How China’s economical changes have hit Africa
10 February 2016
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Hello and welcome to another edition of Old Mutual Live Business, my name is Chris Gibbons and thank you for joining us. Has Africa missed the boat again in terms of spending the windfalls from a decade or more of commodity super profits? There’s no question that the major driver of the commodity boom has been China, that source of demand is drying up, economic growth in China is slowing as it transforms from being investment led to consumption led.
China has been Africa’s major investment partner since the early 2000’s, so where does this transformation leave the continent? Another way of looking at that might be to ask, where did all the money go? We’re joined now by Dr Martyn Davies, Managing Director Emerging Markets and Africa at Deloitte, on the line to us from Johannesburg. Martyn, greetings and welcome, thank you for being with us. Let me start off with a simple question. Do you agree, first of all, that the commodity super cycle is done and that China is on a very different path now?
China’s economic strategy explained
Martyn Davies: Yes, thank you Chris and don’t shoot the messenger here, but I think you’re probably right. The China commodity super cycle started somewhere around 2000, arguably subsided and a dramatic decline since then, probably from about 2012. Why that time exactly?
Well, in response to the financial shock, the Western financial shock of September 2008, China responded to stimulus, China’s always been for the last two and a half decades or so a, not so much an investment driven, but an over investment driven economy. Put in a response to try minimise loss of manufacturing jobs in South East China. Chinese government responded by spending big on infrastructure.
Resulted in rapid debtors collection levels in China, but again, boosted its growth by over 2.5-3 percentage points, which was a very, exacerbated the already very resource intensive growth model that China had. This obviously was very good for commodity prices, particularly for commodity driven economies. Think large waves of Africa, think Western Australia, think Brazil, think Canada to an extent.
A lethal financial combination for Africa
So, that money was largely spent by the end of 2012 and now there’s a sense, now we’re looking at a thing called, sort of how does Africa cope or contend with soft China and hard United States. Hard in terms of strong US dollar currency, but very weak commodity demand on the Chinese side. It’s a lethal combination.
CG: Okay, so as we look back, large inflows of Chinese cash into African economies, but very little to show for it. Where is the infrastructure, where are the schools, the teacher training colleges, the power stations, the transformers, the universities, the technical college, where did it all go?
MD: I think there’s two stories here. One is the, as you’re talking about, the supply flood of capital and also the demand side, i.e. resources demand. I would argue the far more enabling for African growth, headline growths at least, perhaps less arguably, less so development has been the demand side. I.e. the inflationary impact that China’s had on commodity prices and African countries predominantly being commodity suppliers.
The supply side in terms of capital, significant amounts of money has come to the continent from China, geopolitically driven. Building infrastructure, hopefully, hopefully the intention was economic enabling infrastructure. Think roads, railways, ports, airports and the like.
I think a lot of that money, I think the jury is still out as to how money is being spent. Undoubtedly some projects have been beneficial, many have been white elephants. We shan’t be too critical perhaps, is effectively blank cheques at times written out by Beijing to African states.
How India is growing despite appalling infrastructure
A lot of the infrastructure needs to come with better management, the sustainability of an infrastructure, but arguably, it’s not really an infrastructure sort of story so much as it is systems of management story. India is growing, forecast this year nudging 9% with appalling infrastructure.
It’s more about talent one had in one’s domestic economy rather than just sort of the accepted wisdom in Africa, conventional wisdom that if we had infrastructure, we will succeed. I think India has proven that to be incorrect. So, I think we shouldn’t put too much emphasis, of course infrastructure is enabling, of course it will be, but it’s not the sole determinant of economic success.
I think perhaps, and to conclude on this, is that many African states have sort of outsourced and they’re observers of outsourced responsibility for infrastructure financing and development in our continent to Beijing and I think that’s unfair.
CG: I’ve also seen it suggested that African presidents were flattered by Beijing and as one commentator put it, were delighted to have the Chinese as an ally to play off against the West, do you buy that one?
MD: I think certain countries, Angola would fall in that category. Angola’s Dos Santos and friends have been very sort of practical in playing off certain players around oil. When oil prices went triple digits, clearly now the opposite is true. I think it was more of a geopolitical play than a practical one.
I’m not seeing much in terms of African states leveraging one play against the other in a successful sort of fashion. I think, however, that perhaps one of the greatest and positive consequences of China’s engaged with Africa was one where it was always unintended by Beijing, is that was a reaction from traditional and other emerging actors, players, countries and companies coming to Africa because China was. There was almost a fear of missing out. That was never an intended consequence, but perhaps the most important one of all.
