In 2009, China overtook the US to become Africa’s largest trading partner. Today, Nigeria accounts for 30% of Chinese-West African trade as trade between the two countries exploded from $2 billion in 2002, reaching $13 billion in 2013. Yet Nigeria’s economic relationship with China goes beyond just trade – China is a huge investor in Nigerian infrastructure and there is a growing presence of Chinese businesses in Nigeria. Given all this, how can Nigeria respond to China’s economic slowdown?
The collapsing Wall of China?
These are relatively harsh economic times for China. The Shanghai Composite has fallen by more than 40%, GDP growth has slowed to 7% (although unofficial estimates put it closer to 2-3%) and even exports are tumbling. China's struggles have sent shockwaves across other emerging markets. The effects have been stark – expectations about global growth have been severely dampened (China has contributed more to global GDP growth since the financial crisis than anyone else) and depressed commodity prices have piled misery on commodity-driven economies.
As a result, Africa has suffered. Fathom Consulting estimates a 40% year-on-year dip in Chinese imports from Africa for July 2015. And despite limited exposure to China, Nigeria has not escaped unscathed. Lower Chinese demand will keep oil prices low, bad news for Nigeria even though they export very little oil to China, as the Chinese prefer heavy and sweet crude like Angola's to the Bonny light. Furthermore, China’s waning financial strength means access to cheap capital will reduce in the market as China's investment appetite previously created an availability of cheap funding for investment. Finally, China’s situation feeds into the uncertainty created by the stronger dollar and an anticipated interest rate rise in the US. All this points to a harsher international economic climate for Nigeria as it tries to address declining growth.
Despite being the largest economy in Africa, Nigeria has only the 3rd highest trade with China and this could just be the silver lining because trade links are not as strong as they could be. Crude exports should not be affected too much but the devaluation of the yuan, given the inflexibility of the naira, could encourage China to substitute away from Nigerian exports. More worryingly, imported Chinese goods will become cheaper in Nigeria and this could hinder the drive for greater local content. The upside is that cheaper imports will ease some of the pain of Nigerians who are being squeezed by rising inflation. A lot may hinge on the price sensitivity of importers, especially with the growing restrictions on the importation of certain goods.
Nevertheless, the main worry about the Chinese slowdown is its effect on investment in Nigeria’s infrastructure. The concern is that funding may dry up or projects postponed in response to the economic slowdown in China. It is still too early to tell and a lot would depend on the medium term severity of the Chinese slowdown and the policy response to it. The bigger, state-funded projects are at greater risk especially if the Chinese government goes through much-needed financial and political reform but Chinese private investment in Nigeria should remain safe as long as the local market remains buoyant. For now, Chinese investments in African infrastructure are yet to feel the effect of the economic slump.
It is a sign of China’s economic miracle that even a 3% growth in GDP sparks panic. The stock market crash is arguably a misnomer as its tradable value is only a third of GDP. The property market, not the stock market, is a better gauge of the economy and has rebounded recently. Nevertheless, malinvestment and overcapacity still need to be addressed as investment was stretched beyond demand during the property boom. So the economy is definitely weakening, but not by as much as the international response would suggest.
One reason for the panic is the loss of confidence in China’s previously assured government. For a long time, the West ignored the ideological failings of the Chinese regime because it was so skilled at lightly managing the economy. But its uncertain attempts to abate crisis in the stock market and the wider economy have thrown that reputation into doubt. The aura of competence is gone.
The future is bright – and Chinese?
For Nigeria, the future is inevitably Chinese. It is difficult to imagine countries with their respective economies and population sizes not having a significant economic relationship in the future. The key for Nigeria is ensuring that the terms of trade change come the end of this economic cycle. To do that, it needs to be able to export more than just commodities and show more ambition in manufacturing and services. China’s economy should eventually become more consumption-driven and Nigeria must position itself to benefit from that.
To achieve this, more needs to be done on the cultural and diplomatic front. Nigeria’s relationship with China is understandably not as strong as its relationship with the West. A gallup poll reports that Nigeria and other Sub-Saharan countries still give higher approval ratings to the US than China although there have been steps taken to build stronger diplomatic links between Nigeria and China. Clearly, there is more work to be done as this forms the basis of a strong economic relationship.
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