What does the recent downturn in the Chinese stock market mean for investment in African infrastructure?
Monday 24 August 2015 marked the culmination of a prolonged period of market volatility in China, with Beijing’s official news agency dubbing it ’Black Monday‘. Capital has been flowing out of the Chinese stock market all year with dramatic consequences:
- The Shanghai Composite Index fell by nearly 9% on Black Monday.
- The Shanghai Composite Index had lost more than 35% of its value since June.
- The effects of Black Monday were felt globally, with the FTSE 100 seeing $74 billion wiped off its value and the Dow Jones seeing its biggest sell-off in four years.
What are the likely consequences for Africa’s infrastructure sector?
In and of itself the downturn in the stock market does not necessarily have drastic consequences for Chinese investment into Africa. However, it is what this downturn represents – or the circumstances that led to Black Monday – that might signal a potential change in the investment environment.
It is widely considered that the sell-off of Chinese shares was an acknowledgment among investors that the world’s second-largest economy is slowing down as it ends its massive growth cycle. If so, the effects are likely to be felt in a number of African nations that have been developing increasingly strong links with China. In particular:
- Lending by Chinese institutions is likely to slow, both domestically and internationally, which will potentially reduce the sources of financing available for developing African infrastructure.
- For many African nations the value of their currency is tied closely to the value of their export commodities. A slowing Chinese economy is likely to mean slowing demand for commodities and, in turn, a weakening of local currencies. In Zambia, the second-largest producer of copper on the continent, the kwacha fell to an all-time low on Black Monday – more than 3.4% . The currencies of the big oil producing nations, Nigeria and Angola, are expected to follow the trend.
That said – and to (mis)quote Mark Twain – the rumours of China’s death have been greatly exaggerated. Looking at the bigger picture, the Chinese economy continues to grow at a rate exceeding 6 per cent per annum and many investors view recent market volatility as a correction, rather than a fundamental downswing, of the real economy.
There are also no clear signs that, despite Black Monday, Chinese investment in Africa will slow in the near future, with ambitious infrastructure plans pushing ahead across the continent. Take the agreement by the China Railway Construction Corp to build a $3.5bn intercity rail line in Nigeria or the agreement by CHEC to construct the Atuabo Free Port Project in Ghana, both of which will bring Chinese services, but also Chinese money, to the continent.
What does the future hold?
Despite Black Monday, the current view from Beijing appears to be that, in order to meet its aggressive growth targets, it must continue to export its debt-driven model of infrastructure financing. Equally, China remains in need of resources and therefore may be willing to finance the infrastructure which makes resource exploitation viable. These factors taken together can only be a good thing for a continent in need of infrastructure and, by extension, investment.
In the longer term, as the Chinese economy moves from a debt-driven model towards a consumption-based model, investment in Africa may move down the list of priorities in Beijing. However, we consider that to be some way off. The current environment of Chinese investment in, and partnerships with, African nations looks likely to continue for the foreseeable future.