Slowing train still firmly on rails

With its strengths and capabilities, the china-africa train will keep on chugging

Investors in Africa have recently been in two minds as to whether the so-called China slowdown is something of which they need to be afraid.

The more sophisticated investors, however, have understood that China is not so much slowing down as changing gear, but gradually reordering the priorities of its growth model. Others have been spooked by the market traders and the warnings from Western doomsayers who, perhaps fearing the rapid economic rise of China, would like to see a slower growth.

Recent data has suggested that while China is indeed slowing down, it appears to be doing so at an orderly pace and in a coordinated way.

African investors have therefore been reassured in recent weeks that a decelerating Chinese locomotive is not about to derail, and that the African carriages that are loosely connected to it are not about to follow its lead.

While there is no doubt some substance to the concern that a fall in commodity prices arising from a slowing China would have negative knock-on effects in parts of Africa, this cause-and-effect is not as strong as it used to be. Furthermore some commodities, most notably oil and certain agricultural products, have not experienced any material price weakness; a significant number of African countries produce these commodities.

The reason why some investors may have underestimated Africa's economic resilience echoes that of China's - the African growth formula is starting to evolve beyond that of being first and foremost a commodity exporter just as China is evolving beyond being first and foremost a manufactured goods exporter.

And Africa's reason is profoundly connected to China's - the first signs of Africa moving into the manufacturing space are evident, particularly in Eastern Africa. The world's second-largest clothing retailer, Sweden's H & M, has recently moved a factory from China to Ethiopia because of the latter's more competitive wage rates. They join China's Huajian, the world's largest shoe manufacturer, in the cluster of industrial ventures now coming up near Addis Ababa. China's loss has been Africa's gain.

Meanwhile South Korea's Samsung and Japan's Honda have recently announced they will be building manufacturing plants in Nairobi, Kenya, the former to assemble computer equipment, the latter motorcycles.

A significant number of Western commentators, reflecting upon the fact that low-end manufacturing may no longer be viable in China as the latter moves up the value chain taking its wage structure within it, have optimistically predicted this may lead to the "reshoring" of manufacturing back to the West, a view particularly common in the United States.

No doubt there have been and will be further instances of reshoring - but they will be isolated. Far more factories will - if they do not migrate inland in China where wage costs are lower than they are closer to the coast - migrate to other lower cost locations: the shoe industry has favored Vietnam, the clothing industry Bangladesh, while Indonesia has already attracted a number of low-end electronic equipment manufacturers. Why on earth would a manufacturer migrate back to the high-cost West if places even cheaper than China are available?

Africa is very much on the global radar screen of those companies looking to refresh their competitive advantage by accessing lower cost manufacturing locations.

This is not to say that Africa will experience no effect of the China slowdown via lower commodity prices: it will. But rather it is to point out that just as China's slowdown has been overstated - as market traders are now beginning to acknowledge - so too has the predicted fall-out that this will have on the commodity-rich regions of the world, most particularly Africa and Latin America.

And, like China, Africa is developing another shock absorber that will help limit the downside of its economic cycle. Africa is starting to grow its own consumer class as millions of its inhabitants escape the agricultural subsistence trap that leaves little family income above that essential to stay alive. Achieving this generates surplus income that can then be spent on consumer items. African countries are experiencing migration of its citizens from rural to urban areas, the growth of a middle class and the emergence of a consumer culture. Does that sound familiar?

The author is a Cape Town-based global investment strategist for investment company Investec.

(China Daily Africa Weekly 09/20/2013 page9)