China and Africa

Trade between China and Africa will surpass $155 billion in 2011. Since 2003, Sino-African trade has increased by nearly 500 percent. Indeed, integration has been so swift that in 1990, no African countries had trade with China above 5 percent of GDP. Yet by 2008, near two dozen had. Plus, nearly two thirds of African nations list China as a top-five trade partner. And, unlike Africa's trade with longstanding advanced nations, Sino-African trade proved resilient in the wake of the financial crisis.

Given China's growing importance in Africa and China's economic deceleration, fear mongering is growing, but misplaced. What really matters is that China's economy is nearing $7 trillion. It is nearly twice the size of Germany and three times the size of the UK. Therefore, in absolute terms its contribution to global demand (even if its economy slows to 7 percent growth) is continually increasing, and that is what drives Sino-African trade and investment.

In 2012, China will still consume the most coal, copper, nickel, steel and tin in the world and second most oil and lead. It is true that the energy intensity of China's GDP is declining, but the demand overhang does mean that China relies on imports of raw materials. Add growing food demand in China from the growing middle class (one only needs to look at pork prices in China to see the impact of changing diets), and Africa role is clear. Currently, more than 60 percent of the planet's available uncultivated cropland is in Sub-Saharan Africa, but only 3 percent is prepared for irrigation, compared with 40 percent in Asia. Sure, Africa is a long way from being a world bread basket, but in areas like coffee, tea, tobacco, cocoa, soybeans, fruit and so on, Africa will become increasingly important.

Many of state-owned enterprises (SOEs) encouraged to "go out" have subsequently been successful in Africa, growing revenue streams through African operations and diversifying, to become independent engines. Future cash flows from projects here look favorable and as such are now looking to expand their presence on the continent.

It is also obvious that commercial ties have just started. The 2,000 or so Chinese companies with operations in just 17 African nations in which Standard Bank is present and the 1 million Chinese people in Africa obviously have a long-term agenda.   

One thing that is clear - Africa is open to Chinese investment and can serve as a pressure release for China's excess capacity and create employment through infrastructure deals. Africa offers China investment alternatives (real assets) to dollar-denominated fixed income products which suits China's desire to passively diversify its consistently accumulating foreign exchange reserves.

(The author is an economist with South Africa' Standard Bank Group)