A new study titled “China-Africa: Will the convenience marriage last?“, carried out by French company Coface specialized in export credit insurance, made an interesting review of the relation between the two blocks, at 18 years of the first Focac. According to Coface’s financial analysts, “Sub-Saharan Africa nations are growing more dependent on China as an export market, putting them at greater risk to shifts in the Chinese economy.”
The China’s slowdown has sacrificed domestic consumption: that is why the Asian giant has embarked on a new course to boost private consumption compared to investments and therefore also industrial production. By thus penalizing exports of the sub-Saharan region to China, concentrate for over 80% in minerals, metals and hydrocarbons.
A trend that has been confirmed in the last two years in the tangible decline of trade between the African continent and the Middle Kingdom, as well as in the decline of China’s overseas direct investment (ODI) flows to African countries.
Two elements, which in addition to resulting into lower demand for African mining and energy resources, have produced a sharp fall in commodity prices since the peak of 2014, starting with crude oil. A fall that halved the value of African exports, which in 2014 recorded best ever $ 111.7 billion (€ 95.80 billion) against $ 54.8 billion (€ 47 billion) in 2016.
Then, the report notes that the decline in demand will have its strongest impact especially in those sub-Saharan countries that have benefited most from China’s economic expansion. The study classifies them with the help of an Export dependency index to China, structured with score ranging from 0 (no dependency) to 1 (absolute dependence).
Among the 54 African countries, are ten those that the Index considers most vulnerable to the decline in trade with the Dragon. It should be noted that these countries are also the ones who have benefited most from Chinese ODI and lending flows.
The two most vulnerable countries to potential changes in Chinese demand are South Sudan followed by Angola, both characterized by economies based mainly on oil production. The Gambia, which produces wood, is not far behind. While the Congo is penalized for its strong economy dependence on oil obtained from bituminous minerals. Even Eritrea, Guinea, and Mauritania are among the most dependent countries because of their exports of metal ores (iron, copper, aluminium).
However, the report acknowledges that despite the general worsening of dependence on exports to China, recent developments leave room for a vehement optimism dictated by the gradual diversification of Africa’s basket exports, which has incorporated raw materials transformed into higher value-added. Among these potential beneficiaries of the rebalancing of the Chinese growth model, raw wood and, to a lesser extent, some agricultural products such as South African oranges, Ethiopian sesame, Senegalese cola walnuts and Mozambican tobacco.
In addition, Chinese lending and ODIs began to diversify from mining, focusing more on production, utility and services. However, in order to paraphrase the title of the study, a good dose of skepticism is always obligatory in every good marriage. In this case, stemming from the fact that African countries heavily dependent on China remain largely exposed to a weak demand or a possible new crash in commodity prices.
Not to mention, the risk for African governments would be to increase their vulnerability to changes in China’s foreign policy and to those of its demand because Chinese interests in the region are, first and foremost, based on a complex network of political and economic objectives.
All this brings Coface’s economists to the final consideration that “there remains a lot of work to be done for this relationship to become a win-win cooperation”.
Translation of the original article, written in Italian for Nigrizia