Where does all of this leave Africa?
CG: Now, I’m seeing forecasts that say we have at least another five years of economic hardship until the Chinese get themselves sorted out. Five years, according to Goldman Sachs. I’ve also seen forecasts that say none of this gets better until 2030, 15 years from now. What’s your view, where does this leave Africa?
MD: Again, who knows? We’re still now very much feeling the consequences of 2008, sovereign debt, mass significant debt levels particularly amongst the corporates in emerging markets. This will take a long time, we’re still in the great recession. Just that it’s no longer, we seem to be entering crisis again, but is the crisis another hiccup or is it a false start or is it a crisis with a capital C? We’re not entirely sure.
Is it all China dependent? I think the global economy is perhaps, you know, gotten to a point where, don’t believe high growth, robust growth is inevitable, it’s not. Do not believe or assume that countries will graduate from developing, emerging status to develop. Don’t assume that catch-up is linear and a continuation, sort of economic history, it’s not.
So, of course, the headwinds are there on all fronts. There’s a convergence of capital towards traditional centres, towards traditional economies. Countries now have to work to grow whereas previously countries had these major tailwinds. Think emerging economies, think, you know, we believed in this convergent story. That countries would, particularly African countries, if we got our policies right, worked harder, a little bit more innovative, a little bit better governance, a bit of luck perhaps, we’d succeed, we developed.
That was called ‘the great catch up.’ Now I think it’s the great divergence, not convergence. The divergence story and clearly countries, as I said, countries have to work to grow. Some will structurally reform, some will figure it out and some won’t. I’m afraid the majority of African states perhaps won’t figure it out.
Going back to your initial sort of thesis is the golden age we had, past tense, 2000 roughly to maybe 2012/13 has passed and now countries have to, if it’s five years or 10 years, we’ve been trying to figure it out for 50 years already. I don’t think we can put a time limit on this in saying ‘when will things get better.’
Countries should be able to determine their own economic states, despite global situations. I think to assume that we have to wait for the world to correct before Africa can once again start to accelerate its growth as it was a number of years ago, I think is a little bit of wishful thinking. It’s too fatalistic. We need to see countries be agile, structurally reform and ultimately succeed. Not through commodities, but through ideas, i.e. talent, people, innovation and the like.
CG: Final question Martyn, while we’re talking, I have to ask you about your view of China, that Goldman Sachs report, to which I referred, underlying just how difficult, how complex is the process facing the Chinese, will Beijing get it right?
What are the problems China is facing?
MD: Beijing has been getting it right most of the time, for the last three decades. They got it terribly wrong before that, but the biggest mistake Beijing made and they’re paying for it now was this major stimulus package that they put in place from 2002 -2009.
That was the biggest mistake and now it’s the hangover and they kicked the can down the road somewhat. But I’m afraid the market is now bigger than the policy maker’s ability to influence into Beijing. I think that China, this is not unexpected at all. If anyone was assuming China could continue to grow at 9-10%, even slightly less perhaps, 8-8,5% for another, even medium term, that’s just wishful thinking.
So, for China to rebalance, is ultimately a good thing for China, I would argue it’s more sustainable. Of course it’s bad for the world. I think we’re having this correction of China soft on demand. The pricing of commodities, the market is not allowed to operate in China in many industries because of state economics. When states, i.e. the government, gets involved in business and effects in China, in any country, it distorts the laws of economics and that’s what happened.
This is the cost of state capitalism, ultimately and now where you have to pay for it sometime and now we’re paying for it, the globe is paying for it. But China’s still, on a consumer basis, consumer spending is still increasing in double digits. Certain industries are flying, think IT industry, tech, the consumer spending, retail, it’s growing significantly rapidly.
There’s no fundamental problem of the Chinese economy, the problem resides in state owned sectors and that needs to ultimately fall by the wayside. Those companies, we need to have more, ultimately, creative destruction in China and the market will bring that. It won’t be brought by the policy makers and I think Beijing, the ruling party, the Chinese commerce party has yet quite to come to terms with that market reality.
CG: Dr Martyn Davies, Managing Director Emerging Markets and Africa at Deloitte, Martyn, thank you for being with me on Old Mutual Live Business.
MD: Thanks so much Chris.