Four reasons Africa will weather China's slowdown

This analysis is by Bloomberg Intelligence economist Mark Bohlund. It appeared first on the Bloomberg Terminal.

The Forum on China-Africa Cooperation in Johannesburg on Dec. 4-5 will mark the growing importance of relations between the Middle Kingdom and the continent. The pomp of the event can’t disguise the fact that the slowdown in the Chinese economy is having repercussions in Sub-Saharan Africa, most notably in Zambia due to its reliance on China’s demand for copper. However, slower growth in China will be more of a speed bump for the region than a change in direction, and there are at least four reasons not to overstate the negative impact.

Key Points:

  • The Chinese economy might be growing more slowly but it’s from a higher base, underpinning demand for commodities. Still, lower expectations for demand have shifted some commodity markets into surplus, pushing down prices.
  • The drop in exports to China in 2015 largely reflects the decline in oil prices because of expanded production in Saudi Arabia and the U.S.
  • Reports of lower Chinese foreign direct investment into Sub-Saharan Africa does not take into account that Chinese firms are now buying mining assets at sharply lower prices, supporting capital investment in mining-dependent economies.
  • Debt-financed investment is more important than Chinese FDI into Africa and is likely to continue to rise as China expands the range of projects it is financing on the continent.
  • Separately, while the planned Chinese military base in Djibouti is a milestone for China’s global ambitions, its interest in the region coincides with those of the U.S., France and Japan.

The rise of the Chinese economy has undoubtedly been one of the most significant outside influences on Sub-Saharan Africa in the past two decades. Exports to China rose to 6.5% of Sub-Saharan Africa’s GDP in 2014 from 2.4% in 2005, according to the International Monetary Fund, and access to cheap Chinese-produced consumer goods has given millions of Africans access to a higher standard of living at lower levels of income than previously required. However, with China now stumbling somewhat in its shift from an investment-driven economy to one led by consumption, the consequences have been challenging for some Sub-Saharan African countries.

Photographer: Waldo Swiegers/Bloomberg

Zambia feeling the Chinese chill

The impact has arguably been most painful in Zambia due to its heavy reliance on the copper mining sector for government revenue and foreign-exchange earnings. China’s demand for copper has risen so sharply since 2000 that the country accounted for more than 100% of the global growth in demand for the metal, offsetting weakness elsewhere. Chinese consumption of refined copper, used not only in infrastructure projects but also in residential construction, has dropped only marginally since hitting a high of more than 1 million tons per month in late 2014. Yet the LME copper price has fallen to a six-year low because of the increase in supply to meet anticipated additional Chinese demand and the unwinding of stockpiles, which has pushed the global copper market into a large surplus. The Zambian government has arguably added to the downturn of the mining industry and its own fiscal woes by overspending and attempting to impose a new taxation regime on the sector.

However, for the rest of the continent the impact of the slowdown in Chinese growth may have been overstated. There are four reasons for this.

1) Slower Growth Is From a Higher Base

China’s nominal GDP was estimated by the IMF in October to be $11.3 trillion in 2015, four times the size of the economy in 2005 when it was growing at double-digit rates. While the current growth rate is slower and less investment-driven, Chinese demand for commodities is still growing, albeit not at a rate as stellar as some mining companies envisioned.

2) Lower Oil Prices Have More to Do With Saudi Arabia, U.S.

The shock in the form of lower crude prices that is now assailing Sub-Saharan African oil producers is largely because of increased U.S. and Saudi production, rather than lower demand from China. The falling price of oil is arguably the strongest factor behind the 18% year-over-year decrease in Sub-Saharan African exports to China in the first nine months of 2015.

3) Lower FDI Reflects Cheaper Assets

The decrease in Chinese foreign direct investment into Sub-Saharan Africa as reported by some sources is driven to a significant extent by the plunge in commodities. This has brought a sharp decrease in the price of mining assets, which has made it cheaper to invest in them. Chinese greenfield investment only amounted to 7% of the total $88 billion going into Sub-Saharan Africa in 2014, according to UNCTAD’s World Investment Report 2015. What has become more significant is companies in developing countries targeting the assets being relinquished by their developed country peers, according to UNCTAD. While there is no breakdown available of the data, it dovetails with Chinese firms having in recent years acquired existing assets in the extraction of everything from bauxite in Guinea, iron-ore in Sierra Leone, to copper in the Democratic Republic of Congo and Zambia. With global mining stocks having dropped sharply in value from their peak in 2011, as illustrated in the chart below, the presumed decline in Chinese FDI into Sub-Saharan Africa may be largely nominal, rather than real.

The government in Beijing still has a declared interest in securing its access to the natural resources it views as critical for its continued economic development. This should see it continue investing in the Sub-Saharan African mining sector over the foreseeable future. One example of this is the $660 million investment in a hydropower plant in the Democratic Republic of Congo by Sicomines, a joint venture between state-owned Gecamines and a group of Chinese companies. Output from the project, which started in October, cushioned the expected drop in copper production in 2015 from the suspension of production at Glencore-run Katanga Mining. This shows how Chinese companies can operate countercyclically compared with their Western peers and smooth capital investment growth in Sub-Saharan African economies.

4) Financial Flows Are Uninterrupted

Debt rather than FDI has become the primary financial flow from China into Africa, with Beijing extending loans for potentially transformative infrastructure projects such as the Mombasa to Kigali Standard Gauge Railway currently under construction. China is now the biggest single financier of infrastructure in Africa to the tune of $13.4 billion in 2013, according to a report from law firm Baker & McKenzie released on Nov. 30.

This is to a large extent a result of the expansion of concessional lending through China Exim Bank and to a lesser extent China Development Bank. With that support, Chinese companies in a range of industries have won contracts across the world, becoming competitors to global multinationals. While Beijing did initially focus its lending on Sub-Saharan African economies with substantial natural-resource endowments, such as Angola, the Democratic Republic of Congo and Sudan, it has also agreed in recent years to finance and build infrastructure projects in smaller states endowed with less resources.

Chinese infrastructure financing in Sub-Saharan Africa looks more likely to increase than decrease in spite of the drop in China’s foreign-exchange reserves over the past 18 months. The People’s Bank of China transferred $45 billion to China Exim Bank and $48 billion to China Development Bank from its FX reserves stockpile in July to help finance the One Road, One Belt strategy. This new policy initiative is divided into two parts: the Silk Road Economic Belt, connecting China to Europe through Central Asia, and the 21st-Century Maritime Silk Road that focuses on links across the sea lanes.

Which specific projects are part of the 21st-Century Maritime Silk Road is not entirely clear, but ongoing development, such as the Mombasa-Kigali SDR and the Addis Ababa-Ethiopia railway, and planned endeavors, such as the Bagamoyo port project in Tanzania, fit well into the envelope.

Djibouti base underscores rising importance of relations

Chinese-African relations are not only evolving in the economic sphere. China is in talks about opening its first military base in Africa in Djibouti, according to a foreign ministry briefing. It should be kept in mind that China’s main interest of protecting maritime trade in the region coincides with the interests of the U.S., France and Japan, which all have bases in Djibouti.

Whatever the outcome of the negotiations on the military base in Djibouti, it underlines the rising economic and political relations between China and Sub-Saharan Africa. Prominent Sub-Saharan African policy makers such as former Central Bank of Nigeria Governor Lamido Sanusi have warned that China is no longer a fellow underdeveloped economy and is pursuing its own interest on the continent. While this can hardly be contested, mutually beneficial ties are likely to continue to strengthen.

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