China set to play bigger role in Africa trade(2)

From South Africa to Somalia, governments are opening up their economies to foreign direct investment, with the aim of rising up the value chain. Chinese companies, in partnership with the government, have responded with billions of dollars of investment in roads, railways, ports, airports and power plants — at least partially filling Africa's estimated US$93 billion annual infrastructure funding gap. As infrastructure develops, so will Africa's attractiveness to companies catering to the global supply chain. This will help the continent diversify away from resource exports. The food processing sector could be a big win for Africa as it pursues more value-added exports. The continent is home to 60 percent of the world's uncultivated but arable land. Moreover, only 10 percent of cropped land is prepared by tractor, and just 4 percent of cultivated land is irrigated. Introducing scientific farming techniques to boost productivity, then feeding the output to food processing firms and linking them to a Pan-African and global distribution network could create millions of jobs across the continent. China, on the other hand, is facing pressure on its arable land because of rapid urbanization. It already imports agricultural commodities from the US and Latin America; Africa could be its next big source.

The rise of the African consumer is another big trend in recent years. Standard Chartered Research estimates that consumer spending across Sub-Saharan Africa will expand to US$1 trillion by 2020 from US$600 million in 2010.

China's companies are starting to harness this relatively untapped consumer market. Travelling across Africa, one sees newer and lower-priced "made in China" cars gaining market share against competitors from Japan and Europe. The same is true of Chinese high-tech electronic goods and home appliance brands, which compete against products from Korea and Japan.

Chinese companies are also becoming increasingly integrated across African economies, creating trade networks not just between China and Africa, but also within Africa and between Africa and the rest of the world. Many are considering moving manufacturing to the continent to get closer to the market — as reflected in China-funded special export zones in Ethiopia, Nigeria, Zambia, Mauritius and Egypt.

3 regional trading groups

This integration is being facilitated by the formation of three main regional trading blocs: the Southern African Development Community, the Common Market for Eastern and Southern Africa, and the East African Community. These new trading blocs have played a defining role in jump-starting trade within the continent. The next logical step would be to combine these regional economic communities to form the Africa Free Trade Zone, spanning the entire length of the continent from Cape Town to Cairo.

Such a pan-African trading bloc would encompass more than 630 million mostly young people, US$1.2 trillion in gross domestic product, some of the world's most bountiful natural resources, and its largest uncultivated farmland area. Given Africa's growing middle class and increased political and financial stability, the Africa Free Trade Zone could rival the world's other economic unions, giving African states the necessary heft to negotiate free trade agreements with other trading blocs.

Another mega-trend emerging is the growing circulation of the renminbi across Africa. Soaring trade, rising direct investment by Chinese companies, and financial aid and subsidized loans from China's government and its agencies provide a solid base for the regionalization of the currency across the continent.

Africa-China trade settlement denominated in renminbi totalled about US$5.7 billion in 2012, or about 3 percent of annual trade. Looking at it from another angle, Africa constituted 5 percent of China's global trade that year, but its trade settlement in renminbi was just 0.2 percent of total payments, even after including Hong Kong. Thus, there is significant scope for growth. Since a major part of the trade consists of commodities, the big shift will come when commodities start being priced in renminbi instead of US dollars.