Published: February 3, 2016
Best served by the long view
A looming slowdown in China could have serious ramifications for African countries, who have developed close trading relationships with Beijing.
When China sneezes, Zambia inevitably gets sick. Over the past decade, the Southern African country has developed a close relationship with Beijing, based around deals swapping Chinese money and infrastructure projects for Zambian copper.
Zambia is one of a number of African countries, including Angola and South Africa, which are heavily exposed to a downturn in the East. Even so, as investors pressed the panic button in August, China Henan International Cooperation Group won a US$492mn contract to construct and repair roads in Zambia’s copper belt.
Zambia’s copper industry is struggling as demand founders, and the country has struggled to plug twin fiscal and current account deficits. Chinese-owned mines in the copper belt have joined their international competitors in scaling back and shutting down, but contractors, like the state-owned HICG, have been able to benefit from African countries’ need for infrastructure.
China’s emergence as a source of trade and investment for Africa became one of the defining threads within the wider ‘Africa Rising’ narrative. Investment by public, and quasi-public institutions into infrastructure—from hydroelectric dams to football stadiums—and into natural resources has underpinned much of the political relationship, while private sector businesses have flooded into basic trading, of goods, bringing in low-cost Chinese-made items. Attention-grabbing private sector deals included ICBC’s US$5.5bn deal for 20% of South Africa’s Standard Bank in 2007. ICBC paid a further US$690m for a 60% stake in Standard Bank’s London-based global markets division in February 2015.
In the past, many of these deals were backed by Chinese state money, either through soft development loans, commercial financing terms or the China Export-Import Bank. As China’s economy stumbles, policymakers and investors wonder whether Chinese investment will remain durable.
“As growth in China declines so will its need for resources and this reduction of imports will be felt by the many African jurisdictions that have China as a major trading partner,” says Greg Stonefield, a partner at law firm Mayer Brown.
Stonefield believes that Chinese investments that address more short-term domestic demands will slow considerably, but longer-term strategic investments in food security and natural resources are likely to continue, while consumer goods companies who have built strong market positions will remain.
“A general slowdown in the Chinese economy combined with a more industrialised China does of itself lead to a less hectic pace of investment by China in Africa,” Stonefield says. “However, whilst there may be a slowdown there is a reasonable expectation that China will, over the longer term, seek to secure, on a more selective basis, access to certain strategic resources – be these hard or soft commodities. In addition, it is likely that China and Chinese companies will remain keen to ensure that their products are readily accessible to Africa’s burgeoning middle classes.”
Research from the Brookings Institution in Washington DC, released in August, show that Chinese investments—of which there are around 4,000, from around 2,000 firms—are not as concentrated in natural resources as many believe. In fact, services makes up the largest single sector represented in the study, although the majority of investments are in resource-rich countries.
Chinese companies, backed with rhetoric from their government, have been tentatively exploring investments in offshoring manufacturing to Africa. African governments have been pressuring Beijing to take an interest in the development of productive industries. This seems to match well with China’s desire to move away from an export-driven economy. How that plays out, given China’s need to drive further growth and the country’s decision to devalue its the renminbi remains to be seen.
Likewise, Beijing’s ambitions to supplement—or supplant—the Bretton Woods institutions with its own Asian Infrastructure Bank and BRICS-led New Development Bank, hang in the balance.
“As long as there are developing nations with significant funding requirements there will be a demand for institutions to be more reflective of the nations they are funding,” Stonefield says. “The impetus to establish alternative global economic institutions will depend not only to a large extent on the geopolitical will of relevant nations to form such new bodies, but also on the resources of those nations to inject surplus cash into any such new entities.”
Some analysts, however, believe that China’s current difficulties could drive an even more internationalist approach.
“The interesting point to consider is that the recent volatility might lead the Chinese to recognise that their own instability can be hedged through increased exposure to the international community. As a result, I would imagine that the recent circumstances will, over time, re-affirm Chinese outbound investment, certainly to the more stable Western economies, and also to the volatile ones, including across Africa,” says Ylan Steiner, corporate partner at King & Wood Mallesons.
“Many of Africa’s commodity-driven economies, such as South Africa, have seen their own market and currency drop in tandem with China, with the rand falling harder than the renminbi. As a result, South African projects may become cheaper for Chinese investors—or certainly not as expensive.”