As China goes, so goes Africa. If the Chinese economy continues to cool, the raw material and commodity exporters of Africa will suffer correspondingly. Neither American nor European buyers will be able to replace Chinese purchases.
Two surveys released in early April revealed that China’s manufacturers are struggling to maintain their accustomed high levels of output. A purchasing managers’ index fell to an eight-month low of 48, indicating that small and medium enterprises, at least, are contracting. A separate survey of large, state-owned, businesses showed a better result, at 50.3, implying mild expansion ahead. Both polls, taken together, suggest little likelihood for a major uptick in manufacturing in the near future. China is struggling almost for the first time to maintain a GDP year-on-year growth rate over 7 percent. Two years ago the Chinese economy grew at more than 8 per cent annually. Last year China achieved a 7.6 percent growth rate. But in 2014, growth has slowed further.
More worrying are the failures of two companies to pay interest on their bonds. In April, a manufacturer of construction materials could not meet $3 million (18 million renminbi) interest due on the domestic high-yield (junk) bonds that it sold last year, as China began to create its new bond financing channel for small- and medium-sized enterprises. Those bonds, like the bonds of dozens of similarly-placed companies, had been paying attractive interest rates of 10 percent per year. Business losses made the default necessary, with bond-holders taking the hit.
In March, a much bigger solar cell and panel maker also defaulted on its annual corporate bond payments. It had been due to pay almost 90 million renminbi on a 1 billion renminbi bond. Again, weak business conditions forced the solar company to end its payments and shut down. In March, too, a small property developer in a coastal city collapsed after being unable to pay an outstanding debt of more than 3.5 billion renminbi.
These are all novel and worrying developments in a Chinese economy that has been advancing strongly for at least a decade, and pulling Africa economically upwards at the same time. Africa does sell its mineral, its petroleum, and its timber to Europe, America, Japan, India, and other Asian nations as well as to China. But Chinese needs have increased global demand and elevated prices. Given the state of their own economies, neither Europe nor America will be able to pick up any slack resulting from a Chinese slowdown.
Africa should not feel a downdraft of demand in the short term, but over the medium-term any loss of appetite on the part of Chinese industries will affect the social and economic fortunes of even the wealthiest African petro-states. Little Liberia depends on Chinese purchases of oil and iron ore. The Sudan and even South Sudan ship their oil to China. If China needs less oil, or if an abundance of petroleum reduces prices per barrel, the fragile economies of Africa (such as the two Sudans) will struggle even more than they now do. Copper producers in Zambia and the Democratic Republic of Congo will also be compelled to mine and ship less if China’s demand for copper falters.
Fortunately for the continuation of Africa’s average 5 percent annual growth trajectory, Chinese decision-makers and captains of private and state-owned industry look ahead, both medium- and long-term. Chinese concerns are busily seeking new petroleum and gas prospects off Africa’s Indian Ocean coast, and inland in countries such as Uganda. That prospecting will continue, as will the many major dam-building projects, the road and rail construction efforts that are ongoing, and the other infrastructural pursuits that Africa so desperately needs and welcomes. China’s contracts for all of these endeavors are of lengthy duration and neither party will want them to be discontinued.
Yet, African policy leaders will have to watch what is happening in China very carefully. If the three unexpected corporate defaults are followed by others, if Xi Jinping’s anti-corruption drive destroys the rents and therefore some of the incentives for industrial and service expansion, if American and European economies fail to return to growth and therefore demand fewer goods from China, and if Chinese domestic demand contracts more than is currently anticipated, Africa will be compelled to tighten its various national belts just at the moment when their populations are beginning to grow exponentially.
A China weaker economically, even if marginally, will not be good for Africa. Too much of Africa’s recent prosperity depends on China’s own continued prosperity and rapid growth. For that reason, it is not only important for Africa that China remains its engine of growth but it is also important for the United States and Europe, which also need an Africa that is robust economically and strengthening socially and politically.
This post appeared under the same title in China-US Focus, April 4, 2014, http://www.chinausfocus.com