With China’s economy slowing and amid renewed worries about its relationship with the US, fears are growing that a substantial portion of Sub-Saharan Africa’s trade lines are set to face a difficult time, writes Michael Turner.
The volume of Sino-African trade has soared in the last 10 years, with Chinese state-backed banks pumping billions of dollars into the continent through chunky bilateral loans and financing entire infrastructure projects, while African importers have found a huge marketplace to source cheap capital goods and inventory.
China had invested more than US$25bn into Africa by the end of 2013, according to law firm Mayer Brown, while the World Bank says China sold US$22.56bn of capital goods to Sub-Saharan African buyers in 2015 – its most recent data point.
China’s rapid urban growth made it a natural buyer for Africa’s ample resources – and a natural seller to Africa for the goods that would get those resources out of the ground. But some of the certainty of this symbiotic business relationship fell away when China’s economy slowed in 2014, moving from GDP quarterly growth of above 2% in Q4 2013 to 1.6% in Q1 2014 and not hitting 2% again until the first quarter of 2015, according to data company Trading Economics.
The impact this had on imports into Africa was pronounced. “2014 saw a massive dip in the Chinese economy, and then 2016 saw an 11% dip of Chinese imports into Africa,” says Rebecca Harding, CEO of data and intelligence company Equant Analytics. “That’s US$4bn: it’s not a small amount.”
Lower imports coming into the continent present a problem for African exporters, because of how dependent on foreign input they tend to be. “If China is not investing anymore, the issue is that African importers will fall out of the supply chain of being able to export themselves,” says Harding.
While official Chinese government figures put fourth quarter 2016 GDP growth flat to the past three quarters at 6.8%, market watchers are still trying to decipher what the impact of US President Donald Trump’s protectionist policies will have on Chinese growth.
“China has a much larger share of exports destined to the US than the US has exports destined to China,” says Jade Fu, investment manager at Heartwood Investment Management. “While this implies that the economic impact of US protectionism is more significant for China, it is less than clear-cut. Tariffs would be harmful to the profitability of US-listed companies, which generate a larger share of their revenues from China than China-listed companies generate from the US.”
Fu expects the Chinese economy to slow “moderately” in the near term.
As well as the knock-on effect that US protectionism will have on Africa by way of a potentially slowing Chinese economy, President Trump’s ‘America first’ rhetoric will also likely have a direct impact on Sub-Saharan Africa.
“Six months ago, the US would have been the obvious choice to replace China [in trading with Africa],” says Harding at Equant Analytics. “But now, that seems far less likely.”
Not everyone agrees that Chinese imports into Africa are declining by a meaningful amount. While a US$4bn drop is a large headline figure, in absolute terms, it should not make too much of a difference, according to Gabriel Buck, managing director at UK consultancy GKB Ventures.
“It’s nothing,” says Buck. “Chinese exposure to Africa supported by Sinosure [China’s export credit agency] alone is US$30bn for facilities with over three-years repayment. On top of that, Sinosure’s short-term revolving insurance facilities for Chinese exporters into Africa is an additional US$150bn.”
This chimes with what Freddie Tucker, a trade and structured finance employee at mining, construction and heavy equipment supply chain company Dints, is seeing. “I wouldn’t say spend on imports has got any less,” says Tucker. “Rather, companies are more acutely aware of trying to make their spending efficient.”
The data only partially agree with the anecdotal evidence. Imports from all jurisdictions into Sub-Saharan Africa, not including South Africa, have been steadily rising since 2010, according to Equant Analytics, but plunged by 14.3% year on year between 2014 and 2015. They have yet to recover and were just above 2012 levels last year.
While the fall between 2014 and 2015 levels was significant, imports into Sub-Saharan Africa (ex. South Africa) for 2015 hit US$248bn, meaning the absolute number is still high.
Another consultant who covers the region but did not want to be named for this article says: “Any slowdown in China is unlikely to be an issue – Africa has resources that people want, and they will continue to build the infrastructure to get to those resources.”
While it is true that Africa is resource-rich, the price it can charge for them has slumped markedly in recent years. Oil is the clearest faller, losing around half its value since 2014 to trade at US$56.80 a barrel on February 2.
This has already sent some oil-dependent economies into a tailspin, with Angola’s President José Eduardo dos Santos claiming last year that the country can only just about make payments on its sovereign and state-run company debt.
The lower commodity prices add to the picture of woe as increased regulatory requirements has seen more international banks pull out of markets, while many local banks face their own crises. Africa’s trade future is looking bleak.
“In Sub-Saharan Africa, we’ve got almost a perfect storm,” says Harding at Equant Analytics. “We’ve got regulatory know your customer that is impeding funding, and then we’ve got the general economic slowdown and the commodity crisis.”
She adds: “There was no positive growth story across Sub-Saharan Africa in 2015, but in 2016 this began to pick up again. It hasn’t rebounded fully, but it has actually recovered more than places such as the Middle East.”
This is because Africa has a much more diverse list of exports than its oil-dependent northern neighbours, though other commodities have suffered too: cocoa ended January trading at US$2,129 a tonne from an average monthly price of US$2,952 a tonne in January 2016, according to the International Cocoa Organisation.
Meanwhile, gold prices have fallen from highs of more than US$1,780 an ounce in September 2012 to US$1,222 on February 2.
Nonetheless, China is still snapping up African assets. In 2015, Zijin Mining Group bought a 49.5% stake in a copper project in the Democratic Republic of Congo for US$412mn, while Shandong Iron and Steel Group has invested US$1.5bn in its Tonkolili iron ore mine since 2012, according to the Sierra Leone government.
But Shandong’s relationship with Sierra Leone has been fraught with difficulty that saw operations grind to a halt in 2015 due to strikes and accusations of Shandong skipping payments to local companies. Still, as of December 1, 2016, Shandong had exported more than 500 million tonnes of iron from the Tonkolili mine.
“With growth moving away from manufacturing and toward consumption, China’s appetite for raw materials will continue to diminish,” says David Dollar, a senior fellow at Washington, DC-based non-profit public policy organisation the Brookings Institution, in a research article. “China’s shifting economic growth model aligns with Sub-Saharan Africa’s imminent labour force boom, presenting a significant opportunity for both sides.”