Abstract
The March 2017 issue of the IMF Research Bulletin covers key topics of interest at the IMF.
China has emerged as Sub-Saharan Africa’s (SSA) major trading partner and as an important lender in recent years. Sub-Saharan Africa enjoyed a trade surplus with China for more than a decade, but this has now turned to a deficit with the slump in commodity prices. China’s engagement with SSA goes beyond a narrative of natural resources and includes wider cooperation to address bottlenecks in SSA’s development. Despite uncertainties in the external environment China has pledged US$60 billion over the next three years to support SSA’s development.
Question 1. How important is China’s trade with Sub-Saharan Africa?
China has emerged as Sub-Saharan Africa’s (SSA) single largest trading partner, following China’s rapid growth in recent years. Twenty years ago, advanced economies accounted for about 90 percent of SSA exports. Since then there has been a shift in trading patterns with Brazil, India, and China now accounting for over half of SSA exports. China accounts for the lion’s share of SSA exports at about 25 percent. Fuel, metal, and mineral products represent 70 percent of SSA’s exports to China. Over the past decade, SSA enjoyed a trade surplus with China, only briefly interrupted during the global financial crisis in 2009, but this has turned to a deficit since 2015 owing largely to the slump in commodity prices. On the import side, the majority of SSA imports from China comprise manufactured goods and machinery.
China’s Exports and Imports to Sub-Saharan Africa
(Billions of U.S. dollars, 6 month moving average)
Citation: IMF Research Bulletin 2017, 001; 10.5089/9781475595291.026.A003
China’s Exports and Imports to Sub-Saharan Africa
(Billions of U.S. dollars, 6 month moving average)
Citation: IMF Research Bulletin 2017, 001; 10.5089/9781475595291.026.A003
Question 2. Is it all about natural resources?
China’s engagement with SSA transcends natural resources. China’s cooperation with SSA is articulated through the Forum on China-Africa Cooperation (FOCAC) which meets every three years at the heads-of-state level. During the most recent FOCAC meeting (2015), China pledged $60 billion in both project finance and technical assistance designed to cover all important aspects of their cooperation encompassing industry, agriculture, infrastructure, environment, trade facilitation, poverty alleviation, and public health. These interventions are designed to address key bottlenecks to SSA’s development, namely (i) infrastructure; (ii) shortage of talent; and (iii) inadequate financing. China is expected to increasingly shift its labor-intensive industries to Africa, which is complemented by its support for African infrastructure projects via preferential financial arrangements and capacity building through technical assistance, vocational training, and fellowship programs.
Question 3. What do the changes in China’s economy, as it shifts from investment to consumption, mean for Sub-Saharan Africa?
China’s shift to a more balanced growth model that emphasizes consumption has hit SSA commodity exporters hard. With oil and mineral prices falling sharply from previous peaks and China’s demand of minerals decreasing, SSA’s trade surplus has now turned to a deficit. As a result, growth has fallen sharply in many SSA commodity exporters, fiscal deficits have widened, and international reserve buffers have been greatly reduced. With futures markets suggesting a slow recovery in commodity prices and China’s shift from an investment-driven growth to consumption oriented growth, implying lower demand for investment-intensive commodities, SSA commodity exporters will need to undertake an orderly adjustment. This urgency is compounded by a difficult external financing environment
Question 4. How important is China as an investor in Sub-Saharan Africa?
China’s investment in Africa has grown as SSA has diversified its sources of capital. While China’s outward investment has increased significantly since 2006, official statistics suggest that China’s share of FDI to SSA remains relatively small at less than 5 percent. Nevertheless, FDI is widely distributed across oil and non-oil exporting SSA countries. FDI in services accounts for a large share of the number of Chinese private investment projects, followed by manufacturing.
Question 5. How big a lender is China to Sub-Saharan Africa and how important is its aid program?
China has stepped up official lending to SSA. Chinese loans focus primarily on financing public infrastructure projects. These have risen from 2 percent of SSA external debt prior to 2005 to about 15 percent currently. This new source of financing has become increasingly important as SSA countries pursue their sustainable development goals, including addressing large infrastructure gaps. By 2013, about a quarter of all Chinese engineering contracts worldwide were in SSA with a majority in energy (hydropower) and transport (roads, railways, ports, and aviation). However, official aid remains small relative (about 1 percent) to SSA’s total overseas development assistance.
Question 6. Has the slump in commodity prices changed the nature of China’s investments in Sub-Saharan Africa?
Anecdotal data suggest a shift in Chinese investments from commodity exporters to non-commodity exporting countries. Lower commodity export prices have certainly affected commodity exporters’ capacity to repay loans and will be a major factor in driving both official lending and FDI flows. For example, Kenya, Uganda, and Ethiopia have attracted large infrastructure investments, ranging from railways in Kenya and Ethiopia to significant hydropower projects in Uganda.
Question 7. What are the medium-term prospects for China’s engagement with Sub-Saharan Africa?
Despite uncertainties in the external environment, China more than doubled its pledges (US$60 billion) to support SSA’s development over the next three years. The surge in capital outflows from China suggest a search for yield or safe haven as China is rebalancing its growth model and as the role of the renminbi in global transactions has increased. Shifts in production patterns as wages rise in China and changing demographic trends offer SSA new opportunities for growth and investment. By 2035 the number of people entering the working age population in SSA will exceed that of the rest of the world combined. With the appropriate supportive policies that foster investment in human capital and job creation, the challenge for SSA will be to harness this demographic dividend.
