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September 18, 2012

Regional Focus: China’s Influence Spreads in Emerging Africa

CA1_BlogResource-hungry China is Africa's largest trading partner; the relationship has been a key driver for economic growth in Africa. Ties are reinforced by increasing investment in raw materials, but also in Africa's burgeoning consumer markets. The opportunities for Africa are large, however the continent occupies a low value-added role in China's supply chain, as a result Africa is looking to entice other emerging economies to invest in the region.

Key points
  • According to UNCTAD, Foreign Direct Investment (FDI) inflows declined for the third consecutive year in Africa, to US$42.7 billion in 2011. Revolution in North Africa has led to a precipitous decline in FDI, which halved in 2011 alone to US$7.7 billion, with rates in Sub-Saharan Africa increasing. Large deposits of natural resources in West Africa have meant this region has been a beneficiary of large inflows of FDI; FDI inflows increased by 36.2% in US$ terms in 2011, to US$16.1 billion;
  • Between 2006 and 2011 the rate of growth in exports from Sub-Saharan Africa to China has averaged 22.8% a year, almost double Sub-Saharan Africa's average export growth. Click to Tweet! This period has corresponded to a period of significant growth in crude material exports (excluding fuel), which increased by 160% in US$ terms between 2006 and 2011;
  • China's exports to Africa have increased at a similarly rapid rate. Exports to Africa increased to US$64.3 billion in 2011, a 183% increase in US$ terms from 2006. Click to Tweet! An interesting point to note, the Middle East and Africa is one of only two regions in the world that China runs a trade deficit with, worth US$59.1 billion in 2011 due to China's imports of raw materials. The other is Australasia, a region China also imports a lot of its raw materials from;
  • China's private sector has upped investment in the African consumer market. According to UN statistics Africa's population passed the 1.0 billion mark in 2010 and is expected to grow to 1.6 billion by 2030. Click to Tweet! This trend, alongside a rapidly growing African middle class is driving new forms of Chinese investment in the region.
China's appetite for raw materials

As China has grown, its importance to international economics has developed in tandem. Since the financial crisis of 2007-2008 China's outward FDI has increased significantly; outflows increased by 114% in real terms between 2007 and 2011. Much of this growth has been an attempt to secure energy and raw materials for the country's long term growth.

  • The commodities boom since 2000 has benefitted Africa's resource-rich countries. The Metals index for example increased by 290% between June 2000 and its peak in February 2011. China's demand for goods has been instrumental to these rising prices, the country imported more metalliferous ores and scrap metal in 2011 than the 10 largest importers behind it. Click to Tweet! Raw material-rich African countries such as Nigeria, Zambia and South Africa have benefited from this demand, supporting a real GDP growth rate in Sub-Saharan Africa of 75.2% between 2001 and 2011;
Total GDP, FDI Inward Stocks and Exports for Sub-Saharan Africa: 1991-2011

  1

Source: Euromonitor International from national statistics/OECD/International Monetary Fund (IMF), International Financial Statistics (IFS)

  • To support China's long term growth the country has been investing heavily in significant projects in Africa, in an attempt to secure the raw materials needed to transform the country into a developed economy. Energy security is a case in point, oil is a major import for China, and as a result the country has invested heavily in refinery projects in Africa, to secure long term access to Africa's oil. Algeria, Chad, Sudan, Niger and Nigeria all boast oil refinery projects funded by Chinese firms. The Nigerian project alone is worth US$23.0 billion;
  • The general approach China has taken with investment and trade has meant investment in unstable countries. China has partnered with Zimbabwe, providing a US$10.0 billion loan in 2011 in return for mining rights in the country, again to ensure China's raw material security. This investment does however demonstrate the other side of China's involvement in Africa. Murmurs of a new age of economic colonialism are growing, though China vociferously denies these claims.
A new era of African consumption

The historical focus of China's investment has been in raw materials, however a change is occurring. In 2010 Africa's population passed the 1.0 billion mark, while according to the UN the median age was 19.7 years in 2010, this is fostering rapid growth in the region's consumer markets. Between 2006 and 2011 consumer expenditure in Sub-Saharan Africa increased by 19.3% in real terms, as such opportunities for FMCG firms are growing.

