One of the most important developments of the last twenty years has been the emergence of China as a major player on the world stage. As China invested in infrastructure and developing its primary and light industrial manufacturing sectors, it developed an almost insatiable hunger for resources. This hunger, together with the uncomfortable fact of America’s strong position in the Middle East and Latin America, drove China to focus on Africa. China has poured money into Africa in the form of investment in mines, low-interest loans to African states, and financing for investment projects. But the times, they are a-changing. At least, according to Martyn Davies. In this interesting contribution, Martyn looks at how changes in the domestic Chinese economy are likely to drive changes in the way that China interacts with Africa. Although the China/Africa relationship is likely to grow over the next few years, Martyn argues that this will be driven more and more by private Chinese companies, and less and less by the Chinese state.
By Dr Martyn Davies*
The FOCAC (Forum on China-Africa Cooperation) ministerial meeting held in Beijing last year in July 2012 upped the ante of China’s pervasive engagement of Africa. But despite the Chinese government pledging a further sizeable sum of US$20bn in investment to Africa over the next three years, I believe that China’s state-directed capital toward the continent will become less significant to the growing trend of Chinese market-driven outbound investment. This is for three reasons:
First, the light industrial manufacturing component of the Chinese economy is now passing through the “Lewis Turning Point” as the cost of production is now surpassing gains in productivity. This portends the start of a long-term trend of offshoring of China’s low-end labour-intensive manufacturing sector. Whilst China will remain a very competitive manufacturing economy at least over the medium term, rising production costs will encourage and force Chinese firms to relocate their operations abroad. A part of this offshoring could find its way to Africa.
Secondly, the so-called “rebalancing” of China’s economy with the gradual shift away from extremely high rates of fixed asset investment – sometimes over 50% of GDP – will result in a less resource-intensive growth model in China. The imperative – or perhaps “strategic desire”- for resource security by the policy planning bodies in Beijing will as a result lessen over time. This will feed into policy making and could well temper state-owned enterprises appetite for big transaction assets in Africa.
Thirdly, the peak of state-owned enterprise dominance in the Chinese economy was reached at the end of the Hu Jintao administration exacerbated by the significant fiscal stimulus spend from early 2009 to late 2012 – the bulk of which went into the coffers of SOEs. Recent reform measures and questioning of existing state-led developmental models under the Xi Jinping Government may also result in a review of China’s SOE-led outbound investment forays. This will be particularly the case with China’s policy banks and their financing of SOEs. This could well have a knock-on effect of Chinese state-driven investment abroad and into Africa.
The Environment of Enabling Politics
At the last 2012 FOCAC meeting – a vehicle for China-Africa political dialogue that meets every three years – African policy-makers were intent on winning Chinese “pledges” in the form of foreign investment, concessionary loans, grants and aid – Chinese “state capital” – into their economies. This is a wise strategy. A politically-welcoming environment amongst African governments is of paramount importance for Chinese capital. In numerous “western” countries, there have been government attempts to block Chinese investors from acquiring local assets in telecoms, in computer hardware and in mining. In Africa, however, there has yet to be a political obstruction to a Chinese investment on the continent.
Despite the slowing down in China’s economic growth rate, its outbound investment continues to increase rapidly. In the first half of 2012, China’s outbound direct investment (ODI) rose 48.2% year-on-year to US$35.42bn. The main thrust of the ODI was from China’s SOEs receiving both encouragement from China’s Ministry of Commerce and capital from the policy banks to do so, pursuing “strategic national interest” in international markets, most often resources focused.
China’s state-capitalist confidence has been fuelled by the US$600bn-odd stimulus package during the western financial crisis, the bulk of the spending being routed through the SOEs. Arguably, we have reached the peak of the Chinese state’s influence over its SOEs as well as its ability to direct the commercial interests of these enterprises into the global economy. I would argue that China’s slowing economy will encourage the process of internationalisation of Chinese enterprises, be it either state-owned or private business.
From State Capitalism to the Market
Chasing Beijing-influenced SOE investment into Africa will be Chinese private companies. Over the past decade or so, Chinese activity on the continent could be divided into two simple categories, large firm SOE investment and Chinese micro-enterprises made up of migrants either trading or selling. A new type of Chinese investor will be coming to the continent in the medium term – growing private firms that best represent the real competitiveness emanating from the Chinese economy.
In previous high level Chinese and African Government interactions, there has been little focus placed on the macro forces that are impacting the Chinese domestic economy and how African policy-makers should be planning to adjust their own growth strategies in line with changes in China’s own domestic economy. Considering that the China-driven “commodity super-cycle” is now rapidly cooling and in light of the commodity-dependent nature of a large number of African economies, this omission has now become all too apparent.
