There are a couple of things happening in China that Africa should be watching keenly.
First, the structure of the Chinese economy is changing; China has been undergoing a shift from heavy industry to services. In fact The Economist states that its “services sector supplanted manufacturing a couple of years ago as the biggest part of China’s economy, and that trend has only accelerated this year”.
This has massive implications for Africa which has benefited immensely from China’s commodity hunger, particularly from the extractive sector.
How will Africa be affected? Well, while some countries such as Nigeria seem to be weaning their economy from over-reliance on oil, other countries such as South Sudan, Chad, Equatorial Guinea, DRC, Gabon and Angola still rely heavily on crude exports. Thus, Africa can expect a downturn in terms of demand for such commodities and reduced revenues.
There are other implications. For example, sovereign bond issues from oil-exporting African countries heavily reliant on such exports for revenue generation should be approached with caution not only because of waning demand but falling crude prices also.
Investors should look at the overall export profile of a country before making a decision to invest in it. Further, countries like Kenya and much of East Africa which are set to become oil producers should expect significantly lower revenues from the resource.
Not only does demand from countries such as China seem to be waning, there is a fall in prices and a shift in much of Europe and America towards renewable energy.
Mixed bag for Africa
These factors mean that the previous assumption that oil translates to healthy revenue is being challenged in an unprecedented manner. A look at Ghana reveals the pitfalls of a country which overestimates revenue from oil.
Secondly, the recent devaluation of the yuan should be seen as a mixed bag for Africa. On one hand, for an import country like Kenya, the devaluation is relief given the bleak import outlook context of the depreciating Kenya shilling.
Kenya’s largest share of imports come from Asia, with China leading the way particularly in capital and consumer goods. Thus, the devaluation is a bright spot in what has seemed like an unending rise in import bills.
The flipside of this equation however is that a weaker yuan may make African countries deepen an the reliance on Chinese imports making them more sensitive to the volatility of its economy.
Finally, the Chinese economy is shifting from being a predominantly export economy to one more reliant on domestic consumption. Wages have risen as millions of Chinese have reaped dividend from economic growth, with millions pulled out of poverty.
Overall, the Chinese have more disposable incomes. This shift is part of an on-going overhaul which has been informed by the decline in exports from China after the global financial crisis of 2008 to 2009.
In short, China wants to buffer itself from the vulnerability of external demand. This, however, leaves Africa with a series of questions: Which country will become the dominant absorber of African commodities?
Can Africa manufacture goods of sufficient quality to appeal to the Chinese market? Where will commodity-reliant countries source alternative revenue? Who will be the next “world factory”? Africa?
We need to watch China, if for nothing else, to see how Africa can make the most use of the on-going shift in its economy.
Were is a development economist.
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