As China closed its factories, restricted its borders and halted manufacturing in an attempt to contain the spread of COVID-19 earlier this year, its economy shut down in the process. Industrial output dropped by 13.5% in January and February, retail sales lowered by 20.5%, and fixed-asset investment decreased by 24.5%.
While China represents the second-largest recipient of foreign direct investment (FDI) which decreased by 8.6% in the first two months of 2020 alone it also represents a top source of investment fueling one of the fastest-growing markets in the world: Africa.
Over the past two decades, Chinese overseas FDI to Africa has skyrocketed, from $75 million in 2003 to $5.4 billion in 2018.
Through its notable ‘Belt & Road Initiative,’ China has expanded its sphere of influence in the Global South through investment in infrastructure, roads, trains, ports and other facilities. Between 2016 and 2017, Chinese loans for energy and infrastructure projects in Africa almost tripled, from $3 billion to $8.8 billion, with Chinese banks transforming into active lenders across 19 African nations.
Furthermore, Africa is a keen consumer of Chinese goods, with China’s exports to Africa totalling $94.7 billion in 2017, while China’s imports from Africa only reached $75.3 billion.
While China has stated its aim to diversify its imports from Africa with 90 per cent of African exports to China concentrated on natural resources a significant trade imbalance remains, and many African countries lie dependent on Chinese buyers for its natural resources, Chinese manufactures for its finished goods and Chinese lenders for development loans.
Analysis by the Jubilee Debt Campaign conducted in 2018 demonstrated that for 48 African countries, 20% of their external debt is owed to China, 32% to private lenders, 35% to multilateral organizations, and the 13% to other bilateral partners.
“All of these partners need to play their part in supporting African countries to avoid economic distress, but we expect the most intransigent to be the private sector,” Hannah Wanjie Ryder, CEO of Development Reimagined, told AOP.
“In the past, China has shown itself to be a responsible lender, for instance cancelling double the debt than the U.K. did for Highly-Indebted Poor Countries. Just in 2019, China cancelled interest payments for Ethiopia and Zambia, two of the world’s poorest countries. We expect China will play its part now as well.”
The Impact of COVID-19
The shutdown of China’s industrial and manufacturing capabilities is projected to impact global and African economies by creating an ‘economic shock’ to Chinese demand for raw materials. Several African countries, including Angola, Nigeria and South Africa, export a substantial volume of raw mineral wealth to China, which relies on external resources for its growing consumption.
These resources include crude petroleum from Angola and South Sudan, zinc and copper ore from Eritrea, cobalt from the Democratic Republic of Congo and iron and titanium from Sierra Leone.
In South Sudan, 95% of exports are directed to China, and in Angola and Eritrea, the ratio is 61% and 58%, respectively, representing the top African exporters to China as a proportion of total exports.
However, China’s industrial slowdown has halted demand for raw inputs to be refined into finished goods. As a result, imported raw materials from Africa to China face disruption and reduced prices, resulting in production cuts, heavy losses in export earnings and an exacerbated trade deficit for African economies.
In terms of the impact on the supply of Chinese goods, many African countries depend on imported manufactured goods from China, from transport equipment to machinery to low-cost consumables and textiles.
As China’s manufacturing abilities slow, fewer exports will flow to Africa, hampering projects that depend on imported goods as input materials for infrastructure developments, as well as resulting in higher prices for the goods that do remain available.
Furthermore, with global FDI expected to decline by 5% – 15% as a result of COVID-19, a reduced flow of funds from China into Africa, as well as diminished FDI received by China itself, will directly limit the country’s ability to finance Africa’s most important infrastructure projects.
According to a recent analysis conducted by Development Reimagined, a consultancy firm specialised in international development, diplomacy and public relations across regions, the dual supply-demand shocks of China’s industrial slowdown is projected to be mutually exclusive.
This means that African countries will either be negatively impacted by reduced demand for raw inputs, or by limited and more expensive access to manufactured goods, but not both.
That said, the most at-risk countries for experiencing both shocks remain the least developed economies. More developed and diversified markets, such as Nigeria, Kenya and South Africa, import their goods from a multitude of countries and even manufacture some goods domestically.
Conversely, less developed and economically diverse countries, such as Zambia, South Sudan, Mauritania, and smaller countries like Togo, Sierra Leone, Liberia, Mali and Madagascar, lack viable alternative markets from which to source commodities, as well as alternative buyers for its mineral wealth, besides China.
Despite the anticipated economic shocks, the ability for African economies to recover in the medium to long-term remains, not least of which is by attracting interest from international investors due to the long-term shutdown of major alternative recipient markets of FDI, and by shifting the narrative around the inflow of investment into the continent.
“Our firm is already seeing an uptick in Chinese interest and queries about investment in African countries. We hope that COVID-19 will prompt all investors to see African countries not as a risk but instead as a means to diversify their investments and make them more resilient, especially with regards to manufacturing as well as renewable energy,” said Ryder.
In the short-term, a variety of measures to mitigate the economic impact of China’s globally felt slowdown will be required, including but not limited to multilateral financing organisations, high-income countries and domestic banking institutions for the continent’s lowest-income countries.
Loans for small and medium-sized enterprises will help companies to weather price increases for imported goods, as well as subsidise anticipated price reductions in exported goods and stave off higher interest rates.
In the long-term, continuing and increasing external financing remains imperative for helping African countries to diversify their economies, develop local manufacturing capabilities, substitute imported goods for value-added products generated in-country and reduce the fiscal impact of the highs and lows of a volatile international market.