GRACELIN BASKARAN: Banking on fragile China may come back to bite Africa

As African leaders convene in Beijing for the China-Africa co-operation summit, a word of caution: the state of the Chinese economy is precarious. Focusing on building up one source of foreign direct investment and one buyer of African natural resources exposes countries to significant risk.

Just this week Goldman Sachs cut its forecast for global copper prices by a third, from $15,000/tonne to $10,100/tonne in 2025, citing China’s weak property sector. When you add in the high levels of local government debt, high unemployment and slowing growth rates, you see the growing dilemma of relying on Chinese financing and consumption become clear.

China’s economic growth last quarter was the worst in the past five, and retail sales grew at the lowest level since December 2022. In July China unexpectedly implemented measures to try stimulate its slowing economy and increase consumer confidence, including cutting its lending rate for one-year medium-term policy loans by 20 basis points to 2.3%, marking the biggest cut since the Covid-19 pandemic in 2020. It also doubled the subsidy for purchasing an electric vehicle to stimulate demand. 

The IMF recently noted that “China faces significant fiscal challenges” and that its economic risks are “tilted to the downside”. China’s struggling economy opens up two direct risks for African countries.

Africa will see less investment — an acceleration of an ongoing trend. Chinese lending to African countries has been declining for some time. While it is the largest bilateral creditor, China’s lending to African governments and state-linked borrowers dropped from $28.8bn in 2016 to $4.6bn in 2023, an 84% decline. 

President Xi Jinping’s “small but beautiful projects” mantra is an ode to his desire to shrink his overseas investment portfolio. Domestic economic conditions have also made it difficult to finance large infrastructure projects, while China’s real estate developers have gone bankrupt. 

Short-sighted

Given China’s decreasing capacity to deploy capital, relying on it for most investment is short-sighted. Any further economic shocks in China could have reverberating consequences on the long-term health of African economies while populations are rapidly growing and private capital is needed to stimulate employment creation and rein in debt. 

It’s in their self-interest for African leaders to also engage with the US, EU, Japan and other countries for investment, particularly patient capital. China undoubtedly has had a decades-long advantage investing in Africa — but those levels are unsustainable.

The second risk is that the trade balance may worsen. African leaders are pressuring Beijing to narrow the trade balance. In 2021 Xi pledged to import $300bn in goods from Africa by 2025 — an unrealistic figure. China is Africa’s biggest trading partner, but it’s an unbalanced trade relationship. In 2023 China exported $173bn in goods to Africa, but only imported $109bn from Africa. The largest share of these goods were natural resources — minerals, metals and fuels.

But given the state of the Chinese domestic economy and sluggish aggregate demand for minerals-intensive goods, the trade balance is likely to deteriorate further. The East Asian country is by far the biggest buyer of base metals, historically purchasing about half of the world’s output. But domestic commodities surpluses in China are likely to lead to a reduction in imports for key metals. This should encourage African leaders to sign long-term offtake agreements with diverse partners to reduce their own risk exposure. 

African countries need to pursue both diverse sources of investment and strengthen bilateral trade ties with countries globally to protect themselves from exogenous shocks. The fanfare associated with the China-Africa co-operation summit can be alluring — red carpets, dance troupes and honour guards have made a big splash. But the underlying economic fundamentals of the relationship have been deteriorating for several years, and it’s unlikely this will turn around soon. 

• Baskaran, a development economist, is founding director of the Project on Critical Minerals Security at the Centre for Strategic & International Studies in Washington, DC.