China’s development decisions are critically important for Africa. In Lagos, Addis and Johannesburg, China’s surprise yuan devaluation has African analysts scratching their heads.
Obviously Chinese goods will be cheaper in Africa, and African exports more expensive in China. So far, this decision is just a tremor, not a quake. Yet why did China devalue, and what is this likely to mean for Africa?
To understand China’s devaluation, we need to take a step back. Beijing has been trying to manage China’s enormous structural transformation ever since Chinese leaders made their historic decision to move out of poverty by turning to the market in the late 1970s. Their supercharged development model depended on low wages, high levels of foreign and public investment, and rapidly expanding, cheap exports.
Today, China is an upper middle income country with more expensive labor. Their economy is increasingly based on domestic innovation, consumption, and exports of high-tech products. Chinese firms have become significant foreign investors themselves with interests outside China’s borders.
This has been mainly good news for Africa. China’s growing reserves were recycled into large loans for infrastructure finance across Africa. Prices for African commodities rose with Chinese demand, helping underpin a long period of sustained — if unequal – African growth. Trade between Africa and China skyrocketed to $220 billion in 2014, nearly three times the U.S. level. Consumers benefited from low cost cell phones and other goods. On the down side, African manufacturing suffered from the competition with Chinese imports. Critics charge that China’s embrace — like that of other major powers — has not budged African economies away from high dependence on raw material exports.
The devaluation is a step backward in China’s strategy. Chinese authorities had pressing, but short-term political and economic reasons to devalue. Beijing’s policy-makers need to avoid rocking China’s political stability, while still pushing forward with measures that might cause temporary pain as they transform into a high income economy. Slower growth is now necessary, but this needs to be gradual, not dramatic.
In 2015, China’s economy began to slow a bit too rapidly. The Chinese had been using their foreign exchange reserves to prop up the yuan against the challenge of a strong dollar. This pushed their currency to appreciate by 14% over the past twelve months.
The stronger yuan led to a drop in Chinese exports: 8.3% in July alone. That month, China’s factory sector experienced its largest contraction in two years, leading to layoffs. Combined with the recent stock market crash, this was too much change, too quickly.
Last week’s decision allowed the market a greater role in setting the yuan’s value, and it promptly fell. This should lead to a modest export recovery but will do little for the long term goal of continued transformation.
Long-term view
So far, China’s devaluation has been fairly modest — about 4% — but how will this be felt in Africa?
– Prices for African commodities will worsen, then improve. In recent years, China’s slower growth has pushed down prices for gold, crude oil, copper, platinum and iron ore. South Africa’s mining sector was expected to lose over 10,000 jobs due to lower demand.[vi] In response to China’s devaluation, global prices for crude oil and some other African commodities fell further.
These goods have now become more expensive for Chinese buyers using yuan to buy inside China, leading to even lower demand. Yet over the medium term, if growth in China picks up as a result of the devaluation, demand for Africa’s commodities will increase, and prices should recover.
– Africa will import even more from China. Cheaper Chinese exports will please African consumers while putting Africa’s manufacturers at a further disadvantage. There will be more pressure for tariff protections.
Lower cost steel imported from China will hurt African steel producers, but will benefit other manufacturers who use steel in their products. Chinese tourists will be more likely to vacation at home as African safaris become relatively more expensive.
– China’s African investments will be helped — and hurt. The appreciation of the Chinese yuan had eroded the value of profits from Chinese investments abroad when transmitted back to China and exchanged into yuan. Now, Chinese investors will see their profits from African investments automatically rise (in yuan terms) and this could lead them to expand.
On the other hand, new investors will find that they have to pay more (in yuan) to buy dollars for overseas investments. Furthermore, low wages in Ethiopia and elsewhere had been attracting significant factory investment from China. With costs now relatively lower in China, the push to relocate factories overseas will slow. This will save Chinese jobs, but postpones Africa’s own structural transformation.
In the short term it is hard to see how this devaluation can help Africa, notably its productive and export sectors. But if this step backward works, China will bounce back and Africans will benefit.
