China lures Kenya with sweetheart deals

China is changing. The 1.3-billion people’s economy is expected to take a more inward-looking growth strategy, concentrating on increasing domestic consumption than exports.

The policy change, contained in the country’s 12th five-year plan, could be a boon for Africa, trade and development analysts say, as it offers opportunities for increased business in terms of exports from the commodity-rich continent.

The plan, which will be unveiled in Beijing later this year and between 2011-2015, will see the country’s share of global consumption grow from about 5 per cent to approximately 23 per cent.

This will potentially make China the world’s largest consumer within the next decade. Currently, it is third largest market globally in terms of nominal gross domestic product – what a country produces at exchange rate terms – after the US and Japan.

Economists at South Africa’s Standard Bank say the shift will have seismic implications for the global economy as China seeks to increase its domestic consumption to act as a counterweight to the current over-reliance on export-led growth.

Increasing consumption

“For Africa, the increase in consumption in China provides abundant commercial opportunities,” says Mr Simon Freemantle and Jeremy Stevens in their research titled, The rise of the Chinese consumer: Opportunities for Africa presented by the next phase of China’s economic growth.

Already, Africa’s least developed countries enjoy preferential access for 454 products into the Chinese market, including animal, birds and plant products such as coffee, tea, spices and fish as well as various minerals, plastic and textile products.

This list will be increased to almost 5,000 products by 2013, providing opportunities for African exporters in capturing market share in China.
It is a view shared by other analysts.

“Changing lifestyles, diets and patterns of consumption further solidify Africa’s role as a supplier of raw materials, including agricultural products to China,” says Ms Hannah Edinger, a senior manager and head of research at Frontier Advisory (Pty) Ltd, a research and strategy consultancy firm on emerging market economies.

This importance has not escaped Kenyans, given the number of trips President Kibaki and other senior government officials, including Prime Minister Raila Odinga, have made to China lately.

Already, the Chinese are playing a big role in East Africa’s biggest economy such as the construction of Thika Road and lots of other government projects.

In his latest trip to China last week, President Kibaki was following up other development projects, including the construction of Standard Gauge Railway from Mombasa to Malaba on the Uganda border, and a mass transit light rail system for the Nairobi Metropolitan.

But trade with China was not far from the President’s mind during the trip as seen by his visit to the World Expo 2010 in Shanghai, where Kenya is showcasing itself as the central entry point for investors in the East and Central Africa.

“There are benefits of consumer choice and lower prices when importing goods from China, which has had positive effects on inflation rates in Kenya and Africa in general over recent years,” says Ms Edinger whose firm advises clients on Africa, China, India and Latin America.

But despite China boasting the highest population in the world, it only accounted for 12 per cent of Kenyan exports in 2008, according to the Export Promotion Council (EPC).

Kenya’s main exports to China include scrap metals (copper and aluminium waste), fruits and nuts, black tea, sisal fibre, leather, raw hides and skins and fish.

Kenya, in turn, imports telecommunication equipment, electrical machinery, civil engineering equipment, motor and transport vehicles, rubber tyres, motorcycles, and iron and steel products from China.

While Kenya’s exports to China increased from Sh1.2 billion in 2005 to Sh2.5 billion in 2009, its imports rose to Sh74.5 billion from Sh19.4 billion in 2005, because most of the imports are capital goods or goods for industrial use. The Export Promotion Council says Kenya’s imports suggest an expanding economy.

However, Dr Samuel Nyandemo, an economist at University of Nairobi, says the balance of payments in favour of China shows not only the potential of a market Kenyans should exploit, but also how slow the country is positioning itself to exploit the massive Chinese market.

“Even under the current economic plan, China offers enormous business opportunities that we as Kenyans have not sufficiently tapped into. If the Americans and Europeans are turning to China, who are we to ignore it?” said Dr Nyandemo.

It is a challenge that does not require enormous investments. For instance, while Kenya’s tea and coffee are renown world over for their quality and flavour, they are currently mainly exported to the European Union and the US with less to the Asian region.

“Agricultural exports, particularly agro-processed articles, pose great potential to China for Kenya,” says Ms Edinger.

Others warn that Kenya, and other African countries, should be cautious with China’s quest to woo them. Its growing appetite for raw materials and minerals from Africa, they say, could deplete the continent of key resources and leave economies at the mercy of Beijing forces.

China has had its purses open for African countries seeking foreign aid with no strings attached, as opposed to IMF and World Bank, which have stringent conditionalities on transparency and accountability. It has poured billions of dollars in African countries to finance roads, oil exploration and other key projects that are seen aligned to its industrial interests.

Yet, it is the rising income levels in China that analysts single out as one of the key factors that Africans should use to exploit the Chinese market under the new development plan. For instance, between 2004 and 2009, China’s household income in the bottom 20 per cent rose by 50 per cent, while income in the top 10 per cent surged 255 per cent to around Sh390,000 ($4,978) per month.

“It will provide African manufacturers with new opportunities to flaunt competitive labour cost advantages,” say Standard Bank economists.

China has also experienced double-digit rural real wage growth in recent years and is forecast to grow by an average of 11 per cent per year through to 2015.

Rising labour costs

“We have to try and improve our manufacturing efficiency and take advantage of China’s rising labour costs and provide goods cheaply,” said a researcher on industrial development, Dr John Akoten.

Shifting patterns in China will lead to dramatic rises in outbound tourists and the diversity and volume of food products imported into the country, raising the value of Africa’s staggering agricultural potential.

The spill-overs from infrastructure and related constructions as well as investments into countries such as Kenya that are viewed as stable regional hubs (investments into assembly plants, industrial parks), and for accessing regional markets etc, present benefits to countries that are not necessarily abundant with oil or other mineral resources.

The analysts, however, are urging Africans to negotiate concessions on terms that add most value to their countries and promote diversification of their economies and exports, rather than simply exporting raw materials.

“A key risk is the over-reliance on resource exports without any other significant spillovers to promoting growth, sustainable development, poverty reduction, creating opportunities and diversification, particularly in African countries where the windfalls of resources do not reach the grassroots levels,” warns Ms Edinger of Frontier Advisory (Pty) Ltd.
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