Thought leadership: What China’s economic shift means for Africa

But the nature of the relationship is now potentially changing. While resources have underpinned China’s foray into Africa throughout the first decade of its “new” foreign commercial relationship with the continent, a shift is taking place. instead of being initiated on a political level in Beijing, the shift is increasingly being shaped by market forces.

In tune with China’s own domestic reforms, China’s relations with Africa under Xi will become less state-driven and more characterised by the market – in essence, more private sector-driven. This is a result of China’s own evolving economy as well as the gradual declining support by Beijing for its state-owned enterprises (SOE) in Africa, particulary the construction sector, which has gained a dominant presence in Africa largely due to Chinese state support.

Less state influence

The 2012 Forum on China-Africa Cooperation (FOCAC) ministerial meeting – a vehicle for Chinese-African political dialogue that meets every three years – once again upped the ante of China’s pervasive engagement of the continent. African policy-makers were intent on winning Chinese “pledges” in the form of foreign investment, concessionary loans, grants and aid – i.e. Chinese “state capital”. This is a wise strategy. A politically welcoming environment among African governments is of paramount importance for Chinese capital. But despite the Chinese government pledging a further sizeable sum of $20bn in investment in Africa over a three year period, it can be argued that China’s state-directed capital towards the continent will play less of a role in the growing trend of Chinese market-driven outbound investment.

This assertion is made for the following three reasons:

First, the industrial manufacturing component of the Chinese economy is passing through the “Lewis Turning Point”, as the cost of production is now surpassing gains in productivity. This portends the start of a long-term trend of offshoring of China’s low-end labour-intensive manufacturing sector. While China will remain a very competitive manufacturing economy, at least over the medium term, rising production costs in manufacturing-heavy south-eastern coastal provinces will result in Chinese firms relocating their operations both inland and abroad. A part of this offshoring could find its way to Africa.

Secondly, the so-called rebalancing of China’s economy with the gradual shift away from extremely high rates of fixed asset investment – sometimes over 50% of GDP – will result in a less resource-intensive growth model in China. The imperative – or perhaps strategic desire – for resource security by the policy-planning bodies in Beijing will as a result lessen over time. This will feed into policy-making and could well temper SOE’s appetite for large transaction assets in Africa and elsewhere.

Thirdly, the peak of SOE dominance in the Chinese economy was arguably reached at the end of the Hu Jintao administration and magnified by the significant fiscal stimulus spend from the first quarter of 2009, which was largely spent by 2012 – the bulk of which found its way into the coffers of SOEs. The government’s ability to direct the commercial interests of Chinese SOEs in the global economy has probably never been greater. It can also be argued that China’s slowing economy will encourage the process of internationalisation of Chinese enterprises, be it either state-owned or private business.

Recent reform measures and questioning of existing state-led developmental models under the Xi government may also result in a review of China’s SOE-led outbound investment forays. This will particularly be the case with China’s policy banks and their financing of SOEs abroad. This could well have a knock-on effect on Chinese state-driven investment in Africa.

National interest

Despite the slowdown of China’s economic growth rate, its outbound investment continues to increase rapidly. In 2012, China’s outbound direct investment (ODI) was recorded at $84.2bn, representing a year-on-year increase of more than 10%. The main thrust of the ODI came from China’s SOEs receiving both encouragement from China’s Ministry of Commerce, and capital from the policy banks to do so. This allowed them to pursue “strategic national interest” in international markets, most often resource-focused.

The main target sector of China’s ODI is mining, which received over 29% of investment according to 2009 data. While the Ministry of Commerce of the government haven’t released sectoral data on outbound FDI since then, manufacturing has, as an outbound investment destination, probably significantly increased its worth from the 22% reflected in 2009.

From state capitalism to the market

Chinese private companies will be chasing Beijing-influenced SOE investment into Africa. China’s recent commercial activity on the continent could be divided into two simple categories – large SOE investment alongside Chinese micro-enterprises owned by entrepreneurial migrants either trading or selling. A new type of Chinese firm will be coming to the continent over the medium term – growing private firms that best represent the real competitiveness emanating from the Chinese economy.

In previous high-level Chinese and African government interactions, there has been little focus placed on the macro forces that are impacting the Chinese domestic economy and how African policy-makers should be planning to adjust their own growth strategies in line with changes in China’s own domestic economy. Considering that the China-driven commodity super cycle is now rapidly cooling, and in light of the commodity-dependent nature of a large number of African economies, this omission has become all too apparent.

While resources have underpinned China’s foray into Africa, a shift is beginning to occur – no longer planned by the government in Beijing but shaped by the market. The potential move of manufacturing out of China to Africa is the next thrust.

According to Justin Lin, former chief economist of the World Bank and now at Peking University, China is forecast to possibly lose up to 85 million labour-intensive manufacturing jobs within the next decade. In the same way that Japan lost 9.7 million in the 1960s and Korea almost 2.5 million in the 1980s due to rising wages and production costs, the Chinese economy will undergo a similar (but far greater in number) process. Wages for unskilled workers in China are set to increase four-fold in ten years. According to China’s National Statistics Bureau, the average monthly worker’s wage now stands at $325.24 with an annual increase last year that topped 20%. Wage inflation and rising production costs will over time force China’s manufacturers to focus on higher-value outputs, not dissimilar to previous trends in other Asian economies from Japan, Korea, Singapore, and Taiwan, amongst others.