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China’s exports to Africa have upgraded the value chain
China’s exports to Africa have undergone a structural change. In 2000, Chinese exports to Africa were almost evenly distributed in textile and garments (accounting for 28% of the country’s total exports to Africa), machinery and transport equipment (27%), and other manufactured goods (26%). Since then, the structure of China’s export to Africa has begun to change. Exports of capital goods have increased while exports of textile and garments have declined. In 2009, machinery and transport equipment took the largest share in China’s exports to Africa (41%), including communications equipment (20%), road transport vehicles (19%) and electromechanical (18%).
The structural change was driven by several factors:
* Africa’s rapid economic development led to the demand for capital goods. From 2006 to 2010, Africa saw an average economic growth of 5.3% per year. Lasting urbanization and continuous decline of the poverty rate leads to strong demand for capital goods. And the capital goods in turn ensure accelerated economic growth.
* The Chinese government encourages enterprises to go global. The structural change in China’s trade with Africa is consistent with the country’s strategy of going global, a strategy to encourage Chinese enterprises to explore overseas markets. The influence of Chinese enterprises in the capital goods markets in Africa is greater with each passing day. In 2009, 32.3% of Africa’s total communications equipment imports and 31.6% of its office equipment imports were from China. The proportions of electrical machinery, road vehicles and generator sets imports from China are also increasing.
* China’s financing for infrastructure projects in Africa leads to more exports to Africa. The Chinese government has been actively encouraging Chinese enterprises to go global through financing infrastructure projects in African countries. Some policy banks such as China Export-Import Bank and China Development Bank as intermediaries (usually use ChinaAfrica Investment Funds as their investment carrier), provide preferential loans, export credit, equity funding and other services for African infrastructure projects. In return, China ExportImport Bank requires that capital goods worth no less than 50% of the contract value of the project be purchased in China. The World Bank estimated that in 2006 China’s financing for African infrastructure projects reached US$7.1 billion, compared with the US$4.5 billion in 2007. If capital goods worth half of the value of the financing were purchased from China, the proportions of imports from China in Africa’s total imports of capital goods should be 35% in 2006 and 16% in 2007.
What does this mean to African nations?
From the side of China, ChinaAfrica trade is divided into two markets– China import natural resources from Africa and export necessary capital goods to the continent to sustain its economic growth. This trade relation means differently to African countries. As a new buyer of natural resources, China provides new outlet channels for African exports. At the same time African nations enjoyed increased balance of payments and government revenues. For example, Angola’s trade surplus increased to US$28.3 billion in 2010 from US$4.6 million in 2002, and its foreign exchange reserves to US$16.2 billion from US$399 million. The main challenge facing Africa is to turn export surplus into capital investment to stimulate its economic diversification.
Most of the African countries with trade deficit with China benefit from China’s cheap capital goods which facilitate investment in their infrastructure. Lack of infrastructure is considered the biggest obstacle to economic development in Africa. Improved infrastructure will greatly reduce the economic operating costs and attract more overseas investors. This is consistent with China’s intention of overseas investment.
Diversification unleashes potential for growth
Although China-Africa trade is concentrated in terms of structure and geographical distribution, diversification means strong potential for further development. Natural energy resources still dominate China’s imports from Africa. With increasing investment from China, Africa has the potential to participate in the global supply chain and have diversified foreign trade. China’s exports to Africa will expand along with the economic growth in the continent, especially in Southern and Eastern Africa.
As noted in our “Special Report: Super Cycle” (published in November 2010), it was predicted that by 2030, China’s share in global GDP would increase to 24% from 9%, and the share of sub-Saharan Africa to 4% from 2%. If China and subSaharan African countries enjoy increasing importance in the global economy at the same time and have closer economic relations, China-Africa trade will have stronger potential for further development.
