa, the biggest exporter of iron ore to China may slide into recession in 2016 although the government disputes this. In Zambia which relies heavily on China for copper exports, with copper accounting for 70 per cent of Zambia’s exports and 86 per cent of its revenue, 6,000 jobs have been lost because the price has declined significantly since mid 2014.
On the other hand, some low income countries will continue to experience strong growth. Ethiopia, Kenya and Tanzania among others which were forced to diversify their economy in some measure because of lack of extractive resources will be relatively less affected. These countries followed prudent policies, undertook structural reforms and ceteris paribus will continue to experience robust growth in the near future. Ivory Coast, DRC and Mozambique are expected to grow at more than 7 per cent in 2016 according to the IMF.
The economic slowdown in China has not only affected the growth in some African counties but has also given rise to macroeconomic problems such as large current account deficits, fiscal deficits due to less tax collection from job losses and increase in interest rates to prevent further depreciation of the currency and capital flight. An increase in interest rates leads to increase in the borrowing cost and decrease in investment resulting in lower growth. South African Rand has declined in value recently – 10 per cent on Jan 11 2016 – because of decline in worldwide commodity prices which can be attributed to some extent to decline in demand from China and poor government policies. South Africa is experiencing the worst drought in more than two decades and the weak Rand will hurt when it tries to import corn, the staple food of the country. In December 2015, Nigeria’s currency the Naira also declined (in the black market) by approximately 25 per cent from 240 to 300 naira for USD 1 and foreign exchange controls were introduced by the central bank. Angola’s currency Kwanza has declined by 24 per cent in 2015 and the central bank increased interest rates four times and devalued the currency twice in the year. Zambia’s currency has declined by 45 per cent in the last one year. The government has increased interest rates to 15.5 per cent to control inflation and support the currency. Weakening currencies will make it harder for Nigeria, Sudan and especially Angola (which has taken loans of approximately USD 25 billion) to repay China for loans used for large infrastructure projects and for Zambia and Kenya to make interest payments on the Eurobonds. The sovereign debt ratings of Nigeria, Angola, Kenya, Mozambique and Ghana have been downgraded in 2015.
Falling growth rates will also impact development in Africa. There will be reduction in poverty alleviation which may give rise to increase social tensions and political instability and exacerbate these in other cases. In Nigeria, oil accounts for 80 per cent of government’s revenue. Due to fall in price, the government may lack the necessary resources to deal with Boko Haram and control potential unrest in the Niger Delta. In Angola, President Jose Eduardo dos Santos is under extreme pressure. In July 2015, he stated that he would step down in 2017 and in October 2015, the government announced that it was cutting spending by 53 per cent. In other countries, it may also lead to toppling of democratic regimes or stymie democratic transitions and political reforms or even lead to reversals in the democratisation processes.
China’s slowdown will not dent ‘Africa’s rise’ to a significant extent
However, the impact of slow down of China on Africa will not be that severe in the medium term. Although there has been a decline in growth rate, China has a huge economic base of USD 11 trillion. Demand for natural resources, especially metals, is still growing but not as fast as was expected by mining companies. Chinese FDI in extractive industries like coal, oil and gas and metals increased from USD 141 million in the first half of 2014 to USD 289 million during the same period in 2015. Debt-financed investment in Africa – which is more important than FDI – will continue to increase. At the FOCAC Summit in Johannesburg in December 2015, President Xi Jinping announced USD 60 billion to finance 10 projects. The projects will be financed from Chinese domestic and foreign reserves which are not related to trade figures. Moreover, increasing number of Chinese companies will look up to Africa for markets as economic growth in China falls. This along with cheaper imports from China of steel, phones and other finished products could help reduce inflation in Africa
The slowdown in China also provides an excellent opportunity to Africa to diversify its economy, and more importantly, to undertake structural reforms. This will lead to smoothening of economic growth in the medium term. The crisis may also lead to innovation in the technology sector as companies try to remain profitable by reducing costs and innovators try to create solutions in areas with low costs for startups. For instance the ‘one network agreement’ in the East Africa Community (EAC) led to reduced tariff and increased revenues for telecom operators.
Although China is Africa’s single largest trading partner, Western countries together have higher trade with Africa.6 Moreover, increase in trade with China is a recent phenomenon and is not deep rooted. The US, France, India, Germany, UAE and other countries will increase investment in Africa which will to a great extent offset China’s slowdown. These countries were crowded out to a great extent by China. The crisis also provides an excellent opportunity to diversify export markets such as Southeast Asia for agricultural exports. There is also a great scope for intra African trade which may provide alternative export markets. In 2015, a Tripartite Trade Agreement was signed comprising EAC, Common Market for Eastern and Southern Africa and Southern African Development Cooperation with a combined GDP of USD 1 trillion GDP and a market of 650 million people. If it becomes operational, it will offset the decline in exports to China.
Conclusion
The real extent of how much Africa is affected by the slowdown in China will depend on the rate of economic growth in China. If China grows at 6.5 per cent, Africa should not be severely affected. However, if China grows at 5 per cent or less, Africa might be severely affected. Most of the African countries failed to undertake structural reforms, invest in generation of electricity and creating manufacturing jobs during the boom years which would have cushioned the impact of China’s slowdown. There was lack of fiscal prudence and corruption and poor governance have exacerbated the problems. Governments in Africa should bear in mind that international trade and investment is not necessarily an engine of growth, but a handmaiden of growth.
- 1. Andrew England, “African Growth Feels the Strain from China’s Economic Slowdown”, Financial Times, October
27, 2015, http://www.ft.com/cms/s/0/ef4d851a-7bc5-11e5-98fb-5a6d4728f74e.html#axzz…, (accessed
February 12, 2016). - 2. World Economic Outlook, “Slower Growth in Emerging Markets, a Gradual Pickup in Advanced Economies”, IMF,
July 9, 2015, http://www.imf.org/external/pubs/ft/weo/2015/update/02/pdf/0715.pdf, (accessed January 22,
2016). - 3. Simon Freemantle, “Simon Freemantle: Forget ‘Africa Rising’ – Take a Deeper Look”, GE Reports, November 5, 2015, http://www.gereports.com/debate/debate-is-africa-still-rising/, (accessed February 12, 2016)
- 4. Stephen Chan, “Can Africa Cope With China’s Economic Downturn?,” Newsweek, January 1, 2016, http:// www.newsweek.com/how-africa-can-deal-chinas-downturn-416213, (accessed February 12, 2016)
- 5. Op. Cit. n. 2.
- 6. Op. Cit., n. 4.
