Trade winds set to gather strength

Rising consumer spend in Africa is good news for Chinese firms

For all the spectacular growth in recent years, China-Africa trade has been largely confined to exports of oil and other mineral resources from Africa and, until recently, exports of textiles, clothing and low-value machinery from China.

The components of this trade are changing fast, however. Exports of high-end machinery, telecoms equipment, electronic and electrical products, and automobiles from China to Africa have risen sharply in the past few years. These high-end items now account for the majority of China's exports to Africa, and support its growing involvement in building infrastructure across the continent and rising investments in Africa's energy and minerals exploration sector.

In the other direction, natural resources are likely to dominate Africa's exports to China in the coming years given China's growing appetite for energy and its push to diversify its energy and mineral sources away from the Middle East. A third of China's oil imports now come from Africa.

From South Africa to Somalia, governments are opening up their economies to foreign direct investment to climb up the value chain. Chinese companies, in partnership with the government, have responded with billions of dollars of investment in roads, railways, ports, airports and power plants - at least partially filling Africa's estimated $93-billion annual infrastructure funding gap. As infrastructure develops, so will Africa's attractiveness to companies catering to the global supply chain. This will help the continent diversify away from resource exports.

The food-processing sector could be a big winner for Africa as it pursues more value-added exports. The continent is home to 60 percent of the world's uncultivated but arable land. Moreover, only 10 percent of its cultivated land is plowed by tractors and just 4 percent of that land is irrigated.

Introducing scientific farming techniques to boost productivity, and then feeding the output to food processing companies and linking them to a pan-African and global distribution network could not only create millions of jobs in the continent, but also increase local food supply.

The rise of the African consumer is another big emerging trend. Standard Chartered Research estimates that consumer spending across Sub-Saharan Africa will increase to $1 trillion by 2020 (from $600 million in 2010). This links well with China's own development plans as it looks for new markets for its higher-value goods and services.

China's companies are starting to harness this relatively untapped consumer market. Traveling across Africa, one sees newer and lower-priced "made-in-China" cars gaining market share against traditional competitors from Japan and Europe. The same is true of Chinese high-tech electronic goods and home appliances, which compete against products from South Korea and Japan.

Chinese companies are also becoming increasingly integrated in African economies, creating trade networks not just between China and Africa, but also within Africa and between Africa and the rest of the world. Many are considering moving their manufacturing bases to the continent to get closer to the market, as reflected in China-funded special export zones in Ethiopia, Nigeria, Zambia, Mauritius and Egypt.

This integration is being facilitated by the three regional trading blocs: the Southern African Development Community, the Common Market for Eastern and Southern Africa, and the East African Community. These new trading blocs have played a defining role in jump-starting trade within the continent, and the next logical step would be to combine these regional economic communities to form an Africa Free Trade Zone, spanning the entire length of the continent from Cape Town to Cairo.

Such a pan-African trading bloc would encompass more than 630 million mostly young people, a GDP of $1.2 trillion, some of the world's most bountiful natural resources, and the world's largest uncultivated arable land. Given Africa's growing middle class and increased political and financial stability, the proposed free trade zone could rival the world's other economic unions, giving African states the necessary power to negotiate free trade agreements with other trading blocs.

Another mega-trend emerging along the China-Africa corridor is the growing circulation of the renminbi across Africa. Soaring trade, rising direct investment by Chinese companies, and financial aid and subsidized loans from the Chinese government and its agencies provide a solid base for the regionalization of the renminbi in Africa.

Africa-China trade settlement denominated in the renminbi totaled about $5.7 billion in 2012, or about 3 percent of annual trade. Looking at it from another angle, Africa constituted 5 percent of China's global trade that year, but its trade settlement in the renminbi was just 0.2 percent of total in the Chinese currency. Thus, there is significant scope for growth. Since a major part of China-Africa trade consists of commodities, the big shift will come when commodities start being priced in the renminbi instead of US dollars.

As the renminbi gains acceptance as a trade-settlement currency, African central banks are likely to diversify their foreign exchange reserves to include the Chinese currency. The renminbi is already part of central bank reserves in Angola, Nigeria, Tanzania, Ghana, Kenya and South Africa. As Beijing allows greater renminbi convertibility (Standard Chartered expects full convertibility on the capital account by the end of this decade), it will become increasingly attractive as a reserve currency.

Trade is only the start of the current phase of the China-Africa story. As the partnership evolves, Africa is set to emerge as a key manufacturing base for China's top companies. Dim sum bond issuance can be expected from African governments and some of the continent's biggest companies as they look to finance their investment plans. And before long, the renminbi is also likely to become a core component of African central banks' reserves.

The author is chief executive officer of Standard Chartered China. The views do not necessarily reflect those of China Daily.

(China Daily Africa Weekly 05/09/2014 page14)