Dec 28 - Fitch Ratings says that the Africa-China connection has become an important element in Sub-Saharan Africa’s (SSA) growth story. Aided by China’s own rapid development and growing strategic interests in commodity markets, Africa has not only become an important trade partner for China, but also a key beneficiary of Chinese capital investment abroad.
Trade flows between Africa and China have grown rapidly and are broadly balanced, essentially involving an exchange of African raw materials for Chinese manufactured goods. While a few commodity-rich African economies run large trade surpluses with China, notably Angola and Zambia, the majority run trade deficits. China is Africa’s second largest source of imports (behind Europe) and third largest export market (behind Europe and the US). Fitch expects China’s importance to African trade to continue growing.
Economic ties between China and Africa are also characterised by China’s increased role as a lender and investor to the region. The absence of “political strings” imposed by Western governments, such as governance and environmental conditions, combined with competitive terms make Chinese loans an attractive and cheap source of credit for African countries.
Significantly, Chinese loans outweigh levels of Chinese foreign direct investment (FDI) in SSA, with the latter remaining far below those of traditional Western sources. The accumulated Chinese FDI stock in SSA up to 2010 is estimated at USD11bn, equivalent to just 1.1% of SSA GDP.
The largest Chinese lenders to Africa are China’s Export-Import Bank (EXIM) and China Development Bank (CDB). Fitch estimates that between 2001 and 2010, EXIM loans to SSA reached USD67.2bn, overtaking World Bank lending of USD54.7bn to Africa for the same period.
Chinese lending and investment into Africa is highly diverse. Mining continues to attract most FDI to the region; EXIM bank lending targets infrastructure development through its trademark “package loans”; CDB via its China-Africa Development Fund (CADF) and special SME loan programme aims to promote local market and business development in various sectors, including manufacturing, services and commodities.
China’s financial involvement is not always fully transparent and debt management capacity of recipient countries is often weak. There is therefore a risk that some African countries could borrow too much on non-concessional terms, leading to an unsustainable debt burden. Meanwhile, mining investment usually has a low labour intensity, while China traditionally provides much of the labour and materials for the infrastructure projects it finances. As a result, improving local employment participation levels and capturing Chinese industrial ‘know how’ remain long term challenges for Africa’s involvement with China.
Chinese trade and financial links are therefore not without potential downside and do not offer a quick fix to improved living standards for Africa. However, they are providing an important contribution to filling Africa’s substantial infrastructure gap and if the resources are used effectively could help set Africa on a faster development trajectory over time.
Link to Fitch Ratings’ Report: The Africa-China Connection