In addition, China-Africa trade volume will double by 2015, and reach US$1.7 trillion by 2030. In that case, China would replace the EU as Africa’s largest trading partner by 2032, which will probably bring about the following benefits:
* China still has a huge appetite for natural resources. China will import more crude oil from its current African trade partners and new oil-exporting countries. Ghana started to produce oil in 2010. Uganda is likely to join OPEC in 2013. Several state-owned Chinese oil companies are considering investing in the oil industry in the two countries. The Chinese government has already intervened. It is speculated that the major purpose of China’s US$13 billion loan on infrastructure construction to Ghana is to obtain oil. China’s strong exports to Liberia and Benin might also be paving the way for it to get offshore oil resources in the two nations. In addition to oil, China is participating in the mining industry in many African countries. Current trading partners in mining include Zambia, Congo(DRC) and South Africa. More trade in iron ore and metal is expected between China and Africa. China aims to obtain uranium and diamonds from Namibia and gold from Tanzania. Bulk commodity trade will continue to be a driving force behind the development of China-Africa trade.
* Africa is integrating into the global supply chain. A huge supply of cheap labor and proximity to European markets and other advantages have brought opportunities for Africa to integrate into the global supply chain. However, poor infrastructure is impeding its process of industrialization. This is especially true of the power and energy sector and the transportation facilities. The Center for Global Development’s report in 2005 Business Environment and Comparative Advantage in Africa calculated the gross total factor productivity in African countries by setting such variables as total profit, capital cost, labor cost. The results showed that the total factor gross productivity in Senegal and Kenya is higher than Bangladesh (one of Asia’s emerging production destinations, whose gross total factor productivity is slightly higher than that of Tanzania). However, if indirect costs on power and transportation facilities were included in the calculation, the gross total factor productivity of subSaharan African nations, except Senegal, would be lower than that of Bangladesh. This indicates that, if with good infrastructure, African countries are not far behind other nations in terms of manufacturing competitiveness.
* Since 2000, China has been financing the municipal works in subSaharan African countries. This will help improve their productivity in the long run. According to the World Bank report Building Bridges - China’s Growing Role as infrastructure Financier for Africa and the data we have, China’s funding for infrastructure projects in sub-Saharan Africa has seen exponential growth, from US$1 billion in 2001 to US$17 billion in 2010 (including US$13 billion in special loans to Ghana). These infrastructure projects include power plants, roads, railways and airports. African nations giving priority to industrialization such as Kenya and Nigeria should take advantage of China’s financial support to enhance their competitiveness and diversify their exports. From the Chinese side, such investment overseas will lead to larger and more diversified capital goods exports to Africa. Industrial development will also lead to higher wages and larger consumer market in Africa.
* China’s trade with southern and eastern Africa is catching up. Comparison between the regional distribution and the total GDP of China-Africa trade shows that central Africa leads the rest of Africa in terms of trade with China, with a huge amount of commodity trade with China. Other parts of Africa, southern and eastern Africa in particular, are catching up.
* Southern Africa is more popular than other areas thanks to its political stability, good infrastructure, and friendly trade environment. The World Bank’s 2011 Business Index ranked South Africa, Namibia and Botswana second, third and sixth respectively of all African nations in terms of popularity. Close economic relationship between South Africa and China will promote further growth of bilateral trade. In August 2010, South African President Jacob ? Zuma visited China and signed an economic cooperation agreement. At the end of 2010, South Africa was invited to join BRIC (Brazil, Russia, India, and China). The five nations will jointly hold an official summit every year. Establishing partnership with South Africa, the largest economy of the Sub-Saharan Africa and the actual leader of southern Africa, will give BRIC nations a strategic path into the African market.
* Eastern Africa. Widely believed to be poor in natural resources, eastern Africa has to some extent been neglected by China over the past decade. We predict that trade relations between the two sides will develop gradually. Chinese companies are following the emerging oil production in Uganda and the expansion of the mining industry in Tanzania. The rapid economic growth in Ethiopia, Africa’s second most populous country, will bring unlimited market potential. Kenya’s infrastructure, especially its development in ports, telecommunications and advanced financial industry, is China’s stepping stone to East Africa. With the establishment of the common free market in eastern Africa in July 2010, a free trade circle had formed in Kenya, Tanzania, Rwanda and Burundi, eliminating trade tariffs and barriers between the nations.
