Economic troubles brewing in China could potentially derail Africa’s growth momentum.
According to Standard Bank economist Jeremy Stevens, Africa should be equally concerned about developments in China as the problems in the eurozone.
He pointed out that since the previous global financial crisis in 2008, China’s economy has been losing the momentum that once propelled it to record average annual growth of about 11% – even when the crisis was at its worst.
“Africa has to pay attention to what is going on in the Chinese economy. China is the second largest economy in the world. It is twice the size of Germany. It creates South Africa’s GDP in two-and-a-half weeks … It is the biggest source of exports … The risks that are accumulating in the Chinese economy could be dealbreakers for the momentum that we’ve seen build up in Africa since the early 2000s,” he said.
Some analysts fear that China’s growth could drop to below 7%. Stevens, however, estimates a 15% likelihood of such an extreme “hard-landing” scenario.
“Since 2010, the Chinese economy has definitely been experiencing a softening in growth momentum. Systemic risks have been accumulating over the last five years and have been made worse by the stimulus – albeit much needed at the time. Risks are sitting in the economic system, and they are now threatening to cause turmoil in the Chinese financial system,” Stevens explained.
While a sharp fall in Chinese growth would have a widespread impact across the world, Africa would be the hardest hit because of its dependence on commodity exports to China. Stevens noted that Africa’s economic growth in the past five years has been closely tied to China’s fortunes, and that as a result the continent should be watching economic developments in China closely.
“Right now, Africa should be very concerned because its economies are now more sensitive to any developments in China. China has become the biggest investor in Africa and the continent’s most significant trading partner, so whatever happens in China matters a lot to Africa,” he said.
“A deceleration in the Chinese economy would spell trouble for African economies. This would mean weaker commodity prices, and African economies have largely been dependant on strong Chinese demand for its resources. Whilst it is still a fat-tail risk, African countries need to start thinking seriously about how they will deal with the economic downturn in China,” Stevens added.
So what should African countries do? Stevens reckons that the continent needs to diversify more and stop being overly reliant on commodity exports.