Whilst resources have underpinned China’s foray into Africa throughout the first decade of this century, a shift is taking place – no longer planned by the government in Beijing but shaped by market forces. The potential move of manufacturing out of China to Africa is the next thrust.
According to Justin Lin, former chief economist of the World Bank and now at Peking University, China is forecast to possibly lose up to 85m labour-intensive manufacturing jobs within the next decade. In the same way that Japan lost 9.7m in the 1960s and Korea almost 2.5m in the 1980s due to rising wages and production costs, the Chinese economy will undergo a similar (but far greater in number) process. Wages for unskilled workers in China are set to increase four-fold in ten years. According to China’s National Statistics Bureau, the average monthly worker’s wage now stands at US$322 with an annual increase last year that topped 20%. Wage inflation and rising production costs are forcing China to become a higher-value and more efficient manufacturer.
The Chinese economy has reached the so-called “Lewis Turning Point” – named after the Nobel Prize-winning economist W. Arthur Lewis. The point refers to the time when manufacturing costs begin to outstrip manufacturing competitiveness. China has passed this Lewis Turning Point in the past two years.
It has been a very disruptive period over the last decade or so for foreign manufacturers that have battled to compete with the Chinese manufacturing machine. South Africa’s own textile and garments industry along with other sectors have undoubtedly felt the pain. China’s labour-intensive manufacturing competitiveness is, however, now on the wane.
The inevitable result will be the relocation of Chinese low-end manufacturing to lesser-cost developing economy destinations. This will create enormous opportunities for low-income economies with nascent manufacturing sectors. Lin supports this argument by citing the figure of China’s apparel exports amounting to US$107bn in 2009, compared to sub-Saharan Africa’s total apparel exports of just US$2bn. The opportunity for Africa to capture a share of this revenue from relocated Chinese factories is indeed enormous.
From Asian to African Geese?
East Asia’s growth model has been characterised by US academic Daniel Okimoto as a V-shaped flying geese pattern with Japan as the leading regional economy. By the 1970s, Japan was followed by the Tiger Economies of Hong Kong, Singapore, South Korea and Taiwan. The third tier of Asian geese includes Malaysia, Thailand and now recently Vietnam. But the lead goose is undoubtedly China. Its economy is not so much a flying goose in formation as it is a Boeing 747 roaring past, such has been its disruptive impact.
If we apply this model to Africa, can we begin to identify the leading geese? Whilst South Africa is undoubtedly the lead goose on the continent, as rising production and wage costs in our economy have increased, we have not seen South African manufacturing shift to lesser-cost African economies except perhaps textile and garment production moving to Lesotho. It is unfortunate that regional economies in SADC have not done enough to make themselves attractive to South African manufacturing in the way that Asian economies did to attract Japanese manufacturing that divested from its own economy.
As there are few states in sub-Saharan Africa that are sufficiently differentiating themselves from their neighbours – Ethiopia, Ghana and Rwanda stand out as exceptions – perhaps the “African geese” can fall into formation with the Asian model. Which African states will proactively build the required institutions and enabling environments to attract manufacturing into their economies and step up on the bottom rung of the industrial value chain?
Where will Chinese industry which now accounts for over 20% of global manufacturing begin to move to? The emerging competitors to African countries’ manufacturing aspirations are all Asian – Indonesia, Philippines and Vietnam. Their labour costs are becoming relatively cheaper as China’s rise. According to Bank of America quoted in Bloomberg Businessweek, their economies are “poised to accelerate, propelling the area’s currencies and fuelling consumer and property booms.” Supported by young populations – the so-called demographic dividend – and a high literacy rate that is above 92% in all three Southeast Asian states (Bloomberg Businessweek), Asian states are well-positioned to benefit from the relocation of China’s low-end manufacturing.
Africa did not lay the foundations for industrialisation that our Asian counterparts/competitors did in the 1970s and 1980s. The “latecomer challenge” now lies in building the necessary infrastructure, institutions and skills base to attract the investment. African states did not foresee the China-driven “commodity super cycle” of the last decade and thus did not fully leverage the opportunity it presented for its resource sectors. It is imperative that we now recognise the upcoming shift driven by market forces in China’s manufacturing sector in order to give impetus to African industrialisation and beneficiation ambitions. Africa’s relationship with China is no longer just about attracting state capital but also now private investment.
*Dr Martyn Davies, CEO, Frontier Advisory