From trade flow to capital flow
Only through long-term, stable economic development in Africa and continued close economic cooperation between China and Africa, can the growth potential of ChinaAfrica trade be realized. This has laid a solid foundation for China’s economic strength to enter Africa. Since the start of the flow of trade, China has been exerting economic influence in Africa through the flow of capital, which drives the economic development in Africa and creates a broader market for deeper trade relations.
As mentioned earlier, China’ investment in infrastructure projects is one of the major ways of promoting capital flow in Africa. In 2010, China Export-Import Bank and China Development Bank agreed to make US$13 billion worth of special loan to Ghana to finance its infrastructure projects. Meanwhile, China Export-Import Bank granted Kenya US$97 million worth of loan to launch its geothermal resource projects, granted the African Development Bank US$100 million worth of loan to finance Zimbabwe and Burundi’ communications projects.
Another form of capital flow is foreign direct investment(FDI). According to the Chinese Ministry of Commerce, China’s direct investment in Africa increased from US$392 million in 2005 to US$5.5 billion in 2008, and dropped to US$1.4 billion in 2009 (mainly caused by the global financial crisis). Foreign direct investment is also led by the Government. China-Africa Development Fund was set up in 2007 as an equity investment fund under China Development Bank aimed at promoting Chinese enterprises’ investment in Africa. In October 2010, the fund invested part of its US$1 billion in initial capital and US$2 billion raised in Phase II, in over 30 projects, of which 10 projects were directly or indirectly associated with infrastructure and the rest were related with manufacturing and mining.
The strategy of supporting Africa’s development through capital flow puts China into a more advantageous position in further cooperation with Africa. At the same time, steady economic growth in Africa creates more market potential for Chinese enterprises, and ultimately stimulates trade flows.
China-Africa bilateral trade is only the beginning of the story. Expanding trade between these two rising economies has laid a solid foundation for further economic and trade cooperation.
China’s exports to Africa have undergone a structural change. In 2000, Chinese exports to Africa were almost evenly distributed in textile and garments (accounting for 28% of the country’s total exports to Africa), machinery and transport equipment (27%), and other manufactured goods (26%). Since then, the structure of China’s export to Africa has begun to change. Exports of capital goods have increased while exports of textile and garments have declined. In 2009, machinery and transport equipment took the largest share in China’s exports to Africa (41%), including communications equipment (20%), road transport vehicles (19%) and electromechanical (18%).
The structural change was driven by several factors:
* Africa’s rapid economic development led to the demand for capital goods. From 2006 to 2010, Africa saw an average economic growth of 5.3% per year. Lasting urbanization and continuous decline of the poverty rate leads to strong demand for capital goods. And the capital goods in turn ensure accelerated economic growth.
* The Chinese government encourages enterprises to go global. The structural change in China’s trade with Africa is consistent with the country’s strategy of going global, a strategy to encourage Chinese enterprises to explore overseas markets. The influence of Chinese enterprises in the capital goods markets in Africa is greater with each passing day. In 2009, 32.3% of Africa’s total communications equipment imports and 31.6% of its office equipment imports were from China. The proportions of electrical machinery, road vehicles and generator sets imports from China are also increasing.
* China’s financing for infrastructure projects in Africa leads to more exports to Africa. The Chinese government has been actively encouraging Chinese enterprises to go global through financing infrastructure projects in African countries. Some policy banks such as China Export-Import Bank and China Development Bank as intermediaries (usually use ChinaAfrica Investment Funds as their investment carrier), provide preferential loans, export credit, equity funding and other services for African infrastructure projects. In return, China ExportImport Bank requires that capital goods worth no less than 50% of the contract value of the project be purchased in China. The World Bank estimated that in 2006 China’s financing for African infrastructure projects reached US$7.1 billion, compared with the US$4.5 billion in 2007. If capital goods worth half of the value of the financing were purchased from China, the proportions of imports from China in Africa’s total imports of capital goods should be 35% in 2006 and 16% in 2007.
