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EXECUTIVE SUMMARY Economic growth in Sub-Saharan Africa (SSA) has averaged roughly 5 percent per year over the past decade, improving living standards and bolstering human development indicators across the continent. Stronger public institutions, a supportive, private sector–focused policy environment, responsible macroeconomic management, and a sustained commitment to structural reforms have greatly expanded opportunities for countries in SSA to participate in global markets. In recent years, many countries in the region have benefited from an increasingly favorable external environment, high commodity prices, and an especially strong demand for natural resources by emerging economies, particularly China. China-SSA trade has rapidly intensified since the late 1990s and in 2013 China became SSA’s largest export and development partner. China now represents about a quarter of SSA’s trade, up from just 2.3 percent in 1985. About one-third of China’s energy imports come from SSA—a vital trade link, especially as energy consumption rates in China have grown by more than twice the global average over the past 10 years. Despite increased efficiency and rising domestic production, rapid urbanization and heavy industrialization continue to spur robust Chinese demand for coal, oil, and natural gas. China’s banks, notably the People’s Bank of China, the China Development Bank, and the Export-Import Bank of China (Exim Bank of China), have supported large-scale investments in African infrastructure. More than 2,200 Chinese enterprises are currently operating in SSA, most of them private firms (UNCTAD 2014; Shen 2014). Diplomatic contacts and bilateral aid and cooperation initiatives have greatly expanded,1 and the Forum on China-Africa Cooperation, formed in 2000 and convened every three years, has become the primary institutional vehicle for China’s strategic engagement with SSA. * Miria Pigato, Practice Manager, Macroeconomics and Fiscal Management Global Practice, World Bank; Wenxia Tang, consultant, Macroeconomics and Fiscal Management Global Practice, World Bank. The authors gratefully acknowledge the financial support of the Multi-Donor Trust Fund for Trade & Development 2 (MDTF-TD2). 2 After expanding at an average annual rate of 10 percent through the early 2010s, growth of China’s annual gross domestic product (GDP) has slowed to 7.5 percent during the past two years. The doubling of Chinese capital stock between 2005 and 2011 has resulted in excess production capacity and the rate of return on capital is declining. Meanwhile, average household consumption remains low by international standards. The Government of China has responded by initiating a gradual process of economic rebalancing designed to shift the economy toward a more sustainable model, one in which growth will be driven less by investment and exports and more by domestic consumption. These policies will be complemented and sustained by the continued implementation of deep structural reforms to promote a more open and competitive private sector. The rebalancing of the Chinese economy will not only have profound domestic implications, but will also permanently alter the pattern of international trade and investment flows, presenting important challenges and enormous opportunities for developed and developing countries. China’s lower growth rate and changing demand composition are already affecting commodity prices, with particularly strong impacts on global mineral markets. At the same time, the tripling of Chinese labor costs over the past decade has enabled countries with large labor forces and low wage rates to compete with Chinese producers and even attract investment from Chinese firms. This report explores the impacts of China’s economic rebalancing on its trade and investment partners in SSA. The report uses information from the Government of China as well as international databases and individual case studies to review the latest available information on China-SSA trade and foreign direct investment (FDI)2 flows. The objective of the report is to contribute to an informed policy debate as to how SSA can leverage the complex changes taking place in the Chinese economy to accelerate growth, enhance development outcomes, and maximize the benefits of SSA’s increasingly strong ties to one of the world’s most dynamic economic powers. Key Findings Despite China’s slowing economic growth rate, Chinese trade with SSA has continued to expand at a rapid clip, reaching a total value of US$170 billion in 2013. China has recently overtaken Europe as SSA’s largest export partner, and regional economies are becoming increasingly vulnerable to changes in international commodity prices and Chinese demand conditions. The composition of China-SSA trade is not symmetric, with SSA importing a wide variety of consumer and capital goods and overwhelmingly exporting primary commodities, especially oil, minerals, and other natural resources. This pattern has become even more extreme during the past five years; agricultural goods now represent a mere 5 percent of SSA’s total exports to China. China’s rapid industrialization has accelerated growth in many countries in SSA, particularly those rich in natural resources. Because of their widely different export profiles, there is no evidence that China has displaced exports from SSA in third-country markets such as the European Union or the United States. Many of China’s and SSA’s exports are highly complementary. Chinese exports to SSA have benefitted consumers, but they have also put significant pressure on domestic producers. Firms in SSA have faced significant competition from Chinese imports during the 2000s, partly because of the appreciation of the real exchange rate. The appreciation of the real exchange rate in SSA countries was the result of the peg of the exchange rate to other currencies (in particular to the euro), the surge in exports of natural resources and raw materials, and the amount of financial assistance from international donors, including China. 