THE shock waves from China’s surprise yuan devaluation are ricocheting through African economies, sending currencies tumbling and stoking anxiety that the continent’s biggest trading partner might be losing its appetite for everything from oil to wine.
The rand hit a 14-year low of R12.94 to the dollar on Monday, extending a 2% drop since August 10 and a 12% slide this year. Currencies in other African countries with close ties to China, such as Angola’s kwanza and Zambia’s kwacha, are also down sharply after Beijing unexpectedly cut the yuan’s value by 2% against the dollar last Tuesday.
China’s demand for Angolan oil, Zambian copper and South African gold has fuelled a steep increase in trade, helping to fuel rapid growth but leaving economies exposed to policy shifts in Beijing.
In 2013, Africa’s trade with China was valued at $211bn, the African Development Bank said in June, more than twice the continent’s trade with the US. By contrast, 15 years ago, the US traded three times as much with Africa as China did.
Now, a weaker yuan is stoking fear in some African treasury departments and boardrooms that China’s buying power will be eroded — and that the world’s second-biggest economy may be slowing even more than official statistics suggest.
Standard Chartered’s chief Africa economist, Razia Khan, said China’s move was happening at a difficult moment for many African economies, which had been buffeted by volatility that had sent many regional currencies lower this year as oil prices dropped and the dollar surged.
“Countries … with narrow export bases will be substantially disadvantaged,” she said.
Angola is battling a grinding foreign-exchange shortage, as falling oil prices and slack demand from China slash revenue from the crude exports that generate nearly all its export earnings and public revenue.
In Zambia, copper mines are laying off workers or closing because local power shortages have made it too costly to keep production up as long as China’s waning demand holds global prices near six-year lows.
Local gold, wine and other producers say lower demand from China means less hope of lifting the battered economy out of a four-year slump. The finance ministry is forecasting economic growth of just 1.9% this year.
“We’re going to go through a rough patch now,” said Hein Koegelenberg, CE of La Motte, a vineyard near Cape Town, and chairman of L’Huguenot, a wine label aimed at the Chinese market.
Both brands sold more wine in China this year than in 2014, but Mr Koegelenberg said demand was dropping. He expected China’s thirst for South African wine to plateau at about 10-million bottles for some time. “The next year or two will be very difficult,” he said.
To be sure, some African countries could benefit from a weaker yuan that would cut the cost of Chinese goods and services they import. East African countries, including Ethiopia, Kenya and Mozambique, have posted big trade deficits in recent years as they shelled out for Chinese-made bulldozers and electrical lines to build road and power networks.
Kenya’s diversified economy could gain the most from a weaker yuan, economists said. China was the second-biggest source of imports for Kenya, and buyers of heavy Chinese machinery like graders said they were considering paying for their purchases in yuan instead of dollars. “We are watching other competitive companies to see if they will switch their invoices to the yuan,” said Walter Oyugi, Kenya sales manager of Shantui equipment imported for Shantui Construction Machinery, an importer from China’s Shandong province.
“If they do … we’ll definitely have to reconsider our own policy and adjust to stay competitive.”
Such moves could reduce the large trade deficit Kenya has amassed in recent years as its infrastructure spending grew. They could also lower the price of goods on the shelves of many East African retailers.
“The devaluation of the yuan will have some positive impact on these shores,” said Atul Shah, MD at Kenya’s leading retailer, Nakumatt Holdings. “This, against the background of the dollar performance locally, may provide some temporary relief for products imported from China,” Mr Shah said, adding that potential benefits to retailers and consumers would be felt in the East African markets around October.
As China’s trade ties with Africa have strengthened, some African officials have joined China’s campaign to promote the yuan as a reserve currency and international trade alternative to the dollar. “If Kenyan or Ugandan importers start invoicing goods from China in yuan instead of local currencies or the dollar, that will contribute to the internationalisation of the yuan that China has been pushing for,” said Ms Khan.
Nigeria said it would add yuan to its central bank reserves in 2011. SA followed suit in 2013.
The governments of SA, Angola, Kenya and other African governments have also invested in Chinese bonds.
But many executives and economists say China must allow the yuan’s value to be more directly dictated by market forces before it gains real popularity as an African reserve currency.
“It has to be normalised and free floating,” Standard Bank Group CE Ben Kruger said.