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China has become the major development partner of sub-Saharan Africa. It is now the subcontinent’s largest single trading partner and a key investor and provider of aid. In 2013, trade between China and Africa reached a record $200 billion, almost 20 times higher than it was in 2000, with a 44 percent spurt in Chinese direct investment in Africa.
US trade with Africa, but only in goods, not services, totaled $85 billion in 2013. Services amounted to about another $11 billion. European trade with Africa reached $137 billion in 2013. Africa has become the second-largest source of China’s oil imports, and a major destination of Chinese investment, with more than 2,000 Chinese enterprises currently investing there.
So long as China grows its own GDP at more than 7 percent it will need to rely on the resource commodities of Africa – the bulk of this $200 billion trade. Likewise, so long as China grows rapidly, Africa itself can grow at a rapid pace, currently about 5 percent per year on average. Africa, in other words, cannot prosper without China.
But China is in trouble, its economy is slowing down and its stock exchange tumbling down.
The mini devaluation of the Yuan (4%) early this month means technically that companies which buy from Beijing will now have to spend a little less. Firms that import construction material, furniture, electrical goods, clothing, and various products from China, are going to be happy.
By the same token, a devalued Yuan means that buying anything priced in dollars becomes more pricey for the Chinese. Therefore the sale of commodities such as platinum, copper or coal may become more expensive, which could reduce demand for commodities.
Number of African countries that use the Yuan as part of their reserve currency may feel the pinch, including Ghana, Zimbabwe, Nigeria and Kenya. In an effort to make the buying and selling of goods much easier the Nigerian Central Bank in 2011 pledged to store between 5%-10% of its foreign reserves in Yuan, alongside dollars and Euros. At the time, the Chinese economy had the highest growth rates in the world. Nigeria believed that looking east would help protect the local currency, the naira, against the volatility of oil prices set in dollars.
Kenya, whose port is a major gateway for Chinese goods, is setting up a clearing house for the Chinese currency. It is hoped that at the port of entry, Chinese clients selling manufactured goods could pay excise and taxes, and get their goods into the local economy speedily. Will this materialize? We’ll see.
As for Ethiopia and countries importing Chinese goods, such as Chinese-made heavy machinery, vehicles, and construction materials they will benefit from the cheaper cost.
Although the immediate impact of the devaluation of the Yuan, albeit very modest, may not be seen or measured, China’s possible economic slowdown should be the real issue. Indeed, a report by International Monetary Fund finds that China affects the region’s economies directly through its exports and indirectly through commodity price effects, and through the international prices of manufacturing products. The reports finds that a 1 percentage point decline in China’s investment growth is associated with an average 0.6 percentage point decline in sub-Saharan Africa’s export growth. The impact is larger for resource-rich countries, especially oil exporters because they account for a large share of the region’s exports to China.
How bad could things get? And what impact this down turn has on African economies should be up for debate. Still, it’s important that African countries consider all options, from allowing their currencies to depreciate to undertaking deep structural reforms for raising productivity and increasing growth, incomes and standards of living.