A growing diversification of Chinese investment beyond the natural resources sector provides a counter balance to fears of contagion arising from reduced trading volumes in Africa.
As Africa’s single biggest trading partner – dwarfing the EU, the US and South Africa - China has been instrumental in driving up export prices and volumes. Much of this trade has historically been in hard commodities such as copper, iron ore, and crude oil.
However, the recent slowdown in Chinese growth; the excess production capacity at home, lower global commodity prices, and depreciation in the renminbi have all contributed to a policy recalibration.
Rather than relying on exports and outward investment to drive growth, the Chinese government is taking steps to ‘rebalance’ the drivers of Chinese growth to a more sustainable model based on services and domestic consumption.
Changes to China’s domestic investment policy will inevitably have a knock-on effect on its trading volumes with Africa.
From an African perspective, the impact is two-fold: less Chinese appetite for mining and natural resources investment in Africa, and a negative impact on African exports and export prices.
There is, however, some more positive news.
The first is that a more sustainable and resilient growth model in China should facilitate steady, rather than sensational, growth over the long term. China’s growth trajectory has and will continue to level off, but with growth rates projected to hover somewhere between 6.3% and 6.8%, China is unlikely to be the destabilising influence that some press reports would suggest.
The second is that, with reduced economic growth and excess production capacity, there is more capital available to be deployed overseas, for the time being at least. According to the IMF, Chinese investment into Sub Saharan Africa amounted to US$3.1bn in 2013, nearly 7% of global investment in the region.
Chinese investment in Africa spans most of the continent, although it has up to recently been concentrated in resource-rich South Africa, Zambia, Nigeria, Angola and Zimbabwe. While energy and resources projects have long attracted a high proportion of Chinese investment, there are now clear signs of a reduced appetite for resources megaprojects in high risk jurisdictions. This is in part due to the difficulties faced in executing high profile projects in high risk jurisdictions with poor levels of governance, and in part due to the moderation in China’s appetite for resources.
As Chinese appetite for natural resources megaprojects in Africa wanes, Chinese investment in the finance, construction and manufacturing sectors continues to increase. There is a growing prevalence of smaller Chinese investments in a wider range of sectors, from transportation infrastructure to manufacturing, wholesale trading, retail, catering and textiles. And while the Chinese show less interest in mining, others do not: a series of new mining projects in Africa reflect a renewed optimism in the mining industry, as we highlighted in our November blog.