African countries should diversify exports to adapt to changes in China’s economy

29 March 2016

The ongoing changes in China’s economy may be an opportunity for African countries that now mainly export raw materials and oil, to adapt and diversify exports and move up the value chain, according to analysts.

China, Africa’s main trading partner, has registered an economic slowdown and the authorities want the “engine” of growth in the coming years to be domestic consumption rather than investment, which will affect external demand, particularly in sub-Saharan Africa, according to an analysis by the “Trade Law Centre for Southern Africa”.

“As Chinese domestic demand changes from investment goods for domestic consumption and, implicitly, to services, exporters of food and services can gain from the change,” said the March analysis of the China Africa Trading Relationship.

This will offset the impact of reduced demand for African imports and the fall in commodity prices, which will have a negative impact on global prices of such goods, affecting the terms of trade.

“It is therefore imperative for African countries to diversify exports and move up the value chain,” says the document.

Angola, for which oil is the main export and the basis of its economy, is among the countries where efforts to diversify exports are most visible, following the fall in revenue related to the oil price drop since mid 2014.

The increase of Chinese trade with Africa – to US$221.5 billion in 2014, more than 20 times that recorded in 2001 – was driven “by the large bill on oil imports, mainly from Angola,” the Trade and Law Center said.

Figures from UN Comtrade (United Nations Commodity Trade Statistics Database) for 2014 put Angola as the second largest source of Chinese imports in Africa, with 27 percent of the total, behind South Africa (39 percent), and 5th largest destination for exports with 6 percent.

After the last Forum on China-Africa Cooperation (Johannesburg, 4-5 December 2015), economist Mark Bohlund in an article for Bloomberg Intelligence, noted that the slowdown in China would be another “jolt” for African countries.

The fall in oil prices, he argues, is more of a result of increased production in the United States than a reduction of imports by China – whose economy continues to grow, from a higher base.

The drop in investment levels, he said, mainly reflects the devaluation of some mining assets and “investment financed by debt is much more important for Africa than FDI and should continue to grow as China expands the scope of projects financed in Africa.”

“Chinese investment in infrastructure in sub-Saharan Africa is more likely to increase than decrease,” taking into account the Chinese central bank’s transfers to the Export Import Bank of China (US$45 billion) and the China Development Bank (US$48 billion) in July 2015 to finance the New Silk Road strategy, said Bohlund.

The Chinese authorities have been arguing that even in the current context of slowdown, Africa investment and will continue and even become more important.

La Yifan, the Chinese Ambassador to Ethiopia told the Reuters news agency on 15 March that African countries may even be “the ideal place” for business investment of companies that “have driven the expansion of Chinese infrastructure in the last 30 years,” at a time when the domestic economy is slowing and they are increasingly looking to foreign markets.

“Despite all the doubts, I can share that in China the relevant government departments, development banks, and insurance companies are addressing their African partners to make this great plan a reality,” said La. (macauhub/AO/CN)

MACAUHUB FRENCH