Trade flows

China and Africa – strengthening the ties

Recent growth in trade between China and Africa has been impressive, but there is scope for more

Admiral Zheng He’s seven seafaring expeditions to the eastern coast of Africa in the early 15th century are legendary. What is less widely known is that China had been trading with Africa for centuries before those voyages.

In the modern era, trade between Africa and China took off with the establishment of the government-led Forum on China-Africa Co-operation in 2000. Since then, trade has soared 29-fold to USD210 billion in 2013.

We see the China-Africa partnership evolving across three mutually supportive channels

While recent growth has been impressive, there is tremendous scope for further expansion. Based on Standard Chartered’s experience in financing trade and businesses in both China and Africa for over 150 years, we see the China-Africa partnership evolving across three mutually supportive channels. First, we see trade broadening beyond raw materials to higher-value goods and services as both economies rise up the value curve. Second, we expect trade and investment ties to encompass a larger number of African countries with the rise of the consumer class across the continent. And finally, we envisage the renminbi (RMB) becoming a core currency for making payments, raising capital and storing value across Africa by the end of this decade.

The nature of China-Africa trade is changing

Until a few years ago, China-Africa trade was largely confined to the shipment of oil and other mineral resources from Africa, and exports of textiles, clothing and low-value machinery from China. However, the nature of this trade is now changing fast. China’s exports to Africa of high-end machinery, telecommunications devices, electronics and electrical equipment, and road vehicles have risen sharply in the past few years. These high-end items now account for the majority of the country’s exports to Africa. They support China’s growing involvement in building infrastructure across the continent.

In the other direction, although resource shipments are likely to dominate Africa’s exports in the coming years – given China’s growing appetite for energy and the role such exports play in funding African government budgets – governments are also taking steps to reduce their excessive reliance on raw-material exports to fund their expenses. From South Africa to Somalia, governments are opening up their economies to foreign direct investment and building transport and communication networks with the aim of rising up the value chain. As infrastructure develops so will Africa’s attractiveness to companies catering to the global supply chain, helping the continent to diversify away from resource exports.

Africa could be China’s next big source of farm produce

The food processing sector could be a big win for Africa. The continent is home to 60 per cent of the world’s uncultivated but arable land. Introducing scientific farming techniques to boost productivity, then channelling the output to food processing firms and linking them to a Pan-African and global distribution network could create millions of jobs across the continent. China, meanwhile, is facing pressure on its land because of rapid urbanisation. It already imports farm produce from the US and Latin America; Africa could be its next big source.

The rise of the African consumer is another big emerging trend. Standard Chartered Research estimates that consumer spending across Sub-Saharan Africa will expand to USD1 trillion by 2020 from USD 600 million in 2010. This dovetails well with China’s own development plans as it looks for new markets for its higher-value goods and services. China’s companies are starting to harness this relatively untapped consumer market. Travelling across Africa, you’ll see newer and lower-priced ‘Made in China’ cars gaining market share against traditional competitors from Japan and Europe. The same is true of Chinese high-tech electronic gadgets and home appliance brands, which compete against products from Korea and Japan.

A pan-African trading bloc would be a logical step

Meanwhile, the formation of three main regional African trading blocs (the Southern African Development Community, the Common Market for Eastern and Southern Africa, and the East African Community) is jump-starting trade within the continent. The next logical step would be to combine these regional economic communities to form the Africa Free Trade Zone (AFTZ), spanning the entire length of the continent from Cape Town to Cairo. Such a pan-African trading bloc would encompass more than 630 million mostly young people, USD1.2 trillion in GDP and some of the world’s most bountiful natural resources. The AFTZ could rival the world’s other economic unions, giving African states the necessary heft to negotiate free trade agreements with other trading blocs. This is similar to the gains the Association of Southeast Asian Nations (ASEAN) economies are expected to make from their impending economic integration.

Africa is set to emerge as a key manufacturing base for China’s top companies and a major source of China’s food supply

Another mega-trend emerging along the China-Africa corridor is the growing circulation of the RMB across Africa. Soaring trade, rising direct investment by Chinese companies, and financial aid and subsidised loans from China’s government and its agencies provide a solid base for the regionalisation of the RMB across the continent. Africa-China trade settlement denominated in RMB totalled about USD5.7 billion in 2012, or about 3 per cent of annual trade. Thus, there is significant scope for growth. Also, as Beijing allows greater convertibility of the RMB (we expect full convertibility by the end of this decade), the currency will become increasingly attractive as a reserve currency. The RMB is already a part of central bank reserves in Angola, Nigeria, Tanzania, Ghana, Kenya and South Africa.

Trade is only the beginning of the China-Africa partnership

China is in a favourable position across Africa by virtue of its strategic support for the continent’s economic development. The rise of Africa’s middle class and China’s own rise up the value chain is boosting the potential for both markets and setting the stage for increased trade flows. But trade is only the start of the current phase of the China-Africa story. As the partnership evolves, Africa is set to emerge as a key manufacturing base for China’s top companies and a major source of China’s food supply. So-called dim sum bond issuance – renminbi bond issuance outside China – can be expected from African governments and some of the continent’s biggest companies as they look to finance their investment plans. Before long, the renminbi is also likely to become a core component of African central bank reserves. Such a multi-pronged, win-win relationship would be a worthy successor to the centuries-old ties between the two economies.

A version of this article appeared in Shanghai Daily on 28 April 2014