How will China’s economic crisis affect Africa

africa-china-feeding

Seeing as China boasts the world’s second largest economy, the fact its continuing slowdown is being felt elsewhere comes as no great surprise.

In spite of recent growth, which is still comfortably within the government’s targeted range, some analysts believe China’s troubles could spark another global recession.

This is especially bad news for Africa, which has built an increasingly close relationship with China over the past few years. So, how will China’s economic crisis affect Africa exactly?

IG South Africa, a leading provider of contracts for difference (CFDs) and financial spread betting, explores the impact.

The value of the rand:

As opposed to every other African currency, the rand is the only one traded on the “carry-trade”, a money market where foreign exchange brokers base their valuations on a country’s economic strength and future prospects.

On the back of China’s slowdown, South Africa is also showing signs of weak growth, with manufacturing and mining bearing the brunt. When combined with volatile commodity prices, a number of traders believe the rand is too risky and aren’t choosing to invest.

South Africa’s stock market:

With 40% of the daily trades on the Johannesburg Securities Exchange (JSE) coming from foreign investors, the largest bourse in Africa will also feel the adverse side-effects of China’s economic slowdown.

The South African Reserve Bank had previously been asked to impose capital controls on how much money traders could withdraw from the country, but it refused on the grounds that this goes against the grain of a free market economy.

The tourism industry:

Even though a devalued rand means that South Africa is now more affordable for several foreign tourists, this doesn’t mean to say scores of Chinese holidaymakers will make their way there in a hurry, as the yuan continues to struggle as well.

In South Africa, complex new visa regulations only add insult to injury, as travellers from China who can afford to visit are given yet another reason to stay away.

Trade and investment:

Not only is China the number-one trading partner for most African countries, it also has more than US$20-billion in investments, which doesn’t even take development aid into account.

But a devaluation of the Chinese yuan means less demand for African goods, as they are priced in dollars and therefore more expensive.

Over a prolonged period of time, less trade and investment with China could see the individual economies of Africa shrink significantly.

However, donations from the European Union (EU) and US as well as more trade between African countries should offset the China-effect.

Loans:

After negotiating a favourable trade-exchange agreement, China provided loans to the national oil company in Angola. But due to the global slump in oil prices, Angola’s economy may suffer without China’s help.

Zambia and South Sudan could also be affected by China’s financial clout. Several Chinese immigrants have built retail and construction empires in Zambia, while the commercial terms of oil deals with South Sudan may soon change.

In this globalised world, things that happen to one country matter a lot across the globe, especially one with the economic clout of China.

Source: Maravi Post

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