3 SSA is not fully exploiting its comparative advantage in agriculture to expand its export presence in the Chinese market. An analysis of the evolution of revealed comparative advantage (RCA) over the past 10 years shows that Africa has been losing competitiveness in all sectors, with the only exception being certain non-oil natural resources, mostly ores and metals. SSA manufactures have the lowest RCA of any export category and the competitiveness of agricultural exports appears to be eroding over time. These trends likely reflect structural inefficiencies and logistical constraints in Africa; however, China’s relatively high tariffs on agricultural imports (15.1% in 2014, down from 18.1% in 2002) may have also contributed. . Chinese FDI in Africa surged during and in the wake of the global financial crisis and continues to diversify. FDI flows from China to SSA rose from next to nothing a decade ago to US$3.1 billion in 2013, representing 7 percent of global FDI flows to SSA. China has established itself as a major investor in Africa, a dynamic that runs parallel to China’s growing trade involvement. China’s FDI stock in SSA reached nearly US$24 billion in 2013, reflecting an annual growth rate of 50 percent between 2004 and 2013 (MOFCOM 2003-2014; Copley, Maret-Rakotondrazaka, and Sy 2014). The global economic crisis of 2008–09 marked the beginning of a major expansion in China’s engagement with SSA, in scope and in scale. While some foreign investors moved out of Africa, Chinese firms, already well leveraged at home and encouraged by the Chinese government, expanded their overseas operations. Mergers and acquisitions (M&As) surged and commercial lending and other financing arrangements set new records. Oil and other extractive industries remain the sectors of greatest interest to Chinese investors (at 30 percent of total investment), but Chinese FDI has recently undergone a marked diversification into financial services, construction, and manufacturing. Geographically, Chinese FDI continues to be concentrated in Nigeria, South Africa, Sudan, and Zambia, but it now extends across the continent. Chinese manufacturing firms have invested in countries as diverse as Ethiopia, Nigeria, and Tanzania. A review of a sample of Chinese greenfield investments in SSA during the past decade reveals the rising importance of the manufacturing sector and the increasingly significant contribution of Chinese FDI to job creation in countries across the continent. Because of different methodologies, official data on Chinese financial flows differ from data from other sources. . For example, the China Global Investment Tracker (CGIT) puts total Chinese FDI in Africa at US$61 billion in 2013, more than double the official figure. In 2013, the value of Chinese contracts, a proxy for committed investment flows, reached a staggering US$82 billion (CGIT, American Enterprise Institute and Heritage Foundation 2014). China’s financial involvement in Africa is complex and multifaceted and reliable information is not always easily accessible. However, Chinese banks appear to have provided some US$52.8 billion in loans to African countries during 2003–11, equal to 2.8 percent of China’s GDP. Similarly, little information is available on investment flows from countries in SSA to China. SSA’s investment in China appears to be increasing, but remains marginal by international standards. South Africa is the only country in SSA with a significant investment presence in China (leaving aside Mauritius and Seychelles, which are offshore financial centers). Financial flows from countries in SSA to China are dominated by trading companies, often subsidiaries of Chinese firms supporting the business of their parent companies. Despite the broad diversification of Chinese investment, countries in SSA have attracted limited attention from large, export-oriented firms. Although there are exceptions—notably the Huajian shoe factory in Ethiopia and the Yuemei group in Nigeria—Chinese investment has tended to focus on activities related to extractive industries, such as the processing of mineral ores or the 4 production of liquid natural gas. Faced with rising domestic labor costs, Chinese firms have started to relocate some of their low-skilled production lines to other countries. SSA offers abundant, inexpensive labor and proximity to Europe, but so far only a few Chinese manufacturers have moved to exploit these advantages. As a result, the percentage of goods produced by Chinese firms in SSA for export to Western markets is insignificant. Consequently, African firms are not position themselves within China’s value chains, which limits the impact of Chinese investment on economic transformation and export diversification in SSA. Several explanations have been offered for SSA’s weak integration into Chinese and other international production networks, including the small size of many economies in SSA, the low capacity of critical public institutions, the absence of complementary private markets, bottlenecks in essential infrastructure, and the lack of regional integration, all of which can make the establishment of large economies of scale very difficult to achieve. The rise of Chinese private investment, particularly in the manufacturing sector, could have a transformative impact on growth and development. The rise of Chinese private investment in Africa is a new and relevant phenomenon. Most interestingly, private companies are not creating establishments in government-sponsored special economic zones (SEZs), which are in fact struggling to survive. The easing of regulations on outward FDI in the mid-1990s and after the global economic crisis, coupled with the increasing saturation of the domestic market in China, are the key drivers of this development. In many countries (e.g., Tanzania), Chinese small private firms are becoming a significant source of jobs and income and have productivity-enhancing spillovers, but they are competing with domestic firms in the local market. Over the longer term, leveraging Chinese investment to support broad-based growth will require policies designed to boost the competitiveness of sectors in which China’s economic rebalancing may create a comparative advantage for SSA. To date, few African countries have been able to benefit from large-scale Chinese investment outside the resource sector. However, as China’s growth slows and its economy shifts toward a more consumption-driven model, it is likely that global demand for resource imports will slow as well. Countries with the most heavily concentrated export mix, particularly in the mineral and oil sectors, are the most vulnerable to China’s economic rebalancing and should be ready to adopt measures to mitigate the impact of negative terms-of-trade shocks. By contrast, as wage rates in China continue to rise and firms refocus their attention on domestic demand, countries in SSA will be well positioned to exploit emerging opportunities for investment in export-oriented manufacturing. Ethiopia provides an instructive example, as its inexpensive yet relatively skilled labor force, coupled with the government’s proactive efforts to court Chinese investors, have enabled Ethiopia to attract substantial investments in labor-intensive industries. Infrastructure enhancement, workforce development, and good-governance reforms offer a promising strategy for many countries in the region. Although the establishment of industrial zones has yielded mixed results, several salient success stories warrant careful attention. This report discusses how Africa could take advantage of the untapped opportunities offered by China’s progressively intensifying investment and trade ties with SSA. It is hoped that this analysis will enrich the ongoing dialogue between policy makers, private firms, and civil society regarding China’s increasingly important role in the growth and development of Sub-Saharan Africa.
Access and download the full World Bank Investing in Africa paper at: http://www.worldbank.org/content/dam/Worldbank/Event/Africa/Investing%20in%20Africa%20Forum/2015/investing-in-africa-forum-china-and-africa-expanding-economic-ties-in-an-evolving-global-context.pdf