Existing work on China’s economic influence in Africa refers to Africa in broad terms, thereby generalizing the results to an extent that is unhelpful for policy-makers in a specific country. Moreover, the emphasis is on oil exporters. This paper remedies this by focusing on a single, oil-importing country: Kenya.

The paper examines China’s economic presence in Kenya and some of the popular myths surrounding Chinese economic activity. The first myth is that Chinese companies do not employ local workers. In fact, 78 percent of full-time and 95 percent of part-time employees in Chinese companies are locals.

Second, although China represents a large potential market for local exporters, the study finds that China has a better chance of expanding its exports to Kenya than Kenya does to China based on existing specializations. This may change with recent oil discoveries in Kenya, increasing the space for Kenyan exports to China, as well as from China’s shift to a consumption-driven economy which will increase demand for services, a growing strength of Kenya’s economy (World Bank Country Economic Memorandum 2016). The paper emphasizes that Kenyan policy makers should be less concerned about bilateral trade imbalances and worry about Kenya’s overall trade balance. However, the Standard Gauge Railway and Thika superhighway experiences suggest that Chinese firms offer relatively few technology transfer or supplier opportunities for local firms and academia.

Third, the popular focus of Chinese competition is on the impact on well-organized Kenyan producers and not on consumers, thereby underestimating the benefits Kenyan consumer derive from the availability of more affordable Chinese goods. The paper concludes with policy directions for improving export competitiveness and transparency in infrastructure projects, and local content.

Introduction

In recent years, China’s economic presence in Sub-Saharan Africa has risen rapidly. China’s growth in the region is driven in part by its strong demand for raw materials, and resource rich countries that manage the boom well may also translate the gains to the broader economy, working to pay down high public debt or alleviate poverty. But the countries that benefit from the boom are also more vulnerable to China’s economic slowdown. Oil-importing countries such as Kenya will be shielded from China’s slowdown and should even see an increase in their exports. Kenyan exporters of services such as tourism will fare well as China transitions to a consumptionbased economy by 2030. Greater Chinese consumption may also benefit Kenyan producers in the horticultural sector that are taking advantage of the trend of selling directly to large supermarkets in Asia. Supermarkets in China can also recieve Kenyan flowers if Kenya succeeds in negotiating duty-free access for cut flowers as part of the 404 duty free products from African countries.

Exporters of flowers are performing well, but producers of manufactured goods face more competition from China in both domestic and foreign markets. Many fear that local producers will be hurt by Chinese imports; cheap plastic shoes and clothes from China, and second-hand clothes in general, are much more popular than local products. In addition, Kenyan exports of clothing to the United States, for example, lost market share to China between 2004 and 2006, and have only recently begun to recover. The manufacturing sector grew slowly at only 3.4 percent in 2014, down from 5.6 percent in 2013, and some worry that slower growth could be a sign of a premature decline of industry (Chen, Geiger, Fui 2015). Without a turnaround in manufacturing, the growth potential of the economy is limited. But Kenya can enhance its growth in manufacturing if it continues to attract foreign direct investment from China.

A large share of foreign direct investment (FDI) already comes from China, allowing Kenya to diversify its sources of FDI and increase investment in manufacturing. Lagging behind countries such as Ghana, Nigeria and South Africa, Kenya performs poorly in attracting manufacturing FDI. To increase the low investment, Kenya wants to market opportunities to China because Chinese firms are attracted to the low cost of labor in Kenya. The lower wages, however, come with lower productivity, raising the unit cost of labor; at the moment, the unit cost of local labor is higher than in China, making Kenyan workers more expensive than Chinese ones. If Kenya reduces the unit cost of local labor, it will attract more Chinese investment in labor-intensive industries, providing jobs and helping reduce poverty. There is strong potential for poverty reduction in the textile and garments industry because it mainly employs women, who tend to increase the household savings rate.

China also offers critical financing in sectors that traditional investors overlook: infrastructure and construction. China’s loans compete with loans from traditional donors that attach conditions of good governance and transparency. Uninterested in the politics of the country, China funds major infrastructure projects in Kenya. One such project is the Standard Gauge Railway linking Nairobi and Mombasa by the China Road and Bridge Corporation, and other Chinese construction companies are taking advantage of the real estate boom in Nairobi. Following the slowdown in China, marketing for construction services should increase globally, and even more Chinese companies may come to Kenya to undertake major infrastructure and construction projects. The improvement in infrastructure will help lower the cost of doing business, attract more investment, and enhance productivity.

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This paper is a product of the Macroeconomics and Fiscal Management Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org.