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China in Africa: New challenges beyond the commodities super cycle

Following the decline in China’s demand for commodities during the summer months, its imports of crude oil, copper and iron ore are slowly beginning to recover again. To this day, China’s economic relations with Africa are shaped by securing the supply of resources by financing infrastructure and other major projects. There is indeed much to suggest that China’s future activities will be more complex and by no means limited to the commodities sector.

Africa’s importance for Chinese external trade has increased steadily over the last 10 years. Bilateral trade with African countries grew in 2012 to a volume of US$198bn – with South Africa and Angola topping the list. Although trade with Africa represents a comparatively small share of China’s external trade at just over 5%, the rapid increase is not least a reflection of the desire to share in Africa’s growth.

In the next five years there are 13 African countries that are likely to join the ranks of the world’s 25 fastest growing economies, including commodities exporters such as Nigeria, Zambia and Sierra Leone. This is also reflected by the investment flows to Africa that are increasingly originating in emerging markets. China’s stock of direct investments in Africa grew by 34% year-on-year in 2012 to $21.7bn and thus amounted to 4% of total Chinese foreign direct investment. South Africa, followed by Zambia and Nigeria, are the main recipients, but the largest inflows in 2012 were to Angola and the Democratic Republic of Congo.

China’s energy requirements remain huge, even though weaker growth, the changeover to alternative energies and reining in coal consumption should curb demand over the medium term.

China is responsible for some 25% of global demand for commodities, while Africa is home to around 10% of global oil reserves and between 40% and 85% of global deposits of gold, chromium and platinum. China covered over 70% of its iron ore needs in 2012 via imports, with South Africa rising up the ladder to become the country’s third biggest supplier. For crude oil, China’s reliance on imports climbed from 30% in 2001 to 60% in 2012. Africa is therefore of paramount importance when it comes to meeting China’s future commodity requirements. But even though the focus remains on securing the supply of commodities there are strong indications that China’s activities in Africa will be more varied in future:

  • Firstly, Africa is becoming increasingly attractive as a market where products can be sold, and not just labour-intensive imported items. Some 18% of Chinese exports to Africa in 2010 were textiles, whereas in 2006 the figure was still about 25%. Machinery and electronics made up the largest share at 29%. With China’s move upstream in the value chain, more advanced technologies are proving a good fit for a more demanding clientele and the fast growing market for mobile phones in Africa.
  • Second, in the manufacturing sector Chinese firms are making more frequent use of local labour and are relying on their own experience of industrial development driven by companies from Taiwan and Hong Kong. Since wage costs in China are rising, it is likely to become more important in future to exploit the differences in wage costs by generating more added value on African soil.
  • Third, China’s activities in Africa are no longer performed solely via state-owned entities. On the contrary, 45% of China’s direct investments in 2011 came from the private sector, including small and medium-sized enterprises.
  • Fourth, China can speed up knowledge and technology transfer that benefits both sides via its special economic zones in Africa, though only if (private sector) local decision makers are also involved. The training of local workers will also become essential for China given the growing competition in Africa.
  • Fifth, the hitherto adopted model, in which Chinese infrastructure projects in Africa – often the critical prerequisite for extracting raw materials – were tied to export guarantees or asset stakes, can no longer be utilised so easily. Until 2008 preferential infrastructure loans were a constant feature of China’s foreign policy strategy. However, only a few of the stakes acquired as collateral for infrastructure projects are productive. Despite their substantial financial leeway Chinese state-owned companies will probably have to operate more efficiently in future in order to hold their own against the competition when operating outside their domestic comfort zone.

In all, numerous projects that can decisively advance Africa’s industrialisation entail extensive investments and long amortisation periods. China possesses the necessary means to fund such projects. A more complex range of activities will not only provide opportunities for China, but can also generate an increasingly positive contribution to Africa’s economic development by establishing better integrated local manufacturing.

This article was first published by Deutsche Bank DB Research. 


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