China’s Currency and African Trade

Now you might have seen the news this weekend, the Chinese Central Bank has finally decided to unpeg their currency to the dollar and despite the fact that the Yuan/USD exchange rate has remained constant this morning, everyone is expecting the Yuan to appreciate. Now the news everywhere has a lot of comments on how this will effect, China, the US and the G-20. But what I haven’t seen mentioned is how this is going to affect the rest of the developing world. Well I can tell you first hand that it isn’t going to be positive.

Focusing just on Sub-Saharan Africa, China has been praised as being a major driver of growth in the region. Apart from being a major investor, China is also a large trade partner for the region. Here are some outdated stats on their trade situation:
2. China’s Engagement: the extractive sector in Africa
China-African trade: 2005 total $39.75 billion,
Export to Africa $18.68 billion, increase 35.2%; machine and electric
products $8.17 billion, hi-tech products1 $1.83 billion, totally 53.8% of the
Import from Africa $21.06 billion, increase 34.6%; extractive sector, 86.7%
Import oil: $14 billion (38,470,000 tons; 30% of imported oil $47 billion).
China-African trade: 2006 (Jan-Sept): $40.557 billion;
Export to Africa: $18.721 billion, increase 38%; Import from Africa $21.835
billion, increase 45%.

I’m going to assume trade has increased (both import and export) between China and Africa as both regions have grown.

Now here is one major detriment to sub-Saharan Africa and the rest of the region: imports from China will become more expensive.
The simple reason being that due to massive inflation in most sub-Saharan African countries (more than 5% a year), imports are often bought in dollars.
Specifically, most importers purchase ‘containers’ of durable goods from China at a specific dollar rate, and the soon to appreciated Yuan will dictate rising import costs for the rest of sub-Saharan Africa (and all other countries that purchase imports in dollars). Given the very young manufacturing industries in sub-Saharan Africa, most durable consumer goods are purchased from China and this could have some serious problems for retail shops.
With a GDP growth rate that has decreased over the last year, this could be another setback to the region this year, though the magnitude of which I’m not too sure about since the durable retail sector isn’t as large in these countries.


About alalani
I grew up in Tanzania and now I'm a student at Stanford!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: