The China Effect

Lusaka – Trade between Africa and China is expected to reach hundreds of billions of dollars this year, as the latter seeks to maximise on the continent’s natural resources.
Chinese Ambassador to Zambia, Yuxiano Zhou, recently said with increased demand for raw materials from Africa, trade with the continent is anticipated to rise to US$300 billion in 2013, compared to more than US$150 billion recorded last year and the year before.
Speaking during Chinese New Year celebrations recently, Zhou said there have been increased interests by his country in natural resources from Africa, chiefly copper, natural gases, iron, uranium, gold and other base metals.
China’s investment in Zambia is more than US$4b, chiefly in mining, and with increased Chinese interest in retail and other sectors, this figure is poised to swell well above US$6b by 2015.
“Our investment in Africa is projected to rise threefold in the next three to four years, because we need the raw material to develop our growing industry and meet the demand by our consumers,” the ambassador said.
China’s economic ascendance over the past two decades has had ripple effects in the world economy, according to a World Bank report.
Its search for natural resources to satisfy industrialisation demands has brought it to Sub-Saharan Africa.
Trade between China and Africa in 2006 totalled more than US$50b, with Chinese companies importing oil from Angola and Sudan, timber from Central Africa and copper from Zambia.
Demand from China has contributed to an upward swing in prices, particularly for oil and metals from Africa, and boosted real Gross Domestic Product (GDP) in Sub-Saharan Africa.
Chinese aid and investment in infrastructure are bringing desperately needed capital to the continent.
At the same time, however, high Chinese demand for oil is contributing to an increase in the import bill for many oil-importing Sub-Saharan African countries. And its exports of low-cost textiles, while benefiting African consumers, is threatening to displace local production.
However, experts believe that China poses a challenge to good governance and macroeconomic management in Africa because of the potential Dutch disease implications of commodity boom.
China presents both an opportunity for Africa to reduce its marginalisation from the global economy and a challenge for it to effectively harness the influx of resources to promote poverty-reducing economic development at home.
Economic commentator, Jethro Mutale, says African countries have become vulnerable to Chinese exploitation of their mineral wealth because of their leadership’s quest to secure infrastructure in exchange for natural resources.
Sahr Johnny, former Sierra Leone ambassador to Beijing, says, “What has spurred the increased trade between Africa, as a continent, and China is the desire by all countries on the continent to have the best infrastructure as a basis to deceive their electorate as a working government.
“We like Chinese investment because we have one meeting, we discuss what they want to do, and then they just do it… There are no benchmarks or preconditions.
“China’s move into Africa is displacing traditional Anglo-French and US interests on the continent.”
Martyn Davies, Director of the Centre for Chinese Studies at Stellenbosch University in South Africa, attributes China’s increased investment in Africa to the laxity in various laws in almost all the countries at the expense of their own citizens.
But one could defend China’s trade disparities when one looks at the abundant oil in Angola and Cameroon, cotton in Benin, Burkina Faso and Central Africa Republic and diamonds in Botswana to span its textiles, which are later exported to Africa after value addition.
Chad, Congo Republic and the Democratic Republic of Congo, Equatorial Guinea, Gabon have vast resources of oil, Cote d’Ivoire is rich in cocoa, Ethiopia has coffee, Ghana boasts of cocoa and gold, Guinea-Bissau cashew nuts with Kenya boasting of vast tea plantations.
In Malawi, there is tobacco, spurred by the vast expanse of the Lake Malawi, which has a variety of fish species, a delicacy so much liked by the Chinese.
Other Sub-Saharan countries contributing to China’s trade include Senegal with a variety of fish species, diamond in Sierra Leone, South Africa’s gold and platinum, Tanzania has gold, cotton in Togo, with copper in Zambia as well as tobacco in Zimbabwe.
For some resource-rich but oil-importing countries like Botswana and the Central African Republic, the effects of China have been ambiguous, since the upward pressure on metal prices has been partially offset by the higher oil import bill, with the impact on the smaller economies particularly strong.
Since these countries do not export aluminium, copper, steel, or zinc, the China effect on their metal exports has been more modest.
Cotton exporters (Benin, Burkina, and Mali) are benefiting from the slight turnaround in international cotton prices since 2004 due to increase in China’s import demand, but they suffer higher cost of oil importation.
China has long been the world’s largest cotton producer and consumer, but in recent years, its soaring economy and global textile demand have driven its cotton imports far beyond that of any other market’s (USDA 2006).
Oil-importing countries that are also textile exporters, like Madagascar and Mauritius, will suffer from negative terms of trade shocks resulting from the added costs of oil imports and the competition of China’s textile imports, resulting in job losses and shrinkage in domestic manufacturing.
Due to increased Chinese competition in third-country markets, these countries will lose world market share.
Moreover, countries that are coffee producers (Burundi, Ethiopia, Rwanda, and Uganda) and exporters of other agricultural commodities (Cote d’Ivoire, Kenya, Malawi, Tanzania, and Zimbabwe) as well as oil importers will be hurt, because agricultural prices have not increased over the last several years. China currently accounts for less than 1 percent of global coffee and cocoa consumption, and excess supply in world markets has already caused price collapses over the last few years.
Moreover, these African countries do not have a strong comparative advantage in the production of any of China’s main agricultural imports — wheat, corn, beef, and soybeans.
It is envisaged that as a result, these countries will most likely face a worsening of their trade balances in the coming years unless they secure other markets other than China.
China, according to the IMF and World Bank, has had asymmetric effects on Sub-Sahara African economies and has contributed to widening the differential in terms of trade indices of resource-rich and resource-poor economies.
The impact of China on a country’s terms of trade is a direct function of five key variables: the commodity composition of the country’s trade (especially the percentage of oil or metals in its export basket); the importance of textiles in its overall trade; the relationship between world supply and world demand for the commodity; the dependence on imported oil, and the percentage of the increase in world demand for the commodity that is accounted for by China.
China’s effect on commodity prices has influenced macroeconomic performance and growth in these subs-Sahara African countries.
In the last decade, China has increased its integration with the world trading system and to become the world’s manufacturing hub as well as the largest recipient of foreign direct investment.
Shielded from international competition for years through an edifice of protectionism, China has undertaken significant trade liberalisation, partly in the context of the WTO accession.
A system involving physical planning of foreign trade, which dominated China’s trade until the 1980s and resulted in an irrational pattern of exports, has been replaced by a decentralised and market-determined trading system (Lardy 2003).
Chinese ties with the world economy are seen in its rising trade with the African continent, as state-owned Chinese companies search for raw materials for industrial expansion.
The stylised facts reveal an interesting story about changing trade patterns. First, there has been a dramatic increase in direct trade between China and Sub-Saharan Africa in the last few years, especially since 2001, resulting in trebling of trade volumes from close to $10 billion in 2002 to more than US$40 billion in 2005 and more than $50 billion in 2006.
Second, over the last three years, the relationship has been evolving in the direction of growing Chinese trade deficits with Sub-Saharan Africa.
Third, China tends to import mineral fuels and metals from Africa and export cheap consumer and capital goods, and there is little trade in intermediate goods.
Fourth, China’s imports are concentrated among a small number of natural resource economies lacking product diversification in their export structure. More than 75 percent of China’s trade takes place with four countries — South Africa, Sudan, Angola, and Nigeria.
Non-commodity exports from Africa to China are not significant, accounting for less than 10 percent of African exports and include textiles and apparel, processed.
Last year, South African-based economic, financial and business think tank, Southern African Institute of International Affairs (SAIIA) noted that the “lust by African countries to showcase their leadership abilities over their citizenry by asking China to construct various structures, stadia, international conference halls, roads, among others in exchange for natural resources, has raised its reputation among African leadership as a true friend of Africa.
Last year, Zambian president Kenneth Kaunda, one of the oldest African leaders that espouse the Chairman Mao Communism policies hailed China for its untiring friendship to Africa.
In 1976, Zambia benefitted from a US$500 million loan for China to construct a 1 879 kilometre railway line between Dar-Es-Salaam and Kapiri Mposhi in Zambia for passenger and cargo services, one of the facilities that will be worthwhile during regional integration when it comes into fruition by 2018.

February 2013
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