How will a slowdown in China affect Africa

Growth in the Chinese economy is slowing, which should come as no surprise – if the Chinese economy continued growing at 10% it would double in size every 7 years. Official statistics show that the China grew at an annual rate of 7% in the second quarter, which is in line with the World Bank’s full year target of 7.1%. That is still incredibly fast. But what if China wasn’t growing nearly that quickly? A number of economists quoted in the FT and the “Li Kequiang Index” - a composite of electricity production, railway freight volumes and loans disbursed by banks – suggest that the Chinese economy may only be growing at around 5%. A survey of fund managers by Bank of America Merrill Lynch also showed that most investors now expect the Chinese economy to grow at 4.1 – 5 % in three years time.

What does that mean for Africa?

The slowdown in China is a decrease in rate of growth in the economy, not a decrease in the size of the economy. The absolute increase in the size of the economy next year will still be hundreds of billions of dollars. Still, sentiment around growth in China has a massive effect on commodity prices and the type of growth in China is shifting from government lead infrastructure investment to private services. This is bad news for African countries that rely heavily on China as an export destination for their bulk commodities. Data from Bloomberg shows that there are 9 African countries that send more than 30% of their exports to China. Compounding this is the lack of diversity of exports. Oil accounts for more than 90% of Angola’s exports, copper represents 60% of Zambia’s exports and iron ore makes up 40% of Mauritania’s exports. Having one client and one product is a very bad combination when things start slowing down. Angola’s kwanza has fallen 24% against the US dollar this year and the country has cut its budget by a quarter, while Congo’s fiscal deficit almost doubled to 8.5% of GDP.

Graphic - Bloomberg

Graphic - Bloomberg

How is South Africa looking?

South Africa is Africa’s largest exporter to China, with shipments of over US$45bn in 2014. However the country is more diversified. China accounts for 37% of South Africa’s exports, but it is followed by the European Union at 20%. Although commodities such as iron ore, gold and platinum still represent more than half of exports, manufactured goods are increasing in importance and motor vehicle shipments now represent 13% of the total.

Take aways?

The key messages then are that the windfall from China may end sooner than people hope and that African countries need to work harder at diversifying their economies.

(Bloomberg, FT, The Economist, Tradingeconomics.com, World Bank) 

DR ANDREW LOUW CFA

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