What does this mean to African nations?
From the side of China, ChinaAfrica trade is divided into two markets– China import natural resources from Africa and export necessary capital goods to the continent to sustain its economic growth. This trade relation means differently to African countries. As a new buyer of natural resources, China provides new outlet channels for African exports. At the same time African nations enjoyed increased balance of payments and government revenues. For example, Angola’s trade surplus increased to US$28.3 billion in 2010 from US$4.6 million in 2002, and its foreign exchange reserves to US$16.2 billion from US$399 million. The main challenge facing Africa is to turn export surplus into capital investment to stimulate its economic diversification.
Most of the African countries with trade deficit with China benefit from China’s cheap capital goods which facilitate investment in their infrastructure. Lack of infrastructure is considered the biggest obstacle to economic development in Africa. Improved infrastructure will greatly reduce the economic operating costs and attract more overseas investors. This is consistent with China’s intention of overseas investment.
Diversification unleashes potential for growth
Although China-Africa trade is concentrated in terms of structure and geographical distribution, diversification means strong potential for further development. Natural energy resources still dominate China’s imports from Africa. With increasing investment from China, Africa has the potential to participate in the global supply chain and have diversified foreign trade. China’s exports to Africa will expand along with the economic growth in the continent, especially in Southern and Eastern Africa.
As noted in our “Special Report: Super Cycle” (published in November 2010), it was predicted that by 2030, China’s share in global GDP would increase to 24% from 9%, and the share of sub-Saharan Africa to 4% from 2%. If China and subSaharan African countries enjoy increasing importance in the global economy at the same time and have closer economic relations, China-Africa trade will have stronger potential for further development.
In addition, China-Africa trade volume will double by 2015, and reach US$1.7 trillion by 2030. In that case, China would replace the EU as Africa’s largest trading partner by 2032, which will probably bring about the following benefits:
* China still has a huge appetite for natural resources. China will import more crude oil from its current African trade partners and new oil-exporting countries. Ghana started to produce oil in 2010. Uganda is likely to join OPEC in 2013. Several state-owned Chinese oil companies are considering investing in the oil industry in the two countries. The Chinese government has already intervened. It is speculated that the major purpose of China’s US$13 billion loan on infrastructure construction to Ghana is to obtain oil. China’s strong exports to Liberia and Benin might also be paving the way for it to get offshore oil resources in the two nations. In addition to oil, China is participating in the mining industry in many African countries. Current trading partners in mining include Zambia, Congo(DRC) and South Africa. More trade in iron ore and metal is expected between China and Africa. China aims to obtain uranium and diamonds from Namibia and gold from Tanzania. Bulk commodity trade will continue to be a driving force behind the development of China-Africa trade.
* Africa is integrating into the global supply chain. A huge supply of cheap labor and proximity to European markets and other advantages have brought opportunities for Africa to integrate into the global supply chain. However, poor infrastructure is impeding its process of industrialization. This is especially true of the power and energy sector and the transportation facilities. The Center for Global Development’s report in 2005 Business Environment and Comparative Advantage in Africa calculated the gross total factor productivity in African countries by setting such variables as total profit, capital cost, labor cost. The results showed that the total factor gross productivity in Senegal and Kenya is higher than Bangladesh (one of Asia’s emerging production destinations, whose gross total factor productivity is slightly higher than that of Tanzania). However, if indirect costs on power and transportation facilities were included in the calculation, the gross total factor productivity of subSaharan African nations, except Senegal, would be lower than that of Bangladesh. This indicates that, if with good infrastructure, African countries are not far behind other nations in terms of manufacturing competitiveness.
