Rapidly strengthening economic ties and trade flows between China and Africa have been a major feature of the changing global economy. Florian Witt, Senior Relationship Manager for Africa, Commerzbank, reviews the trends and how the relationship between the two continents is likely to develop
November marks the fifth anniversary of the landmark Beijing China-Africa summit. A significant feature of the Chinese economic miracle over recent years has been the country’s fast-growing economic ties with Africa. China is resource-hungry and, together with India, is rapidly displacing the countries of the West as Africa’s most important trading partners. African nations have generally welcomed the contest to woo them between the developed and developing nations, which China appears to be comprehensively winning.
China’s earliest foray in Africa as aid provider goes back to the 1960s when it both financed and executed major construction projects such as the Tanzania-Zambia railway, completed in 1975. By the 1990s the Beijing authorities had decided to accelerate the growth of trade and investment in Africa, at a time when many western companies were pulling out.
As a result, the past 10 years especially have seen trade ties between China and Africa burgeon, offering huge opportunities for Asian corporates. However, there remain numerous pitfalls for corporates looking to enter the region and it is therefore essential that they collaborate with a banking partner that has the on-the-ground presence and expertise to help them navigate the considerable risks that are an inherent part of conducting business in Africa.
In this respect, correspondent banking has proved its worth in enabling corporates in Asia to trade with even the remotest regions of Africa and offers advantages for local African banks. This is because the fundamentals of a properly administered correspondent banking network not only remain sound, but retain distinct advantages over alternative models.
Increasing trade ties
In 2000 the Forum on China-Africa Cooperation (FOCAC) was formed, to strengthen economic and trade ties between the two continents. At that time China represented less than 5% of Africa’s total trade, but that percentage had tripled to 15% by the end of the decade and its share is poised to surpass that of the European Union, according to OECD projections.
Trade volumes between Africa and China, which in 1999 totalled only US$5.6 billion – compared to US$29.6 billion for Africa-US trade – had reached nearly US$107 billion by 2008 when China overtook the US to become Africa’s largest trading partner. After a sharp but short-lived decline in the wake of the global economic crisis, volumes rebounded strongly last year to hit a new record of US$127 billion . That figure is certain to be surpassed in 2011, with the first half total of US$79 billion marking a 29% increase on a year ago.
Africa’s 53 nations have increasingly met China’s growing appetite for oil and gas, copper, gold, nickel and other raw materials, which represent around 80% of its exports. The remaining 20% is made of soft commodities ranging from soybeans and olive oil to coffee and wine. While China has accumulated massive trade surpluses with the rest of the world, the balance with Africa has slipped into deficit. In the first half of 2011, Chinese exports to Africa rose 16.4% year-on-year to US$32.6 billion but imports from Africa were 39.8% higher at US$46.4 billion, swelling the resulting trade gap from US$5.2 billion to US$13.8 billion .
Barriers remain to Africa’s growth
However, China’s ability to lift millions of its people out of poverty over the past 30 years attracts widespread admiration throughout Africa – as has its cancellation between 2000 and 2009 of 35 countries’ debts totalling Chinese Yuan (CNY) 18.96 billion – or nearly US$3 billion . And a huge increase in investment from China to Africa suggests
that many have already enjoyed an economic boost; over the period 2003 to 2009 the figure grew from US$490 million to US$9.3 billion .
Despite this flurry of activity, basic statistics underline a continuing gap between China’s economic achievements and Africa’s unrealised growth potential. The People’s Republic of China’s 1.3 billion people represent 20.6% of the total world population. Its gross domestic product (GDP) of US$4.9 trillion equates to a global share of 8.5% and GDP per capita averages US$3,769. Africa also has a large population; its 53 nations have a combined population of 930 million – a global share of 14.2%. Yet GDP of US$1.2 trillion reflects a global share of just 2.1%, with GDP per capita no more than US$1,290 – and even these modest figures mark significant progress over the past two decades
China’s trading success has been due in no small part to low labour costs and high productivity. Yet Africa lacks a similar advantage; its labour is relatively expensive and productivity low. What is more, if Africa is to mirror China’s rise to the top tier of trading regions, it is clear that it must move up the value chain from acting solely as a producer of raw materials to a manufacturer of end-product. Currently, for example, despite being the world’s sixth-largest exporter of crude oil, Nigeria imports refined petroleum products like kerosene, gasoline and diesel because the country's refineries are dilapidated and only able to work at very low capacity. Latest figures by the country's Central Bank Monetary Policy Committee show that between January and March 2011 this cost the country US$1.34 billion.
On the whole, however, Africa’s future as a global trading force looks promising and the continent’s abundant resources are an obvious attraction for China, whose own resource base is steadily decreasing in the face of huge demand. Indeed, in order to gain access to Nigeria’s oil and gas exploration sector China’s State Construction Engineering Corporation announced an agreement last year with the Nigerian National Petroleum Corp to provide $23 billion in investment for three new oil refineries and a fuel complex.
Role of correspondent banking
No longer secondary targets, African countries have therefore become essential markets for growth for corporates operating out of Asia. The United Nations Economic Commission for Africa (UNECA) estimates economic growth rates in 2011 of 12% for Ghana, 10% for Ethiopia, 8.4% for DR Congo and 6.9% for Nigeria with sub-Saharan Africa and East Africa outpacing the North due to recent political unrest in several countries .
As these emerging markets grow wealthier and more knowledgeable, the opportunities for corporates are endless. As even small businesses grow more sophisticated and begin to source materials and sell goods globally, their banks must grow with them – and be able to provide support for international transactions for both currency and credit.
Correspondent banking is increasingly providing this support, and will continue to play a leading role in the Sino-African trade flow. Its strength lies in its combination of a community bank’s local expertise with the trade finance infrastructure of a leading international bank. Commerzbank, for instance, has five representative African offices in the cities of Lagos, Johannesburg, Addis Ababa, Cairo and Tripoli, which source trade finance business from local financial institutions while our Frankfurt office covers Sudan, Eritrea and DR Congo. Commerzbank’s pan-African correspondent banking network has burgeoned to almost 500 relationships, with 250 account relationships. This global footprint enables Commerzbank to promptly detect and respond to new and changing trade flows.
Certainly, businesses must be able to provide payment services to customers, suited to their needs, in what were once inaccessible growth areas. Steadily rising volumes in Sino-African trade flows means that the Yuan will become an increasingly important settlement currency. Leading banks have responded, preparing their African bank partners by delivering CNY account and FOREX solutions. Commerzbank has a significant number of CNY accounts within its books and has already settled CNY transactions in African countries.
The importance of an “on-the-ground” presence
The value of local knowledge – as provided by correspondent banks – should not be underestimated when conducting business in Africa. The advantage to customers is that complex trade finance processes, such as the negotiation and settlement of Letters of Credit (LCs), can be overseen, or even undertaken, by a correspondent bank with expert knowledge of the local regulatory environment – a major advantage when trading with Africa where LCs will remain prevalent for some years to come.
Furthermore, each of Commerzbank’s foreign branches and subsidiaries in a total of 51 countries has its own documentary department for the handling of LCs of customers abroad. Such coverage is essential if banks are to open, advise and confirm LCs in close conjunction with both their own clients, and locally via the branches or correspondent banks used by African mid-tier customers themselves.
Commerzbank’s strong presence in Africa also offers advantages to investors. Despite its attractions, the region is not the world’s easiest in which to invest. Shallow capital markets, many illiquid stocks, scarcity of information and sheer diversity of markets can all prove highly confusing – making detailed local knowledge essential.