China’s changing relationship with Africa

An economic slowdown in China may force African economies to diversify.
Premier Li Keqiang visited Ethiopia, Kenya, Nigeria and Angola in May
Premier Li Keqiang visited Ethiopia, Kenya, Nigeria and Angola in May

China’s rapid and pervasive entry into Africa has been one of the continent’s defining trends in the past decade and a half.

Premier Li Keqiang’s Africa tour in May took in Ethiopia, Kenya, Nigeria and Angola, and was used to reiterate China’s sizeable investment commitments (without political strings) to the continent. Li committed an additional $10 billion to finance Chinese projects in Africa as well as extending $2 billion to the China-Africa Development Fund (CADFund), a now $5 billion sovereign wealth fund that invests in the equity of Sino-African joint venture companies.

Li also predicted that China-Africa trade would reach $400 billion by 2020, double its existing levels.

The rapidity and scale of China’s investment foray has resulted in Africa inclining toward China’s commercial sphere of influence. This trend accelerated after 2008 as the industrialised economies suffered in the wake of global financial crisis and African economies were reoriented toward the emerging rather than developed world.

But as China’s strategy toward Africa matures, so too must that of African countries toward China, because Beijing is no longer just an actor in Africa’s resources sector but is broadening the scope of its commercial involvement in the continent.

Africa is still struggling to broaden out its domestic economies. By-and-large sub-Saharan African countries remain dependent on resource extraction, often being single-commodity dependent.

China’s resource-intensive growth model has been very enabling for African growth — underpinning the “Africa rising” narrative that has emerged in recent years. China’s stimulus spending after 2008 helped reinforce that by boosting demand for African exports. But it also reinforced Africa’s commodity dependence; strong commodity prices proved a deterrent — or at least a distraction — for African governments looking to diversify their economies.

But the changes now affecting the Chinese domestic economy hold out a new promise for aspirational African economies. The rising cost pressures on China’s light industrial manufacturing sector will increasingly lead to manufacturing capacity being relocated to lower-cost foreign economies, including those in Africa.

Chinese hollowing out of low-end manufacturing and offshoring to Africa is likely to be the next driver of Chinese-African relations. This forms part of what is often referred to as China’s economic rebalancing.

If the opportunity is seized by progressively reformist Africa’s states, they could well be on the cusp of a 19th century style industrial revolution — generating large amounts of employment and creating industries in their own economies.

Beyond resources

Few resource-rich African states took full advantage of the so-called commodity super-cycle driven by China’s insatiable demand for commodities over the last decade. With a handful of exceptions, African economies could have done much more to hitch their resource-reliant economies to the Chinese stimulus-powered growth train.

Even so, a shift is now taking place. Support for state-owned enterprises to move into Africa is still  continuing through China’s policy banks but there is a new focus on manufacturing, often in special economic zones that the Chinese government encourages African states to create. These are in the process of being set up — with varying degrees of success — in Egypt, Ethiopia, Mauritius, Mozambique, Nigeria, South Africa and Zambia.

The rationale behind this is as follows: First, the industrial manufacturing component of the Chinese economy is now passing through a Lewis turning point as the cost of production surpasses gains in productivity. This portends the start of a long-term trend as more and more of China’s low-end labour-intensive manufacturing sector is gradually moved offshore. A part of this offshoring could find its way to Africa.

Secondly, the so-called “rebalancing” of China’s economy with the gradual shift away from extremely high rates of fixed asset investment — sometimes over 50% of GDP — will result in a less resource-intensive growth model in China. This will feed into policy-making and could well temper state-owned enterprises' appetite for resource assets in Africa and elsewhere.

Thirdly, Africa is emerging as a consumer market in its own right. Its one billion-strong population have traditionally been under-served by formal retailers and consumer goods companies. With rising purchasing power, Chinese-made goods are being exported to Africa, either through formal retail channels or sold through Africa’s vast informal sales networks. Despite infrastructure and logistics challenges, local manufacturing in Africa is becoming more profitable.

Until now, the main target sector of China’s foreign direct investment in Africa has been mining, which received more than 29% of investment according to 2009 data. Although the Chinese Ministry of Commerce has not released sectoral data on outbound foreign direct investment since then, manufacturing has significantly increased its share, which was 22% in 2009.

According to Justin Lin, former chief economist of the World Bank and now at Peking University, China could lose up to 85 million labour-intensive manufacturing jobs in the next decade. Wage inflation and rising production costs will over time force China’s manufacturers to focus on higher-value outputs, not dissimilar to previous trends in other Asian economies.

The inevitable result will be the relocation of low-end Chinese manufacturing to cheaper developing economy destinations. This could create significant employment-generating opportunities for low-income economies with nascent manufacturing sectors.

The commercial opportunities for Africa as more Chinese factories relocate offshore could be enormous. Take just clothing as an example. China’s apparel exports totaled $107 billion in 2009, compared with just $2 billion for all sub-Saharan Africa, notes Lin.

Manufacturing as a percentage of the sub-Saharan African economy has held steady at 10% to 14% in recent years. Industrial output in what is now the world’s fastest-growing continent is expanding as quickly as the rest of the economy.

Ethiopia is a case in point. The sovereign wealth-capitalised CADFund is financing a special economic zone industrial park to the value of $2 billion over the next decade to create a light manufacturing zone on the outskirts of Addis Ababa. The focus is footwear and clothing. The eventual outcome of this could be the creation of 200,000 jobs, according to some media reports.

As there are few states in sub-Saharan Africa that are effectively differentiating themselves from their neighbours — Ethiopia, Ghana and Rwanda stand out as possible exceptions — perhaps the African geese will fall into formation with the Asian model of industrialisation. A question to consider is which African states will build the required institutions and enabling environments to attract manufacturing into their economies and step up on the bottom rung of the industrial value chain?

The emerging competitors to African countries’ manufacturing aspirations are all Asian — Indonesia, Philippines, Thailand and Vietnam, where labour costs are becoming relatively cheaper as China’s rise.

Africa did not lay the foundations for industrialisation in the 1970s and 1980s as its Asian counterparts did. The challenge for Africa's latecomers now lies in building the necessary infrastructure, institutions and skills to attract investment. It is imperative that Africa now recognises the upcoming shift in China’s manufacturing sector in order to give impetus to African economic ambitions.

Structural changes in China thus now hold out enormous development potential for Africa’s economies. 

Martyn Davies is the CEO of Frontier Advisory and a member of the World Economic Forum’s Global Agenda Council on China

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