  • China's comparative advantages are highly complementary to the African market. Relatively low cost electronics are in demand in Africa, in particular the market for telecommunications is booming. Lower costs of production and more aggressive investment strategies have allowed Chinese firms to flourish against western competition. Huawei, a Chinese telecommunications firm, has invested US$1.5 billion in Africa since it entered the market in 1998, with its low cost smartphone offerings gaining market share on the continent;
  • The structure of China's trade globally is also developing. Between 2001 and 2006 the most rapid growth in exports originated from machinery and transport equipment and basic manufactures. However between 2006 and 2011 another trend has emerged. Certain consumer goods have been growing above the total export average. Travel goods and handbags for example grew at an average annual rate of 20.4%, 6.0 percentage points higher than the average rate of total export growth, while furniture has also grown above trend;
China’s Average Annual Growth in Exports by Commodity: 2001-2011
2

Source: Euromonitor International from the United Nations (UN), International Merchandise Trade Statistics

Note: The radar diagram notes growth in the 10 export categories for China, each spindle axis represents the average growth rate between 2001 and 2011. Machinery and transport for example is the fastest growing sector, at 25.8%.

  • The turmoil and unrest after the Arab Spring in North Africa means many of the current opportunities lie in the Sub-Saharan region. Nigeria is a country to note in particular. A growing middle class is emerging; in 2011 11.0 million Nigerian households had an annual disposable income of over US$5,000 in purchasing power parity terms, 33.3% of its population. This provides major opportunities in a growing consumer market. Click to Tweet!
Africa developing relations with China

China's influence in Africa has inevitably grown alongside its increasingly active, widespread and formalised involvement with the region. The fifth China-Africa Cooperation Forum for example ended in July with China pledging an additional US$20.0 billion in loans to Africa over the next 3 years.

  • There are two contrasting trends developing in the investment relations of China and Africa. Chinese raw material and energy investment projects are dominated by state funded initiatives, usually in the form of sovereign wealth funds and largely aimed at energy and resource security. The consumer markets on the other hand have been left largely to private investors;
  • The state-backed sectors have in some cases been criticised for a colonialist bent. Although this accusation is perhaps overly-dramatic, there is no doubt that China's investment in Africa has taken a long term perspective. For example, investment has expanded out to include transport and infrastructure projects, usually in partnership with nation states. These investments will benefit Africa through spillover effects on employment and technology. It is important that Africa is able to upskill to prevent being locked into a low-value added role in China's supply chain.
Prospects

The high price of commodities has no doubt been a boon to the economic performance of Africa, however the slowdown in the world economy in 2012 means non-food commodity prices are declining in the short term. The Europe Brent crude oil spot price declined by 17.7% between 26th March 2012 and 24th July 2012, while the metals index has also declined.

  • The crisis in the Eurozone and global uncertainty is reducing demand for Chinese exports, slowing its industry in the short term. Euromonitor International forecasts real GDP growth of 8.2% in 2012, though large downside risks are present. This is having a knock on effect on demand for energy and raw materials. Longer term growth in China is however expected to remain strong but at lower rates than in previous years; the real GDP growth target set by the Chinese government is 7.5% a year for the coming five years. The continued migration to urban centres and government efforts to drive consumption in China means the volume of energy and raw materials demanded by China is likely to rise. As a result the commodity-rich African countries are expected to continue to benefit from China's growth;
  • Since late 2010 the Arab Spring in North Africa has excluded this region from access to the opportunities of China's FDI to a large extent and restrained consumption. This is slowly changing however; real annual disposable income per capita is expected to increase by 36.9% between 2012 and 2020 in Egypt while real GDP is expected to grow by 57.9% in Egypt over the same period. Euromonitor International therefore expects increased opportunities in North African countries between 2012 and 2020; Click to Tweet!
  • According to the UN, Africa's population is set to increase to 1.6 billion by 2030, the fastest growing region in the world. Click to Tweet! As this region develops opportunities in consumer markets will increase. Greater competition from Western European and North American companies, as well as other emerging markets is likely; however China's companies have demonstrated a willingness to invest early in African markets, giving them an advantage over potential competition.

 


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