Five ways China's economic crisis will affect Africa

Image source, AFP

Signs of an economic slowdown in China have led to fears of a global recession, including Africa, given the close ties it has built up with China in recent years.

BBC Africa Business Report's Lerato Mbele looks at five ways the continent could be affected:

The rand

South Africa's currency has taken the hardest battering because it is the only African currency traded on the so-called "carry-trade".

This is the money-market, where currency- and foreign-exchange brokers decide on the valuations of each nations currency. They look at the nature of the economy, its strength and its future prospects.

In this regard, South Africa is showing signs of weakness on the growth front, low productivity of the factory side and pull-backs on the mining side.

Together with volatile prices for its commodities such as gold, platinum and coal, traders have decided that the South African economy, and therefore its currency, will be risky to buy and invest in.

This is why the rand has lost nearly 8% of its value in the past week alone.

It is important to note that for other countries that buy and sell commodities, similar speculation would have occurred.

South Africa's stock market

Image source, AFP

South Africa will feel a secondary impact on its stock market.

The Johannesburg Securities Exchange (JSE) is the largest bourse in Africa and the 17th largest in the world.

That means the companies listed on the exchange are exposed to buyers and fund managers abroad.

About 40% of the daily trades on the JSE come from foreign traders, mainly in Europe and the US.

If these stockbrokers believe that the risks of buying shares in Africa outweigh the opportunities to profit from these stocks and bonds, they will withdraw their investments.

These trades happen at a click of the button, so in a day the JSE could lose millions of dollars.

In order to prevent this, the South African Reserve Bank has been asked to step in by imposing capital controls on how much money traders can withdraw from South Africa each day.

However, the bank refuses to take that action, saying it goes against the grain of a free market economy and will allow the markets to correct themselves naturally.

The only other option is to push up interest rates as this will reduce the debt on some of these stocks and reward those who invest their money over a longer period of time, with higher profits in the future.

Trade and investment

China is now the number-one trading partner for most African countries.

It also has more than $20bn (£13bn) in investments, in addition to development aid. That makes it a huge customer for African governments selling resources such as minerals and oil on the international market.

So in the medium-term a devaluation of the Chinese yuan could result in less demand for African goods - as they are priced in dollars that would make them more expensive for the Chinese.

Lower demand means Africa trades less and earns less. If that cycle continues over a much longer period of time, African states could see their economies shrink, government coffers running dry and eventually countries taking on more debt.

Image source, AFP
Image caption,
Chinese state companies are building a lot of infrastructure in Africa

However that is a worst-case scenario and not likely to happen just yet because the European Union and the US are also major trading partners and donors to Africa.

Trade between African countries is also on the rise, so regional trading relationships could offset the China-effect.

Where there may be a direct impact will be on the investment side. Chinese state companies have been on a huge drive to build roads, railways, power-stations and airports from Nairobi to Lagos.

With less money to spend, some of the infrastructure deals in the pipeline could be put on hold for a while longer. That does not bode well for industry and job creation in Africa.


Image source, EPA

Tourism is another sector that may bear the brunt of a Chinese economic slowdown.

The rise of China to become the second-largest economy in the world has made the Chinese wealthier and affluent.

As such they are becoming curious and vociferous travellers overseas. Africa is a choice destination for Chinese tourists because of the abundant wildlife here and favourable exchange rates.

A devaluation of the yuan means the Chinese have less to spend, so they may cancel their African safaris.

In South Africa, the situation is compounded by new complex visa regulations. For that country, the global volatility would create a double jeopardy for the local tourism industry.


Countries such as Angola, Zambia and Sudan may also feel the effects on the fiscal side.

China is known to have negotiated a favourable trade-exchange to buy oil cheaply in Angola. In return, Beijing has provided loans to the national oil company.

Without that buffer from China, Angola's economy may suffer an even bigger setback on the back of the 50% collapse in global oil prices which happened earlier this year.

Image source, AFP
Image caption,
Chinese traders have opened up businesses across Africa

Zambia has a large community of Chinese immigrants who have built successful businesses in the retail and construction industries.

It is not clear whether they receive any subsidies from China, but if they do, this support may be reduced.

While South Sudan is celebrating the signing of a peace deal, its spirits will be dampened by the news from China, which is a major buyer of its oil.

China is also a potential builder of the much-needed pipeline to take oil from the South to Sudan, a key part of the peace process between the two former enemies. If China is feeling the pinch, it may be forced to change the commercial terms of its oil deals with South Sudan.

On the whole, China has built up strong partnerships in Africa and its will take more than a wobbly in global financial system to reverse that.

The Chinese commitments already made, such as assembling the first Africa-made smartphone in Ethiopia, should still happen.

This is mainly because these days China's private companies have enough cash-reserves and profit motive to come to Africa, without relying on capital from the state.

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