* Since 2000, China has been financing the municipal works in subSaharan African countries. This will help improve their productivity in the long run. According to the World Bank report Building Bridges - China’s Growing Role as infrastructure Financier for Africa and the data we have, China’s funding for infrastructure projects in sub-Saharan Africa has seen exponential growth, from US$1 billion in 2001 to US$17 billion in 2010 (including US$13 billion in special loans to Ghana). These infrastructure projects include power plants, roads, railways and airports. African nations giving priority to industrialization such as Kenya and Nigeria should take advantage of China’s financial support to enhance their competitiveness and diversify their exports. From the Chinese side, such investment overseas will lead to larger and more diversified capital goods exports to Africa. Industrial development will also lead to higher wages and larger consumer market in Africa.
* China’s trade with southern and eastern Africa is catching up. Comparison between the regional distribution and the total GDP of China-Africa trade shows that central Africa leads the rest of Africa in terms of trade with China, with a huge amount of commodity trade with China. Other parts of Africa, southern and eastern Africa in particular, are catching up.
* Southern Africa is more popular than other areas thanks to its political stability, good infrastructure, and friendly trade environment. The World Bank’s 2011 Business Index ranked South Africa, Namibia and Botswana second, third and sixth respectively of all African nations in terms of popularity. Close economic relationship between South Africa and China will promote further growth of bilateral trade. In August 2010, South African President Jacob ? Zuma visited China and signed an economic cooperation agreement. At the end of 2010, South Africa was invited to join BRIC (Brazil, Russia, India, and China). The five nations will jointly hold an official summit every year. Establishing partnership with South Africa, the largest economy of the Sub-Saharan Africa and the actual leader of southern Africa, will give BRIC nations a strategic path into the African market.
* Eastern Africa. Widely believed to be poor in natural resources, eastern Africa has to some extent been neglected by China over the past decade. We predict that trade relations between the two sides will develop gradually. Chinese companies are following the emerging oil production in Uganda and the expansion of the mining industry in Tanzania. The rapid economic growth in Ethiopia, Africa’s second most populous country, will bring unlimited market potential. Kenya’s infrastructure, especially its development in ports, telecommunications and advanced financial industry, is China’s stepping stone to East Africa. With the establishment of the common free market in eastern Africa in July 2010, a free trade circle had formed in Kenya, Tanzania, Rwanda and Burundi, eliminating trade tariffs and barriers between the nations.
From trade flow to capital flow
Only through long-term, stable economic development in Africa and continued close economic cooperation between China and Africa, can the growth potential of ChinaAfrica trade be realized. This has laid a solid foundation for China’s economic strength to enter Africa. Since the start of the flow of trade, China has been exerting economic influence in Africa through the flow of capital, which drives the economic development in Africa and creates a broader market for deeper trade relations.
As mentioned earlier, China’ investment in infrastructure projects is one of the major ways of promoting capital flow in Africa. In 2010, China Export-Import Bank and China Development Bank agreed to make US$13 billion worth of special loan to Ghana to finance its infrastructure projects. Meanwhile, China Export-Import Bank granted Kenya US$97 million worth of loan to launch its geothermal resource projects, granted the African Development Bank US$100 million worth of loan to finance Zimbabwe and Burundi’ communications projects.
Another form of capital flow is foreign direct investment(FDI). According to the Chinese Ministry of Commerce, China’s direct investment in Africa increased from US$392 million in 2005 to US$5.5 billion in 2008, and dropped to US$1.4 billion in 2009 (mainly caused by the global financial crisis). Foreign direct investment is also led by the Government. China-Africa Development Fund was set up in 2007 as an equity investment fund under China Development Bank aimed at promoting Chinese enterprises’ investment in Africa. In October 2010, the fund invested part of its US$1 billion in initial capital and US$2 billion raised in Phase II, in over 30 projects, of which 10 projects were directly or indirectly associated with infrastructure and the rest were related with manufacturing and mining.
The strategy of supporting Africa’s development through capital flow puts China into a more advantageous position in further cooperation with Africa. At the same time, steady economic growth in Africa creates more market potential for Chinese enterprises, and ultimately stimulates trade flows.
China-Africa bilateral trade is only the beginning of the story. Expanding trade between these two rising economies has laid a solid foundation for further economic and trade cooperation.