‘When China sneezes, Africa catches the flu.” This expression has never rang truer than last year when African exports to China dropped 42 percent by value, hit by a slump in commodity prices and a slowdown in the Chinese economy.
According to a research note by Standard Bank, the value of African exports to China fell by 42 percent to $67 billion last year from $116bn in 2014, while China’s exports to Africa held up pretty well with Chinese companies exporting to Africa goods worth $102bn last year compared with $106bn in 2014.
While the overall value of trade between China and Africa stood at $169bn last year, it has become increasingly clear that the second biggest economy in the world is enjoying a huge trade surplus with Africa, which supplies mainly raw materials to fuel China’s rapid industrialisation, urbanisation, and infrastructure development.
On the other hand, China exports anything from clothes and textiles to high-value electronic goods and vehicles to Africa.
In a published research note, Simon Freemantle, a Standard Bank senior political economist, wrote: “What is now unambiguously clear, however, given both the reduction in the value of African exports to China is that China is running a large trade surplus with Africa.
“Last year, this surplus amounted to $35bn.
“By comparison, in 2014 the US ran a trade surplus of just $4bn with Africa, while the EU and Japan both ran trade deficits with Africa, of $2bn and $6bn respectively.”
Freemantle noted that the imbalance in the trade relationship between China and Africa was “obviously problematic”, where China buys raw materials from Africa and then sells manufactured goods to the continent.
“This presents political challenges for Beijing, which has until now aimed to position itself as an equal, and developing world, counterpart in its commercial and political engagements with Africa,” he warned.
African exports could take another pounding this year if Daniel Ameduri’s prediction of China’s economy imploding into a recession comes to pass as the East Asian country’s centrally planned economic “miracle is now turning into a nightmare”.
Ameduri, president of US-based financial advisory website FutureMoneyTrends.com, argues that the slide towards recession by the Chinese economy is a disaster for commodity investors and producers.
“Ghost cities and $50bn bridges to nowhere were all part of an economy and job market built on air. Now, as reality sets in for China’s future growth, a new reality needs to set in for investors: the fact that we have no idea what will be China’s new normal, because even once they hit bottom, they’ve already built cities for the next 20 years,” he says.
“Think of the harm this has done to a construction worker looking to enter the workforce in five years. What’s the point? The cities of 2025 were built in 2010.”
While Ameduri’s prognosis on the Chinese economy is bearish, Freemantle is somewhat bullish as he banks on Chinese companies to continue extending their global reach to offset weak markets back home.
“Further, the Chinese government appears to remain convinced of Africa’s long-term potential, and is able to secure meaningful commercial and geopolitical access with fewer of the barriers, and costs, that exist in comparable frontier and emerging economies in Latin America and the Middle East,” says Freemantle.
The South African Chamber of Mines, representing 72 companies responsible for producing more than 90 percent of the country’s mining output, is optimistic that commodities will rebound despite the weak global economy and China’s economic woes.
Spokeswoman Charmane Russell said: “Mining is and always has been a cyclical business. The mining industry is predominantly a price taker as commodity prices are set by international markets and are dependent on many variables outside the control of the industry.
“That said, there is no aspect of modern life that can do without the products of modern mining. We are cautiously optimistic that commodity prices will improve in the medium to long term.”
In these tough times, commodity producers and mining companies are forced to manage their costs effectively to ensure their operations are profitable.
Russell said a failure by commodity prices to rebound could lead to job losses and lower tax revenues for governments. – GetBiz