China and Africa Develop a Close Economic Union
Policy + Politics

China and Africa Develop a Close Economic Union


Over the past decade, African exports have boomed: total volume tripled to more than $330 billion. This is according to a new report published by Fitch. That growth, predicated largely on an ever-shifting global workforce of cheap labor, has largely been fueled by China.

During the period, Chinese demand has ramped higher than that of other purchasers. In 2000, just 5% of exports from the continent ended in a port or runway in China. Today that figure stands at 17%, nearing the same levels as U.S. and European purchases.

In a new report titled The Africa-China Connection, Fitch documents China's growing influence in the block.

"China’s engagement with Africa can be classified into three rationales: its dragon-sized appetite for resources, new export markets and new investment opportunities," says Fitch analyst Kit Ling Yeun.

The Pacific behemoth has used cheap credit, along with a special loan program, to incent development in the region — as well as itself.

Federal direct investment has centered heavily around mining and manufacturing. FDI reached $11.1 billion in 2010, or about 4% of total investments. That is relatively low compared to other regions like Latin America, which accounts for 14% of Chinese direct investment.

But these federal investments have not kept pace with overall loans written. China's Export-Import Bank and the China Development Bank have underwritten billions in debt for African sovereigns.

Between 2000 and 2010, Fitch estimates that the Export-Import Bank provided $67.2 billion in debt financing for projects including infrastructure expansion, energy plants, telecommunication services and water supplies. The World Bank provided about $12.5 billion less over the same period.

The China Development Bank deployed the China-Africa Development Fund in 2007, which partners private Chinese ventures with African companies. The bank's mission is of "strengthening China's competitiveness and improving the living standards of its people." However, in doing so it has raised more than $1 billion for African industry, with expectations for that figure to quintuple by 2015.

The work has built a robust market for African goods, now representing more than 30% of Angola exports and 18% of Congolese exports. Below is data from the International Monetary Fund and the United Nations Conference on Trade and Development, documenting the rapid growth in sub-Saharan Africa exports to China.

Fitch calls the Sino-Africa connection a "potential win-win situation," creating a strong export market for African countries while China gains a consistent commodity supply stream.

And the ratings agency is not alone. Deutsche Bank recently called it the new frontier, forecasting it to match a BRIC-like pace of economic expansion.

"Stronger linkages with China and other rapidly growing markets have also added impetus to growth," Robert Burgess, EEMEA Chief Economist at Deutsche Bank, says. "Almost half of sub-Saharan African exports now go to emerging and developing markets compared with less than one-quarter in 1990."

Risks remain when investing in the continent, as ethnic fighting and political instability heightens uncertainty. Fitch also noted that China may not always be good for the resource-rich continent.

"The challenge for Africa is to maximize the wider benefits in terms of growth, employment and transfer of expertise, while avoiding the risk of taking on too much debt and using it for consumption rather than investment," Yeun says.