Month: March 2014

The consequences of China’s economic slowdown for Africa

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The Chinese economy is officially slowing down, ‘In January 2014, figures from China’s National Bureau of Statistics showed that in the quarter October to December 2013, China’s GDP grew at rate of 7.7%. This is the lowest since 1999’.[1] While these GDP growth rates are still spectacular comparatively speaking, most of us are unaccustomed to them. In fact as Africans we’ve banked on roaring GDP rates to feed China’s voracious appetite for African raw materials some of which are then converted into cheap goods sold on global markets. Africa has benefitted from both sides of this spectrum as we are providers of the raw materials and thankful consumers of cheap goods. But what are the implications of the slowdown for Africa? Quite frankly, it seems to be a bit of a mixed bag.

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The first consequence is obvious: A smaller appetite for Africa’s raw materials which means lower demand which may eventually cause a dip in commodity prices which then negatively impact African economies. And the slowdown is serious, in fact, ‘China’s manufacturing sector is not only slowing down, it’s contracting’.[2] Sadly, ‘African economies in their present state remain highly dependent on their trade with China and none will be immune to the consequences of reduced demand’ so with, ‘revenues down, (African) exporters are cutting jobs and governments are tightening their spending’.[3],[4] This does not bode well for African governments as they may, ‘have to cut ambitious plans for spending on education and other social programs’. Not good.

The second consequence is that the slowdown will force the Chinese government and investors to take a good look at their economy and regroup. There will likely be a period of introspection and economic restructuring within China and this is both good and bad news for Africa. The good news is that such introspection may reduce the pace of investments made in Africa, thereby giving African governments and companies time to regroup and have a more intelligent strategy when interacting with China. This investment slowdown is also likely to make African government reduce the pace of their ‘look East’ policy and prompt some rebalancing. The bad news however is that with the deceleration, Chinese investors are likely to become pickier than they have been. Africa may find investment propositions tabled scrutinised with China bargaining with more zeal than Africa has been used to. This paradox is one African governments need to get their heads around, and quickly.

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The third consequence linked to the point above is that with the slowing in demand for African raw materials and less rambunctious Chinese investment into Africa, African GDP rates may falter in the short to medium term. This does not bode well for African governments who have been desperately trying to sell themselves as the new global investment destination, promising robust returns.

Fourthly however, this slowdown may be good news for the global economy which is good news for Africa. In fact, ‘we should all welcome a slower China. Debt has been piling up to dangerous levels, industry is burdened by excess capacity, and the financial sector has been taking on bigger risks as a result’.[5] And because of the sheer scale of China’s economy, ‘fears have been mounting that China could suffer a financial crisis like the one that tanked Wall Street in 2008. That would threaten the stability of the entire global economy’.[6] Indeed, analysts have long questioned whether China’s model is sustainable thus the slowdown is welcome.
Fifthly, the China slowdown is an indication of a shift of from an, ‘investment-led to a consumer-led’ economic model. The implication for Africa is that this will pressurize African economies to, ‘expand their consumer good exports and manufacturing bases, in order to keep up with shifting demand’.[7] In short, China’s demand is shifting from copper to cameras.[8] This is a conundrum because a long-term solution is needed to address the short to medium-term consequences of a China slowdown.

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Africa however has reason to be optimistic despite this deceleration. Firstly, as the African Development Bank Chief Economist stated, the fallout will not be catastrophic for Africa and indeed African economies should be relieved there is a slowdown as , ‘the 7% rate of growth is a more sustainable rate of growth…this level of economic growth will still manage to [sustain] the upward trend in terms of demand for commodities’.[9] Secondly, Africa remains attractive to China as an investment destination. Africa is investment hungry and China still wants to do business. So although the specifics of the dynamics may change, healthy investment and trade will still occur. Finally, it will do African companies and governments a world of good to stop seeking economic solutions from outside. This slowdown ought to prompt African governments to do the much needed work to: a) Ensure investments already made are executed effectively with a positive impact of development and, b) Engage in the effort to promote intra-African trade and investment with renewed rigour as it appears that Africa can rely neither on the West nor East to fuel economic growth and development.

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[1] Gumede, William  (2014), ‘China’s economic slowdown and the potential impact on African growthOpinion’, http://www.enca.com/opinion/china%E2%80%99s-economic-slowdown-and-potential-impact-african-growth
[2] Minqi Li (2014), ‘Why is China’s Economy Slowing Down?’, http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=11405
[3] Cape Breton Post (2014), ‘5 ways China’s slowdown will ripple across global economy’, http://www.capebretonpost.com/Business/2014-02-11/article-3611600/5-ways-China%26rsquo%3Bs-slowdown-will-ripple-across-global-economy/1
[4] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter-at-fdi-magazine-fdi-intelligence/
[7] African Arguments (2014), ‘Could China’s slowdown mark the end of Africa’s decade of growth? – By Barbara Njau, Senior Reporter at fDi Magazine, fDi Intelligence’, http://africanarguments.org/2012/08/28/could-china%E2%80%99s-slowdown-mark-the-end-of-africa%E2%80%99s-decade-of-growth-by-barbara-njau-senior-reporter -at-fdi-magazine-fdi-intelligence/
[8] Langi Chiang and Jonathan Standing, ‘From copper to cameras; feeling the heat from China slowdown’, http://www.reuters.com/article/2013/07/24/us-china-economy-idUSBRE96N04N20130724
[9] Creamer, Terrence (2013) ‘African growth ‘resilient’ to China slowdown, but AfDB wary of QE tapering risks’, http://www.engineeringnews.co.za/article/african-growth-resilient-to-china-slowdown-but-afdb-wary-of-qe-tapering-risks-2013-08-07

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