Africa a mere marginal player in OBOR

One Belt One Road (OBOR) aims to revitalize the ancient Silk Road that ran from China to Europe through Central Asia. To this end, OBOR involves a series of interconnected infrastructure projects in more than 60 countries. The end game is a regional production chain of advanced manufacturing and innovation, furnished by First World infrastructure networks, with China at the centre.

First mooted in 2013 as a counter-weight to the Obama administration’s pivot to Asia, it is now being repackaged as China’s response to de-globalisation trends believed to be enveloping the global economy. Since then, Chinese domestic media have branded the OBOR initiative as the brainchild of Xi Jinping, essentially tying his legacy to its success. Therefore, putting it plainly OBOR is the new spearhead for China’s foreign policy for the next five to ten years, usurping all other initiatives such as FOCAC and BRICS.

OBOR is more than simply a diplomatic branding exercise; the OBOR initiative also makes perfect commercial sense for China. Indeed, trade between China and countries along the land and sea-based routes exceeded USD1 trillion in 2016 – a quarter of China’s total trade value. In 2016, Chinese exports to OBOR countries tallied USD596bn, which is around 38% of China’s total global sales. Moreover, from 2013 through April 2017, sales to these countries have expanded by an average of 5.8% y/y each month, whereas China’s exports elsewhere have increased by an average of 0.6% y/y each month. In fact, sales to South East Asian countries – the largest market for Chinese exports in OBOR – jumped by 50% y/y in 2016, led by sales to Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

OBOR potentially gives China access to developing countries in the region. Until recently, led by China, the global macroeconomic landscape over the last twenty or so years has been exemplified by emerging markets’ outperformance. This macroeconomic outperformance has resulted in a surge in internationally competitive and globally minded multinationals (MNCs) and business leaders in China. It is without doubt these companies are armed with low-cost structures, appealing and relevant products, and, perhaps most importantly, very ambitious leaders. OBOR countries offer enormous potential markets for their wares.

Impact on China-Africa ties

China’s role in supporting African development obviously pre-dates official OBOR by many years. Over the past decades, China has built up a strong brand in Africa. For instance, a survey of 54,000 individuals spanning the continent by Afrobaraomter found that 63% of respondents believed China was either a somewhat or very positive influence on their country.

As a cause and consequence, China has proven to be incredibly successful both diplomatically and commercially. As a result, Africa’s economic trajectory has increasingly aligned to China’s. Consider: China is the source for 21% of Africa’s total imports, and 17% of Africa’s total exports; China’s policy banks have extended nearly USD100bn in loans to African sovereigns and corporates; and Chinese FDI stock in Africa is close to USD30bn.

Given China’s rising importance across Africa, many African nations are still metabolising the medium- to long-term implications of the “New normal”. Envisioned here is an economy that is expanding more slowly; one that is less factor- and investment-driven. Of course, lower output growth in China has spilt over onto sub-Saharan Africa through direct and indirect channels. Now it seems another question must be posed: what further impacts will OBOR have on China-Africa ties?

Promisingly, it seems that the downward momentum of China-Africa investment and trade has bottomed. China’s non-financial direct investment to Africa jumped 64% y/y in the quarter. Interestingly, Djibouti – one of three African countries embedded in OBOR – saw an increase of over 100% y/y in the quarter. Furthermore, China-Africa trade increased 16.7% y/y in Q1:17, from USD32bn in 2016 to USD38bn in the first three months of this year, which is the first quarterly rise since 2015.

Chinese imports from Africa increased from USD12bn in Q1:16 to 18bn in Q1:17. Unfortunately, since peaking in 2013 and 2014, Africa’s largest exporters to China are well below their peaks. Granted, much of that reflects lower commodity prices; however, despite relative economic stability in China’s economy last year and a recovery in commodity prices from lows of 2015, African exports to China declined to USD56bn in 2016 – a third consecutive fall. In addition, China’s purchases from the rest of the world reversed the fall of 2015, importing more coal (+15.3%), crude petroleum (+14%), iron ore (+9%) and steel (+1%) in 2016.

Looking ahead, on a more positive note, OBOR projects may place a floor under raw material demand inside China (even as the economy rebalances) given the projects envisioned in China’s Western and Central regions. Furthermore, the infrastructure projects across OBOR are certainly potentially sizable. That said, over the near term, given that China’s domestic fixed asset investment tallied USD8.5trn in 2016, it would be difficult for OBOR fully offset the ongoing slowdown in investment growth in China.

Of course, given five years of below-trend economic growth in advanced economies, China has been recalibrating the destination of its sales abroad. And Africa has proven to be an obvious market because it still needs China’s well-made but low-cost products. Indeed, for a two and half year period after the global financial crisis, Africa was actually China’s fastest-growing market.

Worryingly though, for the first time, African imports from China declined in 2016. The slump has been particularly precipitous in some key economies such as Angola (-60%), Nigeria and South Africa (-25%), and Mozambique (-37%) and Tanzania (-13%). Of course, Africa’s softer economic growth has had a sizeable explanatory role in declining sales to Africa – especially in key markets such as Nigeria and South Africa. Thus, it is reassuring that Chinese sales to Africa were flat in Q1:17 at USD20bn.

As yet, rising consumer demand in Africa is reflected in the growth of total imports. African countries need to begin to selectively manufacture these products in partnership with Chinese firms. In recent years China’s manufacturing investment has increased significantly. China faced with increasing labour costs manufacturing firms have begun relocating to countries with lower wage rates, including several in Africa. Looking ahead, OBOR casts some doubt over what was seen as a logical progression of outbound investment following Chinese sales in Africa.

More than ever before the onus is on African projects to remain relevant. It seems reasonable to argue that any African infrastructure projects that can fit into the still fluid OBOR narrative will be fast-tracked. Thereby, OBOR may build an additional framework – complementing FOCAC – for which Chinese government and corporate leaders and their counterparts can align their engagements.

This means that Africa needs to provide a more systematic coordinated and industry-specific plan to remain at the centre of China’s foreign policy. At the same time, African governments must also focus sustainable development and determine the best policy mix and governance structures to China true to its often stated commitment to job creation and industrial upgrading of Africa.

The author, Jeremy Stevens, is an international economist for the Standard Bank Group, based in Beijing, China. Access the full analysis, published on 19 May 2017, here.