China devalues, Africa trembles?
China's development decisions are critically important for Africa. In Lagos, Addis and Johannesburg, China's surprise yuan devaluation has African analysts scratching their heads.
Obviously Chinese goods will be cheaper in Africa, and African exports more expensive in China. So far, this decision is just a tremor, not a quake. Yet why did China devalue, and what is this likely to mean for Africa? To understand China's devaluation, we need to take a step back. Beijing has been trying to manage China's enormous structural transformation ever since Chinese leaders made their historic decision to move out of poverty by turning to the market in the late 1970s. Their supercharged development model depended on low wages, high levels of foreign and public investment, and rapidly expanding, cheap exports.
Today, China is an upper middle income country with more expensive labor. Their economy is increasingly based on domestic innovation, consumption, and exports of high-tech products. Chinese firms have become significant foreign investors themselves with interests outside China's borders.
This has been mainly good news for Africa. China's growing reserves were recycled into large loans for infrastructure finance across Africa. Prices for African commodities rose with Chinese demand, helping underpin a long period of sustained -- if unequal - African growth. Trade between Africa and China skyrocketed to $220 billion in 2014, nearly three times the U.S. level. Consumers benefited from low cost cell phones and other goods. On the down side, African manufacturing suffered from the competition with Chinese imports. Critics charge that China's embrace -- like that of other major powers -- has not budged African economies away from high dependence on raw material exports.
The devaluation is a step backward in China's strategy. Chinese authorities had pressing, but short-term political and economic reasons to devalue. Beijing's policy-makers need to avoid rocking China's political stability, while still pushing forward with measures that might cause temporary pain as they transform into a high income economy. Slower growth is now necessary, but this needs to be gradual, not dramatic. In 2015, China's economy began to slow a bit too rapidly. The Chinese had been using their foreign exchange reserves to prop up the yuan against the challenge of a strong dollar. This pushed their currency to appreciate by 14% over the past twelve months.
The stronger yuan led to a drop in Chinese exports: 8.3% in July alone. That month, China's factory sector experienced its largest contraction in two years, leading to layoffs. Combined with the recent stock market crash, this was too much change, too quickly.
Last week's decision allowed the market a greater role in setting the yuan's value, and it promptly fell. This should lead to a modest export recovery but will do little for the long term goal of continued transformation.
China's development decisions are critically important for Africa. In Lagos, Addis and Johannesburg, China's surprise yuan devaluation has African analysts scratching their heads.
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